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chubb.com for more information on factors that could affect these matters.
First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Peter Enns, our Chief Financial Officer.
We had a very strong third quarter, highlighted by outstanding P&C premium revenue growth globally of 17% and simply excellent underwriting results on both the calendar and current accident year basis, despite elevated catastrophe losses.
Our results were powered by double-digit commercial lines growth, strong continued underlying margin expansion, the strength of our reserves and our broad diversification of businesses.
Core operating income in the quarter of $2.64 per share was up 32% with $250 million over prior year to $1.2 billion, while net income of $1.8 billion was up 53% from prior year.
For the year on both a net and core operating income basis, we have produced record earnings.
Again, it was an active quarter for natural catastrophes.
Yet, with over $1.1 billion of cats, we reported a 93.4% combined ratio with P&C underwriting income up 58% to $617 million, which speaks to the underlying strength of our businesses, and again, broad diversification of our company's sources of revenue and earnings, both domestically and globally.
Year-to-date, we have produced $2.4 billion in underwriting income for a combined ratio of 90.4% and that includes $2.1 billion of cat losses, and what is shaping up to be another year of sizable weather-related loss events kind of the new normal brought on by climate change and other societal changes.
Speaking again to our underwriting health, on a current accident year ex-cat basis, underwriting income in the quarter was $1.4 billion, up 23% with a combined ratio of 84.8% compared to 85.7% prior year, a quarterly underwriting record.
If we exclude the one-time positive adjustment we took last year due to lower frequency of loss because of the COVID-related shutdown, our current accident year combined ratio unaffected improved 2 points.
The strength of our balance sheet and conservative approach to loss reserving was again in evidence this quarter as we reported $321 million in favorable prior period reserve development.
Net investment income in the quarter was $940 million, up 4.5%.
Peter is going to have more to say about cats and prior period development, investment income and book value.
Turning to growth in the rate environment.
As I said at the opening, P&C premiums were up nearly 17% globally or 15.5% in constant dollar with commercial premiums up 22% and consumer up 4%.
The 17% growth for the quarter and 14.2% for the first nine months, topped last quarters and was the strongest organic growth we have seen again since 2004.
Growth in the quarter was broad-based with contributions virtually all commercial P&C businesses globally from our agriculture business to those serving large companies to mid-sized and small and most regions of the world and distribution channels.
The robust commercial P&C pricing environment remains on pace in most all important regions of the world with continued year-on-year improvement in rate to exposure on the business we wrote, both new and renewal.
In North America, total P&C net premiums grew over 17% with commercial premium up about 22.5% excluding agriculture, which had a fantastic quarter in its own right with premium growth of over 40%, commercial P&C premiums were up over 16.5% in North America.
New business was up 13% for all commercial lines and renewal retention remained strong at over 97% on a premium basis.
The 16.5% commercial premium growth is a composite of 15.5% growth in our major accounts and specialty business and over 18% in our middle market and small commercial business, simply a standout quarter for this division.
Overall, rates increased in North America commercial lines by over 12%.
Once again, loss costs are currently trending about 5.5% and vary up or down, depending upon line of business.
And again, like last quarter, just to remind you, in general, commercial lines loss costs for short-tail classes are trending around 4% though we anticipated this to increase in the future while long-tail loss costs excluding comp are trending about 6%.
Let me give you a better sense of the rate increase movement in North America.
In major accounts, which serves the largest companies in America rates increased in the quarter by just over 13%.
Risk management-related primary casualty rates were up over 6%.
General casualty rates were up about 21% and varied by category of casualty.
Property rates were up 12% and financial lines rates were up 17%.
In our E&S wholesale business, rates increased by 16% in the quarter, property rates were up 13%, casualty was up 20% and financial lines rates were up about 21%.
In our middle market business, rates increased in the quarter nearly 9.5%.
Rates for property were up over 11%.
Casualty rates were up about 9.5% excluding workers' comp with comp rates down 2% and financial lines rates were up 18%.
Turning to our international general insurance operations.
Commercial P&C premiums grew 20.5% on a published basis or 16% in constant dollar.
International retail commercial P&C grew nearly 17% or 12% in constant dollar, while our London wholesale business grew over 31%.
Retail commercial P&C growth varied by region with premiums up almost 28% in our European Division, Asia Pacific was up 15.5%, while Latin America commercial lines grew about 6.5%.
Internationally, like in the U.S. in those markets where we grew, we continued to achieve improved rate to exposure across our commercial portfolio.
In our international retail commercial P&C business, rates increased in the quarter by 15%, property rates were up 11%, financial lines up 33% and primary and excess casualty up 7% and 11% respectively.
And in our London wholesale business rates increased in the quarter by 11%, property up 13%, financial lines up 14%, marine up 8%.
Outside North America, loss costs are currently trending about 3% though that varies by class of business and country.
Consumer lines growth globally in the quarter continue to recover from the pandemic's ongoing effects on consumer-related activities.
Our international consumer business grew almost 10% in the quarter on a published basis or 5% in constant dollar, and breaking that down a little further, international personal lines grew almost 11% on a published basis, while international A&H grew over 8.5% or just 5% in constant dollar.
Latin America had a particularly strong quarter in consumer with personal lines and A&H premiums up 18.5% and 17.5% respectively, powered by both our traditional and digitally focused distribution relationships.
Net premiums in our North America high net-worth personal lines business were up just over 1%, adjusted for non-renewals in California and COVID related auto-renewal credit, we grew 3% in the quarter.
Our true high net-worth client segment, the heart of our business, grew 11% in the quarter.
Overall, retentions remained strong at 95.7% and we achieve positive pricing, which includes rate and exposure of 14% in our homeowners portfolio.
The severity trends in personal lines in the U.S. remain elevated.
Lastly, in our Asia-focused international life insurance business, net premiums plus deposits were up over 52% in the quarter, while net premiums in our Global Re business were up over 22%.
In sum, we continue to capitalize on broad-based and favorable market conditions and improving economic conditions.
All of our businesses did well or are improving from agriculture to all forms of commercial P&C globally, both retail and wholesale, serving large companies to middle market and small to our improving global personal lines and A&H businesses to our Asia life businesses, to our Global Re business.
In one sentence, both growth and margin expansion are two trends that will continue.
In the quarter, as you saw, we announced the definitive agreement to acquire the life and non-life insurance companies that house the personal accident supplemental health and life insurance businesses of Cigna and Asia-Pacific for $5.75 billion in cash.
This highly complementary transaction advances our strategy to expand our presence in the Asia-Pacific region, including our company's Asia-based life company presence and add significantly to our already sizable global A&H business.
Upon completion of the transaction, which we expect during 2022, Asia Pacific share of Chubb's global portfolio will represent approximately 20% of the company.
For many years, we have admired Cigna's business in Asia including its people, product innovation, distribution and management capabilities.
The underlying economics and value creation of the transaction are very attractive, and these businesses will contribute to our company strategically for decades to come.
The transaction once again demonstrates our patience in advancing our strategies and confirms our consistent and disciplined approach to holding capital for risk and growth, both organic and inorganic.
Our company has considerable earning power and a patient hand to deploy capital effectively over time.
We return excess of what we need to shareholders in the form of dividends and share repurchases, while we continue to build future revenue and earnings generation capabilities.
In conclusion, this was another excellent quarter of growing our business and our exposures, expanding our margins and investing in our future.
All in a period with substantial cats, which are not unexpected.
My management team and I have never been more confident in our ability to continue to outperform and deliver strong sustainable shareholder value.
As you've just heard from Evan, our overall franchise continues to deliver outstanding top line growth, margin improvement and profit growth.
Now let me discuss our balance sheet and capital management.
Our financial position remains exceptionally strong, including our cash flow, liquidity, investment portfolio, reserves and capital.
It all starts with our operating performance, which produced $3.3 billion in operating cash flow for the quarter and $8.5 billion for the first nine months.
We continue to remain extremely liquid with cash and short-term investments of $5.1 billion at the end of the quarter even after our significant capital management actions.
Among the capital related actions in the quarter, we returned $1.9 billion to shareholders, including $1.5 billion in share repurchases and $346 million in dividends.
Through the nine months ended September 30th, we returned over $5 billion, including almost $4 billion in share repurchases or over 5% of our outstanding shares and dividends of over $1 billion.
The agreement to acquire Cigna's A&H and life insurance businesses in Asia-Pacific is not expected to impact our share repurchase and dividend commitments.
Our investment portfolio of $122 billion continues to be of a very high quality and we have not made any material changes during the quarter to our investment allocation.
The portfolio increased $759 million in the quarter and at September 30th our investment portfolio remained in an unrealized gain position of $2.9 billion after-tax.
Adjusted pre-tax net investment income for the quarter was $940 million similar to last quarter and $40 million higher than our estimated range benefiting from higher private equity distributions.
As I noted on the second quarter earnings call, our investment income is based on many factors, and notwithstanding our better than expected results over the last few quarters, we continue to expect our quarterly run rate to be approximately $900 million.
Pre-tax catastrophe losses for the quarter were $1.1 billion with about $1 billion in the U.S., of which $806 million was from Hurricane Ida and $135 million from international events, of which $95 million was from flood losses in Europe.
Our reserve position remains strong, with net reserves increasing $1.7 billion or 3.2% on a constant dollar basis reflecting the impact of catastrophe losses in the quarter and 2021 growth, in particular from our agricultural business which has a seasonality impact on reserves.
We had favorable prior period development of $321 million pre-tax which include $33 million of adverse development related to legacy environmental exposures.
The remaining favorable development of $354 million was split approximately 30% in long-tail lines, principally from accident years 2017 and prior and 70% in short-tail lines, principally from our 2020 North American personal lines.
Our paid-to-incurred ratio was 73% or a very strong 75% after adjusting for cats, PPD and agriculture.
Book value decreased by $744 million or 1%, reflecting $1.16 billion in core operating income and a net gain on our investment portfolio of $190 million, which was more than offset by foreign exchange losses of $305 million and the $1.9 billion of share repurchases and dividends.
Book and tangible book value per share increased 0.6% and 0.4% respectively from last quarter.
Our reported ROE for the quarter and year-to-date was 12.3% and 14.4% respectively.
Our core operating ROE and core operating return on tangible equity were 8.2% and 12.6% respectively for the quarter.
As a reminder, we do not include the fair value mark on our private equity funds in core operating income as many of our peer companies do.
For comparison purposes, our core operating ROE increases by 5 percentage points to 13.2% and our core operating income increases by a $1.61 per share to $4.25.
Year-to-date, our core operating ROE, including the fair value mark on our PE funds would be 13.8%. | compname reports strong second quarter net income per share of $5.06 and record core operating income per share of $3.62.
consolidated net premiums written up 14.3% globally, with commercial p&c lines up 19.9%; best organic p&c growth in over 15 years.
q2 core operating earnings per share $3.62.
qtrly p&c combined ratio was 85.5% compared with 112.3% prior year.
qtrly pre-tax catastrophe losses, net of reinsurance and including reinstatement premiums was $280 million.
p&c net premiums written were up 15.5% globally for quarter. | 0 |
I'd also like to call your attention to supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section.
The company has explained some of these risks and uncertainties in its SEC filings, including the Risk Factors section of its annual report on Form 10-K and quarterly report on Form 10-Q.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer; and Andy Long, our Executive Vice President and Chief Financial Officer.
I would like to start with a high-level recap of the strategic priorities that the Owens & Minor leadership team and I outlined during our Investor Day meeting in late May.
I spoke about our transformation based on our business blueprint that focused on; one, our culture, a culture that is based on hard work, stellar execution and an unrelenting focus on our customer, while being anchored by our mission and our ideal values.
Next our discipline, which is based upon the Owens & Minor business system that is laser focused on continuous improvement.
And third, our investments, our investments that are implemented in a disciplined manner enabling us to achieve our strategic priorities.
These three elements are ingrained in our corporate DNA, have set the foundation of our business blueprint, and have enabled us to ignite long-term profitable growth.
As committed during the Investor Day meeting, I will provide periodic updates.
Today let me start with an update on some of our investments, which we spent time at our Investor Day detailing.
These investments remain on track and are designed to provide attractive returns for our stakeholders.
Let me remind you of a few; one, we continue to expand our own manufacturing capability for nitrile gloves in our existing facility in Thailand.
This will put us in an advantaged position allowing us to have greater control and improved cost structure.
Our new capacity is expected to go live in early 2022.
Two, we remain focused on leveraging our manufacturing strength and brand value through the expansion of our product portfolio.
During the second quarter, we doubled our wound care product line and we remain on track to expand our incontinence care portfolio later this year.
Furthermore, we continue to identify additional product category opportunities to expand our proprietary product offering in the future.
Three, we are also diversifying into new verticals to sell specialty higher-margin products into new end markets.
For instance, we expanded into cleanroom glove market space under the HALYARD PUREZERO brand.
In addition, we recently launched our Safeskin consumer brand of gloves.
Next, we continue to invest in technology-based offerings that provide our customers with actionable data through our service solutions.
And finally, we are focused on the balance between technology and touch in our distribution centers, with continued investment in automation, AI and human capital, all of which expand our leading ability to be flexible and scalable to provide best service for our changing customer demands.
These initiatives are just a few examples of how we are investing to generate long-term profitable growth, while providing significant benefits for our customers.
In addition to having the Owens & Minor business blueprint in place and the investments that I just discussed, I'm equally proud of our focus on corporate social responsibility.
We are committed to delivering on both our financial and our corporate social responsibility obligations.
So far this year, we have launched the Owens & Minor Foundation, which is committed to improving our communities in which we operate and live.
Two, we released our first sustainability report, detailing the advancement that Owens & Minor has made in ESG.
And three, we undertook a first step in reducing our carbon footprint, with our electric fleet pilot initiative.
Our ESG efforts, just like our business blueprint, are part of who we are and that good corporate citizenship is fundamental to our mission and values.
Let me now shift gears to our second quarter performance.
I am extremely pleased to report another strong quarter that continues to build upon the solid performance from 2020.
A year ago, we were in uncharted waters due to the pandemic, but our ability to be flexible and adjust to meet the critical needs of our customers and the nation help to establish momentum that is carried into the second quarter.
Additionally, we continue to find ways to keep driving efficiency and be more productive, as markets begin to return to pre-pandemic form.
Now let me update you on the segments and I will start with our Global Solutions segment.
Within this segment, the medical distribution business performed well and posted much improved results.
We continue to bring in net positive wins, as a result of our market-leading service, combined with the trust we gained during the pandemic.
In addition, we saw volumes associated with elective procedures return to pre-pandemic levels during the second quarter.
Related to our patient direct business, we continue to grow through new patient capture in this rapidly growing patient direct markets.
And finally, our ongoing investments in our Global Solutions segment are expected to provide continued growth in an attractive long-term outlook.
Moving on to the Global Products segment.
This segment produced significant top line growth, as sales of our surgical infection and prevention products, including PPE, remained strong.
The strong sales are a result of our increased output of previously added capacity to fulfill continued high usage, share gains made during the pandemic, stockpile fulfillment and increased elective procedures.
In addition, we saw favorable timing for cost pass-through on gloves adding to the top line growth.
In addition to the solid performance in our two reporting segments, our balance sheet remains strong, with net leverage at 1.8 times and total net debt of less than $1 billion.
This gives us the latitude to continue to make well thought-out investments to improve our operations and drive growth.
Moving from the second quarter and looking to the rest of 2021 and beyond.
We are excited about the long-term future.
We expect the rest of the year to be driven by S&IP utilization, elective procedures, opportunity pipeline and continued strength of our patient direct business.
In addition to this, we will continue to have a tenacious focus on operational excellence and continuous improvements.
As we have said, we believe that the usage for S&IP products, including PPE, will be defined by the new normal; the new normal in the healthcare industry.
We continue to believe that usage for many PPE categories will settle somewhere below the peak of the COVID-19 outbreak, but in excess of the pre-pandemic levels as a result of established healthcare protocols, stockpile requirements and our share gains obtained during the pandemic.
In addition, we expect the expansion of our PPE into new markets like clean room and consumer to provide incremental opportunity.
However, as the year progresses, we expect moderation in both pricing and demand for PPE.
But let's not forget another factor to consider.
That is the elimination of PPE emergency use authorization which will create opportunity for our Americas-based, manufactured medical-grade PPE.
Let me give you a few examples.
First, most recently the FDA revoked emergency use authorization for non-NIOSH-approved disposable respirators, which will prohibit the use of these devices in the healthcare setting.
Second, the CDC has recommended that healthcare facilities return to conventional practices, and no longer use crisis capacity strategies like bringing in non-medical grade supplies.
And third, the EUA for Decontamination and Bioburden Reduction System has been revoked.
All of these actions by the federal agencies bring to light the significance of authorized medical-grade PPE in the healthcare setting.
Our unique value chain of vertically integrated Americas-based manufacturing footprint and supply chain will remain a distinct advantage for us, as we continue to work closely with the government and industry to help address the current and future needs for PPE requirements.
Next, on elective procedures, by the end of the second quarter we saw elective procedures return to pre-pandemic levels.
And we expect this to continue through the second half of the year.
This expectation is consistent with our customers' outlook and assumes COVID rates don't get markedly worse across the country.
Moving on to our pipeline, our medical distribution continues to provide best-in-class service and is backed by our complete suite of products and services.
These together provide one of the industry-leading offering to best serve our customers.
We will continue to advance with a large pipeline of opportunity, while capturing net new wins.
Again, our medical distribution continues to provide market-leading operational performance and stability, that supports our customers' need for continuity supply and supply chain resiliency.
And lastly, our patient direct business, our patient direct business enjoys a leading national presence as the partner of choice for referral sources.
We are uniquely positioned to meet the needs of our customers in this fast-growing home health space.
We expect this business to continue to grow across our major product categories with an annuity-like recurring revenue model.
I'd like to conclude by underscoring the success we've achieved during the quarter.
Our strong second quarter gives us the confidence to affirm the range of our 2021 guidance for adjusted earnings per share and of $3.75 to $4.25 and adjusted EBITDA of $450 million to $500 million as well as affirm our previously issued 2022 guidance.
We continue to be excited about, what's ahead.
We have one of the strongest value chains in the healthcare solutions market while having the ability to be flexible and scale, along with the financial flexibility to invest as appropriate.
And finally, we have our great teammates that exemplify our high deal values everyday and live our humble mission to empower our customers to advance healthcare, as we continue to deliver on our commitments to our stakeholders.
Today I'll review our financial results for the second quarter and the key drivers for our quarterly performance.
And then, I'll discuss our expectations and assumptions for the balance of the year.
I'd like to start by saying that, we're delighted to report a record second quarter with solid growth in revenue, EBITDA and earnings per share.
We're maintaining our expectations for adjusted earnings per share in 2021 to be in a range of $3.75 to $4.25 and adjusted EBITDA in the range of $450 million to $500 million.
Also we are affirming our previously announced guidance for 2022.
I'll provide additional color on this later in my remarks.
Let's begin with the results for the second quarter.
Starting with the top line, revenue for the second quarter was $2.5 billion, compared to $1.8 billion for the prior year.
This represents 38% growth with strong performance in both of our segments.
Top line growth in the quarter was driven by ongoing recovery of elective procedures glove cost pass-through and higher levels of PPE.
Gross margin in the second quarter was 16.1%, an improvement of 117 basis points over prior year due to revenue mix from higher margin sales in the Global Products segment and patient direct business, timing of the pass-through of glove costs and improved operating efficiency.
These were partially offset by higher commodity prices in Global Products and transportation costs across the business.
Also compared to Q1, gross margin was lower by nearly 300 basis points due to margin compression in gloves as anticipated and discussed last quarter.
We also began to see commodity and transportation inflationary pressures in the beginning of the quarter and expect this to continue through Q3.
Distribution, selling and administrative expense of $294 million in the current quarter was $52 million higher compared to the second quarter of 2020.
The increase represents higher variable cost to support top-line growth, funding of ongoing investments across all business lines and higher incentive compensation, driven by our financial performance.
This performance coupled with the efficiency gains from enterprisewide continuous improvement led to adjusted operating income for the quarter of $116 million, which was $77 million higher or three times the same period last year.
Adjusted EBITDA for the second quarter was $128 million, which increased by $76 million or over two times year-over-year.
Interest expense of $12 million in the second quarter was down 47% or $10 million compared to last year, driven by lower debt levels and effective interest rates.
On a GAAP basis, income from continuing operations for the quarter was $66 million or $0.87 a share.
Adjusted net income for the second quarter was $80 million, which yielded an adjusted earnings per share for the quarter of $1.06, which was over five times our performance from Q2 of last year.
The year-over-year foreign currency impact in the quarter was unfavorable by $0.02.
In the second quarter, the average diluted shares outstanding were 14.7 million higher year-over-year as a result of our equity offering in the fourth quarter of prior year and the impact of restricted shares for compensation.
Now I'll review results by segment for the second quarter.
Global Solutions revenue of $1.98 billion was higher by $429 million or 28% year-over-year.
The segment experienced continued growth, driven by ongoing recovery in volumes associated with elective procedures of approximately $300 million along with higher sales of PPE as well as continued strong growth in our patient direct business.
During the quarter, elective procedures continued to move toward pre-pandemic levels, while we recognize that a number of COVID hotspots remain throughout the country.
Global Solutions operating income was $18.5 million, which was $29 million higher than prior year as a result of higher volumes coupled with productivity and efficiency gains in our medical distribution business.
In our Global Products segment, net revenue in the second quarter was $689 million, compared to $370 million last year, an increase of 86%, which was led by higher S&IP sales particularly PPE volume as we benefited from our previous investments to expand capacity and the previously discussed impact of passing through higher acquisition costs of approximately $200 million.
Operating income for the Global Products segment was $95 million, an increase of 84% versus $52 million in the second quarter last year.
This was driven by higher PPE sales, favorable timing of cost pass-through on gloves, productivity initiatives and improved fixed cost leverage.
These were partially offset by higher commodity prices and elevated transportation costs.
Next, let's review cash flow, the balance sheet and capital structure.
In the second quarter, our cash flow was negatively impacted by our investment in working capital to support top line growth, inventory build to ensure supply given numerous supplier issues, global transportation delays and continued unfavorable payment terms with glove manufacturers.
We expect working capital to improve throughout the second half of the year as global supply chain issues subside and as payment terms to glove manufacturers return to historical levels.
As a result, we continue to expect 2021 cash flow to be back half loaded.
Total net debt at the end of the second quarter was $964 million and total net leverage was 1.8 times trailing 12-months adjusted EBITDA.
I'd like to highlight that despite our working capital consumption, we maintained our leverage profile below two times adjusted EBITDA.
Still the improvements we've made to enhance our capital structure provide us with the operational flexibility and put us in a strong financial position to implement our growth strategy.
Our achievement in this regard was recently rewarded with another credit upgrade from S&P last month.
Finally, turning to the outlook.
Earlier today, we affirmed our guidance for 2021 and 2022.
The confirmation of our guidance range for 2021 is a result of our strong Q2 performance and improved visibility into the second half of the year.
Let me provide some context on the assumptions for our outlook.
Our recently installed PPE-related capacity has been fully deployed and our previously announced glove manufacturing capacity expansion is on track to begin contributing to our financial results in early Q1 of next year.
We now expect the full year top line impact of glove cost pass-through to be in the range of $675 million to $725 million.
Any sudden unforeseen declines in the market price of gloves could result in downside to our revenue and adjusted earnings per share projection.
In addition, we believe our patient direct business will continue to perform above market and demonstrate attractive patient capture and retention rates.
As I mentioned earlier, elective procedure-related volumes are at or very close to pre-pandemic levels in much of the country, and we expect the trend to continue in the second half of the year.
As experienced in Q2, we are now including a headwind from elevated commodity pricing and transportation costs and expect this to continue through Q3.
Guidance for adjusted earnings per share is based on 75.5 million shares outstanding.
The increase in our dilutive share count is related to the treatment of certain performance share grants and incremental restricted stock grants driven by our strong financial results.
Even with the 6% increase in shares and new inflationary headwinds, we are confirming our outlook for 2021, 2022 and targets for 2026.
In terms of the calendarization of our guidance, starting with revenue, we expect Q3 revenue to decline slightly from Q2 as the pass-through of glove cost begins to ease.
The 2021 quarterly earnings pattern is contrary to our typical seasonality with most of the year's profitability weighted toward the first half of the year.
Specifically, we continue to expect Q3 earnings to be softer than Q2 due to the timing of glove cost pass-through.
However, we expect Q4 to improve due to the seasonal impact of healthcare utilization across our businesses.
Also, remember that cash flow is expected to improve in the back half of the year, as working capital headwind soften as previously discussed.
Please note that these key modeling assumptions for full year 2021 have been summarized on supplemental slides filed with the SEC on Form 8-K earlier today and have been posted to the Investor Relations section of our website.
In closing, I'm delighted with another strong quarter and proud of the efforts of our teammates around the world.
As we further embed our business blueprint into our day-to-day activities, we'll be well positioned to deliver on our long-term objectives. | q4 earnings per share $1.95.
q4 revenue rose 2.6 percent to $3.856 billion. | 0 |
But before we begin, I'd like to recognize all Church & Dwight employees around the world for their continued dedication to keeping our company going during the pandemic, especially our supply chain and R&D teams as during this quarter the company faced the complexities of raw material shortages and labor shortages at our suppliers and third-party manufacturers.
Now let's talk about the results.
Q2 was another solid quarter for the company.
Reported sales growth was 6.4%, organic sales growth -- grew 4.5% and exceeded our 4% Q2 outlook.
The 4.5% organic growth is impressive considering Q2 2020 organic sales growth was 8.4%.
Adjusted earnings per share was $0.76 and that's $0.07 better than our outlook.
The earnings per share beat is attributed to two things, one, a temporary reduction in marketing, and two, our revenue growth handily exceeded our outlook.
Another item that is noteworthy is we overcame a tax rate which was much, much higher than expected in Q2.
We grew consumption in 13 of the 16 categories in which we compete, and in some cases on top of big consumption gains last year.
Another way to look at this is to compare our Q2 consumption on those 16 categories to 2019, a pre-COVID year, we have higher consumption in 14 of those 16 categories compared to Q2 2019.
Regarding brand performance, nine of our 13 brands saw a double-digit consumption growth and I'll name them for you: gummy vitamins, stain fighters, cat litter, condoms, battery powered toothbrushes, depilatories, dry shampoo sailing spray and water flossers.
Now although many of our brands delivered double-digit consumption growth it is not reflected in our 4.5% organic sales growth as shipments were constrained by supply issues which we do expect to lessen by Q4.
In Q2, online sales as a percentage of total sales was 14.2%.
Our online sales increased by 7% year-over-year.
But remember, this is on top of the 75% growth in e-commerce that we experienced in Q2 2020 versus '19.
We continue to expect online sales for the full year to be 15% as a percentage of total sales.
With 70% of American adults having at least one vaccine shots so far, the US has been opening up consumers becoming more mobile.
In recent days however, it appears that trend could slow down due to the delta variant combined with many people still being unvaccinated.
Outside the US, many countries continue to enforce periodic lockdowns and we expect that to continue.
As described in the release we faced shortages of raw and packaging materials.
Labor shortages at suppliers and third-party manufacturers have reduced their ability to produce.
And transportation challenges have further contributed to supply problems.
Besides shortages, we are dealing with inflation.
Significant inflation of material and component costs is affecting our gross margin expectations, which Rick will cover in his remarks.
Due to a lower case fill rate we pulled back on Q2 marketing, especially for household products.
We expect the supply issues to begin to abate in Q4.
The higher input costs and transportation costs are expected to continue though for the rest of the year.
On past earnings calls we described how we expected categories and brands to perform in 2021.
Overall, our full year thinking is generally consistent.
To name a few categories, demand for vitamins, laundry additives, and cat litter is expected to remain elevated in 2021.
Condoms, dry shampoo, and water flosses are recovering and experiencing year-over-year growth as society opens up and consumers have greater mobility.
Baking soda and oral analgesics are expected to decline from COVID highs.
Now I'm going to talk about the divisions.
Consumer Domestic business grew organic sales 2.8%.
This is on top of 10.7% organic growth in Q2 2020.
Looking at market shares in Q2, five out of our 13 power brands met or gained share.
Our share results are clearly impacted by our supply issues.
I'll comment on a few of the brands right now.
VITAFUSION gummy vitamins saw great consumption growth in Q2, up 10%.
Consumers have made health and wellness a priority.
It appears that new consumers are coming into the category and they're staying.
So here's a supporting statistic.
In the last year, VITAFUSION household penetration is up 17%.
That means the brand is now in one out of every ten households.
Next up is WATERPIK.
WATERPIK grew consumption 72% in Q2 as it continues to recover from COVID lows and benefits from the heightened consumer focus on health and wellness.
WATERPIK is also benefiting from dental offices returning to pre-COVID patient levels.
We expect the frequency of our Lunch 'n Learn program to return to normal levels in the second half of this year.
BATISTE dry shampoo grew consumption 37%.
Dry shampoo is recovering as stores have reopened and consumers are becoming more mobile.
Similarly TROJAN delivered 11% consumption growth.
Society has been opening up.
As restaurants, bars and clubs have reopened people are hooking up again.
Here's a fun fact that might be a contributing factor.
In Q2, TROJAN launched on TikTok with explosive uptick from consumers with over 47 million views.
Next I want to discuss International.
Despite intermittent lockdowns in our markets, our international business came through with 10.4% organic growth in the quarter, primarily driven by our strong growth in our Global Markets Group.
Asia continues to be a strong growth engine for us.
WATERPIK, BATISTE, and ARM & HAMMER led the growth for the international division in the quarter.
Our Specialty Products business delivered a positive quarter with 11.8% organic growth.
This was driven by higher pricing and volume.
Milk prices remain stable and demand is high for our nutritional supplements.
At the prior year quarterly organic growth for specialty products was 3%.
So 11.8% is an impressive result.
Now, turning to new products.
Innovative new products will continue to attract consumers.
In the household products portfolio, we introduced OXICLEAN laundry and Home sanitizer.
It's the first and only sanitizing laundry additive that boost stain fighting and eliminates 99.9% of bacteria and viruses.
In the personal care portfolio, VITAFUSION launched Elderberry gummies, Triple immune gummies, and Power Zinc gummies to capitalize and increased consumer interest in immunity.
WATERPIK launched WATERPIK ION, a water flosser which is 30% smaller with a long lasting lithium-ion battery.
It is specifically designed for smaller bathrooms spaces.
To capitalize on its earlier success, WATERPIK SONIC FUSION, the world's first flossing toothbrush was upgraded to SONIC FUSION 2.0 with two brush head sizes and two speeds, and that's doing extremely well.
And finally, FLAWLESS is taking advantage of the at-home beauty and self-care trends with at home manicure and pedicure solutions.
Now let's turn to the outlook.
Since we last spoke to you in April, unplanned cost inflation has grown by another $35 million.
In addition to the price increases on 33% of our portfolio that we announced in April, we have just announced price increases on other categories, which means we have now priced up 50% of our portfolio.
Of course there is a lag in the positive impact of these increases which impacts our earnings outlook.
We now expect to be at the lower end of our range of adjusted earnings per share growth of 6% to 8% as a result of heightened input costs.
Although we expect to be at the low end of the range, it's really important to remember that we are comping 15% earnings per share growth in 2020.
We expect full year reported sales growth of 5% with 4% full year organic sales growth.
It's also important to call out that we are committed to maintaining the long-term health of our brands by ensuring sustained high levels of marketing investment in the second half.
In conclusion, July consumption continues to be strong.
We are navigating through significant supply challenges and cost inflation.
We believe we are well positioned for 2022 with the pricing actions we have taken.
We expect our portfolio of brands to do well both in good and bad times and in uncertain economic times such as now.
We have a strong balance sheet and we continue to hunt for TSR accretive businesses.
Next up is Rick to give us details on Q2.
We'll start with EPS.
Second quarter adjusted EPS, which excludes the positive earn-out adjustment was $0.76, down 1.3% to prior year.
And as we discussed in previous calls, the quarterly earn out adjustment will continue until Q4, which is the conclusion of the earn out period.
$0.76 was better than our $0.69 outlook primarily due to continued strong consumer demand for many of our products as well as a temporary reduction in marketing spend as supply chain shortages were impacting customer fill rates, which we expect to recover in Q4.
The $0.76 includes a $0.04 drag from a higher tax rate and a $0.04 drag from the VMS recall costs.
Reported revenue was up 6.4%.
Organic sales were up 4.5% driven by a volume increase of 4.3%.
Matt covered the topline and I'll jump right into gross margin.
Our second quarter gross margin was 43.4%, a 340 basis point decrease from a year ago.
This was right in line with our outlook for down 350 basis points for the quarter.
Gross margin was impacted by a 480 basis points of higher manufacturing costs primarily related to commodities, distribution, and labor costs.
Tariff costs negatively impacted gross margin by an additional 50 basis points.
These costs were partially offset by a positive 40 basis point impact from price volume mix and a positive 140 basis point impact from productivity programs as well as a ten basis point positive impact from currency.
Moving to marketing, marketing was down $5.3 million year-over-year as we lowered spend to reduced demand until fill rates could recover.
Marketing expense as a percentage of net sales decreased 100 basis points to 9.2%.
We continue to expect full year marketing expense as a percentage of net sales to be approximately 11.5% in line with historical averages.
For SG&A, Q2 adjusted SG&A decreased 140 basis points year-over-year with lower legal costs and lower incentive comp.
Other expense all in was $11.4 million, a $3.3 million decline to the lower interest expense from lower interest rates.
And for income tax, our effective rate for the quarter was 24% compared to 19.6% in 2020, an increase of 440 basis points, primarily driven by lower stock option exercises.
You will hear in a minute this also impacts our full year tax rate.
And now to cash.
For the full -- for the first six months of 2021 cash from operating activities decreased 42% to $344 million due to higher cash earnings being offset by an increase in working capital.
Accounts payable and accrued expenses decreased due to the timing of payments.
As a reminder, in the year-ago numbers there was an $80 million benefit in Q2 related to the timing of US federal income tax payments shifting from the second to the third quarter in the prior year.
We expect cash from operations to be approximately $90 million for the full year.
As of June 30th, cash on hand was $149.8 million.
Our full year CapEx plan is now $140 million as we continue to expand manufacturing and distribution capacity, primarily focused on laundry, litter, and vitamins.
The decrease from our previous $180 million is project timing related.
For Q3 we expect reported sales growth of approximately 3%, organic sales growth of approximately 1.5% entirely due to supply chain constraints.
We expect gross margin expansion in the quarter led by our price increases.
Adjusted earnings per share is expected to be $0.70 per share, flat from the last year's adjusted EPS.
A strong operating performance is offset by higher tax rate.
And now for the full-year outlook, we now expect full-year 2021 reported sales growth to be approximately 5%, organic sales growth to be approximately 4%.
Our consumption is strong and outpacing shipments.
We expect our customer fill level to improve by Q4.
Turning to gross margin, we now expect full year gross margin to be down 75 basis point.
This represents an incremental impact from our last guidance due to broad based inflation on raw materials and transportation costs.
Our April outlook expected gross margin to be flat for the year, and $90 million of inflation from our original guidance.
Now we're absorbing $125 million of incremental costs for the full year.
This additional $35 million of inflation drives the change in our gross margin outlook.
We've taken another round of pricing actions with over 50% of our global brands having announced price increase.
While some of this benefit helps the second half of 2021, most of the benefit is in 2022.
As a reminder, we price to protect gross profit dollars, not necessarily margin.
The $35 million movement versus our previous outlook is primarily non-commodity related, transportation, labor, third-party manufacturers, and other raw material price increases make up the majority.
Commodities are also up.
And while we have 80% of our commodities hedged, let me give you a sense of what's going on with major commodities.
Over the past few months, second half expectations for resins have moved up considerably.
For example, previously in our forecast it was based on HDPE being up 30% in the second half of the year, now it's up 60%.
Polypros [Phonetic] moved from being up 40% to now 90%.
In addition, transportation costs such as diesel have continued to rise.
We previously expected second half diesel to be up 18% and now it's of 27%.
Cartons and corrugate previously were single digit, now they're low double digit.
So that's the latest Bank [Phonetic] on commodities and now we'll move to tax.
Our full year tax rate expectations are now 23%, higher versus our last expectations due to lower stock option exercises.
This is a $0.04 drag versus our previous outlook.
We now expect adjusted earnings per share to be at the lower end of our previous range of 6% to 8%.
Our brands continue to go from strength to strength as strong consumption in organic sales growth lapped almost 10% organic growth a year ago.
While inflation is broad based, we have taken pricing actions to mitigate, which gives us confidence in margin expansion in the back half.
And with that, Matt.
And I would be happy to take any questions. | compname reports q2 adjusted earnings per share $0.77 excluding items.
q2 adjusted earnings per share $0.77 excluding items.
2020 full year outlook raised from original outlook.
2020 reported sales growth forecast raised to 9-10%.
2020 organic sales growth forecast raised to 7-8%.
2020 adjusted earnings per share growth forecast raised to 13%. | 0 |
I will begin today with a high-level overview of our first quarter performance and capital allocation priorities.
Karla will then speak to our operating results and demand trends by end market, and Arthur will conclude with a review of our first quarter 2021 financials.
Our resilient business model, coupled with outstanding execution in a favorable market, resulted in record financial performance during the first quarter of 2021.
We experienced ongoing strength in metals pricing during the first quarter, led by multiple price increases for carbon steel products, along with improving demand in many markets, and leveraged our decentralized operating structure, small order sizes and diversification of products, end markets and geographies to achieve record gross profit margin for the third consecutive quarter of 33.6%, up 60 basis points from the fourth quarter of 2020 and up 330 basis points from the first quarter of 2020.
Our record quarterly gross profit margin, combined with average selling prices well above our expectations and our continued focus on expense control, contributed to record pre-tax income of $359 million in the first quarter of 2021, up over 100% from the prior quarter and up over 300% from the prior year period.
Our quarterly earnings per diluted share of $4.12 were also a record and substantially exceeded our outlook.
Our strong earnings and effective working capital management resulted in cash flow from operations of $161.8 million in the first quarter of 2021 despite $182.8 million of working capital investment.
This is a significant result as we typically use cash in the first quarter as we rebuild working capital from seasonal low fourth quarter levels, compounded by the significant increases in metals costs we are experiencing.
We improved our inventory turn rate to 5.4 times, surpassing our 2020 annual rate and companywide turn goal of 4.7 times.
Our ability to cross-sell inventory among our family of companies, which we believe is the key advantage and differentiator of our model and scale, was a significant contributor to our improved inventory management.
Despite extended mill lead times and inventory shortages, collaboration among our family of companies and strong long-standing relationships with our domestic mills enabled us to source the metal needed by our customers.
Our managers in the field effectively supported our valued customers by ensuring inventory availability while maximizing margin on opportunistic orders.
Our strong cash flow generation and significantly enhanced liquidity position enables us to maintain a flexible capital allocation strategy focused on both growth and stockholder returns.
Our 2021 capital expenditure budget of $245 million includes new buildings and other projects to expand, upgrade and maintain many of our existing operating facilities.
However, when factoring in project delays and extended lead times for equipment due to COVID-19, we believe our potential cash flow outlays for our capital expenditure will be closer to $300 million in 2021 due to the prior year holdover spending.
During the first quarter of 2021, we invested $43.7 million back into our business through capital expenditures, including several growth opportunities to address and exceed our customers' and suppliers' needs.
For instance, we've invested in toll processing expansions in Texas and Kentucky given the significant demand we've experienced in our toll processing capabilities throughout our footprint.
Operations at our Kentucky facility commenced in November 2020 and have been steadily ramping ever since.
Construction continues in Texas on our new greenfield facility focused on carbon steel tolling, which will support increased capacity of our toll processing customers who are primarily metals producers and their end customers.
We're very excited about these opportunities to expand our toll processing service offerings and see many more possibilities in the future for our toll processing capabilities moving forward.
As mentioned on our last call, we are installing energy-efficient lighting and solar panels in certain of our facilities as well as investing in additional innovative processing equipment to continue providing our customers with the highest quality products and services.
We continue to see a healthy pipeline of prospective opportunities, including in adjacent businesses in addition to traditional metals service center businesses as we've broadened our universe of potential acquisition candidates.
Nevertheless, we will maintain our strict transaction criteria, including our focus on quality of earnings when we evaluate any prospective targets to ensure a strong fit within our family of companies.
I will now turn to our stockholder return activity.
During the first quarter of 2021, we paid $44.8 million in dividends to our stockholders.
We've maintained our payment of regular quarterly dividends for 62 consecutive years without ever suspending payments or reducing our dividend rate.
In fact, we've increased our dividend 28 times since our 1994 IPO, including the most recent increase of 10% in the first quarter of 2021.
At March 31, 2021, approximately 2.8 million shares remained available for repurchase under our stock repurchase program.
We expect to remain a prudent allocator of capital by maintaining our flexible approach focused on both growth, which remains our top priority; and stockholder return activities, including opportunistic repurchases of our common stock.
In summary, I am inspired by the strong operational execution demonstrated by the entire Reliance team during the first quarter of 2021.
Our unwavering focus on the core elements of the Reliance business model, including health and safety, pricing discipline, diligent expense control when needed, inventory management, organic growth and innovation, enables us to perform from a position of strength in both good times and bad.
In the current environment characterized by extremely high metal pricing, strong demand from many of our customers and limited metal availability, we believe Reliance remains well positioned to continue generating strong earnings.
Given our strong liquidity position, we look forward to continuing to support the growth and needs of our customers and suppliers while also returning value to our stockholders.
We will continue to support our colleagues, customers, suppliers and communities in a sustainable manner through both the challenges and opportunities that lie ahead.
We remain confident that America is going to need Reliance to rebuild.
Strong demand conditions in the majority of our end markets resulted in our tons sold increasing 11.3% compared to the fourth quarter, which was within our guidance range of up 10% to 12% and above the typical seasonal improvement in shipping volumes we experienced in the first quarter.
While demand is healthy and continues to improve in most markets, our first quarter shipments did not reach pre-pandemic levels and were down 4% from the first quarter of 2020.
However, on a per day basis, our tons sold were down only 2.5%.
We believe underlying demand is stronger than our shipment levels reflect, given many factors holding back economic activity for us, our customers and our suppliers, including metal supply constraints, supply chain disruptions for various components and materials and labor and trucking shortages.
The good news is we expect to fill this demand in future periods and these factors support increased metal pricing.
This strengthened demand, coupled with rising input costs and limited metal availability, resulted in metal prices accelerating throughout the first quarter for many of the products we sell, most notably carbon steel products.
Our average selling price increased 20% compared to the fourth quarter of 2020, exceeding our guidance of up 12% to 14% by a significant margin.
These robust demand and pricing conditions contributed to an all-time high quarterly gross profit margin of 33.6%.
On a non-GAAP FIFO basis, which we believe is the best measure of our day-to-day operating performance, we achieved a record gross profit margin of 37.1%, an increase of 350 basis points compared to the prior quarter and up 600 basis points from the first quarter of 2020.
Way to go, team Reliance.
Our record gross profit margin was the result of outstanding execution by our managers in the field who once again effectively implemented price increases at the time of mill announcement prior to receiving the higher-cost metal into inventory, maintained their focus on higher-margin orders and were very selective given limited metal supply, which enabled us to capture an incremental margin benefit in excess of already strong levels.
I'll now turn to a high-level overview of our key end markets.
Demand for nonresidential construction, which includes infrastructure and is the largest end market we serve, continue to improve with first quarter shipments approaching pre-pandemic levels.
We continue to experience strong quoting activity for projects for big-box retailers, healthcare facilities, schools, large warehouses and data processing centers, among others.
And given our healthy backlogs, quoting activity and positive customer sentiment, we believe demand will remain steady at current solid levels.
We saw continued strength in demand for the toll processing services we provide to the automotive market, surpassing activity levels in both the fourth and first quarters of 2020 with automotive OEMs and steel and aluminum mills continuing to ramp production.
Importantly, our tolling operations serving the automotive market saw only minimal impacts to date as a result of the global microchip shortage, and we expect tool processing volumes to remain strong.
Demand in heavy industry for both agricultural and construction equipment continued to improve in the first quarter as our customers increased production levels to meet customer demand and replenish dealer inventories.
Demand for industrial machinery used in manufacturing processes was also strong in the first quarter of 2021.
Absent disruptions for our customers that impact their production, we expect demand to continue at strong levels.
Semiconductor demand during the first quarter continued to strengthen from the fourth quarter, and we expect this to continue.
The semiconductor space continues to be one of our strongest end markets.
Demand in commercial aerospace began to experience limited signs of improvement compared to the fourth quarter of 2020, which we believe was the trough of the current cycle.
We expect limited improvement throughout 2021.
On the other hand, demand in the military, defense and space portions of our aerospace business remains strong with backlog improving during the quarter.
We anticipate strong demand continuing in the noncommercial aerospace market for the balance of the year.
Finally, demand in the energy sector, which is mainly oil and natural gas, saw a modest recovery toward the end of the first quarter of 2021.
We anticipate a slight improvement in the second quarter given current oil prices and customers needing to replenish inventory for certain products.
We entered the second quarter of 2021 with strong demand and pricing momentum that creates an environment for us to optimize our model and deliver strong results.
We remain dedicated to partnering with our key customers and suppliers during these extraordinary times, and we can only do this with the continued commitment to health and safety and operational excellence that our Reliance colleagues have demonstrated every day throughout very challenging times.
I'll start with a recap of our quarterly results.
Strong pricing, healthy demand and record gross profit margin contributed to record gross profit dollars, which in turn drove record pre-tax income and record earnings per share.
Turning to our sales.
The significant increase in metal pricing and healthy demand resulted in our first quarter sales increasing 33% over the fourth quarter of 2020.
Compared to the prior year period, our first quarter sales were up over 10%, supported by the strong pricing momentum for most carbon steel products.
As Jim and Karla mentioned, the strong pricing environment, along with our focus on higher-margin orders and continued investments in value-added processing capabilities, collectively resulted in record quarterly gross profit of $953.7 million and a record gross profit margin of 33.6% in the first quarter of 2021.
We incurred LIFO expense of $100 million in the first quarter of 2021.
This compares to LIFO income of $20 million in the first quarter of 2020 and LIFO expense of $15.5 million in the fourth quarter of 2020.
At the end of the first quarter, our LIFO reserve on our balance sheet was $215.6 million.
We revised our annual LIFO expense estimate to $400 million from $340 million primarily due to higher-than-anticipated costs for certain carbon steel products.
Consistent with our accounting policy, we allocate our annual estimate on a pro rata basis in each quarter.
As such, our current projected LIFO expense for the second quarter of 2021 is $100 million.
As in prior years, we will update our expectations each quarter based upon our inventory cost and metal pricing trends.
Now turning to our expenses.
Our SG&A expense was generally consistent with traditional seasonal trends, increasing $54.9 million or 11.8% compared to the fourth quarter of 2020 due to strong volume and pricing momentum.
The quarter-over-quarter increase was mainly a result of higher incentive-based compensation given our record gross profit and pre-tax income.
Overall, our head count remained relatively consistent with year-end levels.
In comparison to the prior year period, SG&A expense was roughly flat due to lower wages as a result of reduced head count, which was down approximately 8% year-over-year, and was offset by higher incentive compensation due to record earnings levels in the first quarter of 2021 and to a lesser extent, inflationary increases.
We will maintain our disciplined approach to expense management and continue to monitor our expense structure as we progress further into 2021.
Our non-GAAP pre-tax income of $357.1 million in the first quarter of 2021 was the highest in our company's history and represents an increase of $136.5 million or 61.9% from the first quarter of 2020 due to favorable demand and pricing conditions, strong execution and diligent expense management.
Our non-GAAP pre-tax income margin of 12.6% was also a record and exceeded the prior year period by 400 basis points.
Our effective income tax rate for the first quarter of 2021 was 25.3%, up from 24.3% in the first quarter of 2020 mainly due to higher profitability.
We currently anticipate a full year 2021 effective income tax rate of 25%.
As a result of all these factors, we generated record quarterly earnings per share of $4.12 in the first quarter of 2021 compared to $0.92 in the first quarter of 2020.
On a non-GAAP basis, our first quarter earnings of $4.10 per share significantly exceeded our outlook and were up 104% from $2.01 in the fourth quarter of 2020 and up 67.3% from $2.45 in the first quarter of 2020.
Turning to our balance sheet and cash flow.
Our operations continue to generate cash despite significantly higher working capital needs.
We generated strong cash flow from operations of $161.8 million during the first quarter of 2021 due to our profitable operations and effective working capital management, including our focus on inventory turns.
As of the end of the first quarter, our total debt outstanding was $1.66 billion, resulting in a net debt-to-EBITDA multiple of 0.85.
We had no borrowings outstanding on our $1.5 billion revolving credit facility, providing us with ample liquidity to continue executing on all areas of our capital allocation strategy while maintaining our investment-grade credit rating.
I'll now turn to our outlook.
While macroeconomic uncertainty stemming from the COVID-19 pandemic continues, we remain optimistic about business conditions with strong underlying demand in the majority of the end markets we serve.
However, factors impacting shipment levels in the first quarter of 2021 such as metal supply constraints and supply chain disruptions for many of our customers will continue to persist in the second quarter of 2021.
Despite these factors, we estimate tons sold will be flat to up 2% in the second quarter of 2021 compared to the first quarter of 2021.
We expect metal pricing will remain near current levels with the potential for further upside in certain products.
Since current metal prices are substantially higher than the average selling price in the first quarter of 2021, we estimate our average selling price per ton sold for the second quarter of 2021 will be up 5% to 7%.
Given the strong demand and pricing fundamentals, we anticipate continued strength in our gross profit margin in the second quarter of 2021.
Based on these expectations, we currently anticipate non-GAAP earnings per diluted share in the range of $4.20 and to $4.40 for the second quarter of 2021.
In closing, we're extremely pleased with our record first quarter 2021 operational and financial performance, supported by strong pricing and demand trends as well as excellent execution by all of our colleagues in the field.
These factors collectively resulted in yet another quarter of robust profitability and cash flow, enabling us to continue executing on our capital allocation priorities of investing in the growth of our business and returning value to our stockholders. | q2 adjusted non-gaap earnings per share $1.09.
sees fy adjusted earnings per share $4.00 to $4.05.
raised 2021 full-year financial guidance.
increased quarterly dividend by approximately 8 percent.
qtrly revenue $2,812.8 million versus $2,454.4 million. | 0 |
Today, we'll update you on the company's third quarter results.
Our third quarter results exceeded our expectations as net sales rose 9% over the prior year to approximately $2.8 billion.
Our adjusted earnings per share was $3.95 per share.
All of our businesses performed well, managing through a changing environment in a period COVID directly and indirectly impacted many economies, creating supply chain difficulties that disrupted production as well as leading the government lockdowns in Australia, New Zealand and Malaysia that halted manufacturing and retail.
Despite these and other headwinds, our third quarter sales trends continued in most regions, with Europe's results reflecting more normal summer seasonality.
Home sales were robust across most geographies and consumers continued remodeling investments at a strong pace.
Year-over-year, the commercial sector showed improvement though at a slower rate as COVID concerns delayed the timing of some projects.
Our strategy is to enhance organizational flexibility, reduce product and operational complexity and align pricing with cost improved our results in the period.
We continue to implement lean processes and reduce complexity in manufacturing and logistics.
We're managing our investments in SG&A to support new products that will expand our future revenues and margins.
Even with greater external constraints, we ran most of our operations at high levels and we successfully managed many interruptions across the enterprise.
Rather than improving as we expected, the availability of labor, materials and transportation became more challenging, resulting in higher costs in the period.
Tight chemical supplies, in particular, reduced the output of our LVT, carpet, laminate and board panels.
While we are presently seeing COVID cases declining in most of the regions, many of our operations experienced increased absenteeism during the period, affecting our efficiencies in production.
For the near term, we do not see any significant changes in these external pressures.
Due to supply shortages, government regulations and political issues, natural gas costs in Europe are presently about 4 times as high than they were earlier in the year.
This has a temporary challenge to our European businesses as higher costs are reflected in gas, electricity and other materials.
Though our inventories increased during the period, mostly due to higher material costs and transportation delays on customer orders, our service levels remained below historical norms.
Most of our businesses are carrying significant order backlogs, and we plan to run our operations at high levels during the fourth quarter to improve our service and efficiencies.
Currently, some of our fastest-growing products are being limited by material and capacity constraints.
We have initiated additional investments to increase our production of those and increase our sales and service.
Completion of those projects is being extended due to longer lead times on building materials and equipment.
Our results have improved significantly during 2021 and we generated over $1.9 billion of EBITDA for the trailing 12 months.
Given this in our current valuations, our Board increased our stock purchase program by an additional $500 million.
Since the end of the second quarter, we bought approximately $250 million of our stock at an average price of $193 per share.
With our current low leverage, we have the capital to pursue additional investments and acquisitions to expand our sales and profitability.
Jim will now review our third quarter financials.
Sales for the quarter exceeded $2.8 billion and 9.4% increase as reported and 8.7% on a constant basis.
All segments showed growth, primarily due to price and mix actions as volume was generally constrained by supply, labor, transportation and COVID disruptions.
Gross margin, as reported, was 29.7% or 29.8% excluding charges, increasing from 28.3% last year.
The year-over-year increase was driven primarily by improved price and mix, which offset the increasing rate of inflation.
In addition, gains in productivity, less year-over-year downtime and favorable FX improved our margins.
The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed after the call.
SG&A as reported was 16.9% and flat versus prior year, excluding charges.
Increased SG&A dollars versus prior year as a result of costs that were curtailed due to the COVID-19 pandemic, higher sales, increased inflation, new product development and price and mix.
Operating margin as reported was 12.8%.
Restructuring charges were approximately $1 million, and we have reached our original savings goal exceeding $100 million in annual savings.
We continue, though, to pursue other initiatives to lower our costs.
Operating margins, excluding charges, were also 12.8%, improving from 11.5% in the prior year or 130 basis points.
The increase was driven by improved price and mix, offsetting increasing inflation as well as gains in productivity, favorable FX and greater year-over-year manufacturing uptime, improving our results.
We were partially offset by impact of constrained volume and increased cost in product development.
Interest expense was $15 million in the quarter, flat versus prior year.
Our non-GAAP tax rate was 21.4% versus 16.9% in the prior year, and we still expect the full year rate to be between 21.5% and 22.5%.
Earnings per share as reported were $3.93, and excluding charges were 3.95% -- $3.95, excuse me, increasing by 21% versus prior year.
Now turning to the segments.
Global ceramic sales came in just under $1 billion, a 9.6% increase as reported or approximately 9.1% on a constant basis, led by strengthening price and mix across our geographic regions.
Brazil, Mexico and the U.S. countertop business saw the strongest volume gains while other products performed well against a difficult year-over-year Q3 comparison, which had an abnormal seasonality.
Operating margin excluding charges was 11.9%, up 160 basis points versus prior year due to the favorable price/mix offsetting increasing inflation, which improved -- with improved productivity and limited year-over-year shutdowns strengthening our results, partially offset by increased costs in new product development.
Flooring North America sales just exceeded $1 billion, a 6.9% increase as reported.
The sales growth was driven by price and mix actions to offset rising costs as our sales volumes were impacted by supply, transportation and labor constraints.
Operating margin excluding charges was 11.4%.
That's an increase of 320 basis points versus prior year.
The improvement was driven by positive price and mix offsetting the increasing inflation and volume constraints.
In addition, productivity gains and less temporary shutdowns favorably impacted our results.
In Flooring Rest of the World, sales exceeded $760 million, a 12.7% as reported increase or 10.5% on a constant basis, driven again by price and mix actions while volumes here were constrained by material disruptions, especially in LVT, a return to a normal summer seasonality and COVID restrictions, which caused lockdowns in Australia, New Zealand and Malaysia.
Operating margin, excluding charges, was 17.4%.
This is a decrease versus prior year as a result of the return to a normal summer holiday, along with material constraints and COVID lockdowns which increased our costs and lower productivity, volume and increased the temporary shutdown.
Improved price and mix, which offset the increase in inflation and favorable FX benefited our results.
Corporate and eliminations were $11 million, and I would expect that to be $45 million for the full year.
Taking a look at the balance sheet.
Cash for the quarter exceeded $1.1 billion with free cash flow of $351 million in the quarter and over $720 million in third quarter year-to-date.
Receivables were just shy of $1.9 billion with a DSO of just under 57 days.
Inventories were just over $2.2 billion, an increase of approximately $374 million or 20% from the prior year.
That's an increase of about 16% if you compare to the year-end balance.
Inventory days just under 107 days compared to our low point last year at just under 100 days and 103 days at the year-end.
Property, plant and equipment exceeded $4.4 billion with capex for the quarter at $148 million, in line with our D&A.
Full year capex is currently projected to be $650 million, with D&A projected at $586 million.
Looking at the current debt.
One note on October 19, the company redeemed at par their January 2022 EUR500 million 2% senior notes plus unpaid interest, utilizing cash on hand.
The balance sheet overall and cash flow remained very strong with gross debt as of the end of Q3 of $2.3 billion and leverage at 0.6 times to adjusted EBITDA.
For the period, our Flooring Rest of World segment sales increased 12.7% as reported and 10.5% on a constant basis.
Operating margins were 17.4% as a result of pricing and mix improvements, offset by inflation and a return to more normal seasonality in the period.
During the quarter, sales were strong across our product categories and geographies outside those affected by government lockdowns.
Overall, raw material supplies continue to impact our operations, with LVT production affected the most during the quarter.
We expect that material, energy and transportation inflation will continue and chemical costs that rely on gas will accelerate in upcoming periods.
During the period, COVID shutdowns in Malaysia, Australia and New Zealand interrupted our production and sales.
These restrictions have now been lifted, and we are ramping up production to meet demand.
Our laminate collections continue to have strong sales growth with consumers embracing our proprietary waterproof products for their performance and realistic visuals.
Our new premium laminate introductions feature unique services that replicate handcrafted wood floors.
Our sales volume increased during the period, though our margins were pressured by higher-than-anticipated raw material and transportation inflation.
We added new capacity in Europe to meet demand, and we are initiating other projects to support further sales growth.
In Russia and Brazil, our laminate businesses are growing as we expand distribution with our leading collections.
As anticipated, our LVT sales were lower during the period, given material shortages and lower production that reduced our output.
We minimized the impact by improving our product mix and raising prices to pass through inflation.
Sales of our higher-value rigid LVT collections with patented water-type joint outperformed and benefited our mix.
We anticipate improved material availability in the fourth quarter to support higher LVT production levels and improve our service.
We have announced additional price increases as our energy and material costs continue to rise.
Our sheet vinyl production and sales were impacted by tight material supply and transportation bottlenecks and outbound shipments.
Our Russian sheet vinyl business performed well with sales growing as our distribution expanded.
Our wood plant in Malaysia resumed full operations in September after 12 weeks of government lockdowns due to COVID.
Sales of our wood products will be down in both the third and fourth quarters as our inventories have been depleted.
We have acquired a European wood veneer plant to improve supply, yields and cost of our wood flooring.
We're introducing waterproof wood collections with our patented Wet Protect Technology in our markets after its successful launch in the U.S. Production stops in Australia and New Zealand reduced our sales and margins, and we are scaling up our operations to meet demand as the markets reopen.
Our new premium collections, enhanced merchandising and consumer advertising will benefit our business as the markets return to normal.
We are increasing pricing to offset inflation and transportation costs.
Sales of our European insulation panels grew in the period as we implemented another price increase to offset rising material inflation.
Our income improved with disruptions in manufacturing due to tight material supplies.
We acquired an insulation manufacturer in Ireland and have begun integrating their operations with our existing business.
During the third quarter, our panels business grew and margins expanded as we increased our price mix and pricing.
We're introducing a new decorative range to enhance our participation in specified markets.
We have added new press that will increase our capacity and add more differentiated features to our products.
Our ongoing pricing actions offset rapidly rising material prices, and we will increase prices further in response to inflation.
In the fourth quarter, we will complete the acquisition of an MDF manufacturer in France to expand our capacity in Western Europe.
The company is a pioneer in bio-based resins, which will enhance our sustainability position.
In the third quarter period, our Flooring North America segment sales increased 6.9% and operating margins were 11.3% as reported as a result of productivity, pricing and mix improvements, partially offset by inflation.
Flooring North America had strong results given the material, transportation and labor constraints impacting our sales and production during the period.
Supplies of most oil-related chemicals were restricted, creating unscheduled production stops that lowered our sales and raised our costs.
We implemented additional price increases across most product categories as inflationary pressures intensified.
We continue to streamline our product portfolio and reduce operational complexity, benefiting our efficiencies and quality.
In residential carpet, limited material and labor availability are affecting our production and manufacturing costs.
We continue to increase prices to recover continued inflation.
Volume and efficiencies are being negatively impacted by low inventories, shorter runs and labor challenges.
We are replacing older assets with more efficient equipment, which is improving our labor productivity.
We have an elevated backlog, and we plan to run our operations at high levels in the fourth quarter to improve service and replenish inventories.
We are enhancing our sales and mix as consumers upgrade their homes with our premium SmartStrand and luxury nylon collections.
Commercial sales improved in the period, though the rate of growth has slowed as COVID cases increased.
The government, education and healthcare sectors outpaced office, retail and hospitality channels which are recovering more slowly.
Our hard surface sales are growing as we expand our offering and increase specifications in commercial projects.
We are investing in more efficient assets to improve cost, enhance styling and reduce labor requirements.
Our laminate and wood business continues to grow, though our sales were restricted by our capacities.
Our new laminate line should be operational by the end of this year to expand our sales and provide more advanced features.
Chemical shortages limited our laminate production in the period as we responded by reengineering our formulations to maximize our output.
We are reducing complexities to simplify our operations and improve our efficiencies and production.
Our new high-performance UltraWood collections are increasing our mix in wood and the productivity of our new plant is improving as volume increases.
Our LVT sales increased in the period, even with material supplies limiting production and shipping days in our sourced products.
We have improved our mix with enhanced features and lowered our costs by streamlining our processes.
Our plant has increased throughput and yields despite disruptions from a lack of material supply.
To support future growth, we are expanding our LVT operations adding approximately $160 million of production, with the initial phase beginning at the end of this year.
We are also increasing our sheet vinyl plant's production to satisfy expanding sales of our collections.
In the quarter, our Global Ceramic segment sales increased 9.6% as reported and 9.1% on a constant basis.
Operating margins were 11.9% as a result of higher volume, productivity, pricing and mix improvements, partially offset by inflation.
Our U.S. Ceramic business grew during the period with the residential sector remaining strong and commercial continuing to show improvement.
Our margins improved in the quarter as we implemented price increases to offset higher transportation and raw material costs, enhanced our mix and increased output from our plants.
Additional pricing actions are being taken to offset continuing inflation.
We are reducing our manufacturing costs by reengineering our products, utilizing alternative materials and enhancing our logistics strategies.
We are introducing higher-value products with new printing technologies, textured finishes and polished services to provide alternatives to premium imported tile.
We are growing our studio direct program that focuses on high-end remodeling and exterior collections that sell-through outdoor specialists and home centers.
Our quartz countertop sales continue to grow substantially as our production recovered during the period.
Our countertop mix is improving as sales of our higher-end visuals grow at a faster rate.
Our Mexican and Brazilian ceramic businesses are growing as we increased prices to offset inflation in both countries.
We are refining our product offering, improving our efficiencies and increasing our output.
We have expanded our participation in residential projects and commercial sales.
We are increasing the number of retailers that exclusively sell our products.
We are investing in new manufacturing assets in both countries to expand our production and enhance our product offering.
Sales in our European ceramic business remained strong as vacation schedules return to normal.
Increases in price, mix and productivity enhanced our results, though they were more than offset by rising inflation.
Our new products with enhanced visuals, unique shapes and large slabs increased our average selling price and improved our mix.
We are upgrading production lines to further enhance our styling and improve our efficiencies.
In the period, natural gas and electricity prices in Europe rose to unprecedented levels due to anticipated shortages.
Our margins will be negatively impacted until our prices align with energy cost in the future.
Sales and margins increased in our Russian ceramic business as enhanced mix and increased prices offset higher inflation.
Lower inventories and capacity limitations impacted our sales volume in the period, and we will continue to manage our mix until new capacity is operational.
Due to an equipment delay, our production expansion will not be ready until the third quarter of next year.
Our sanitary ware sales are growing significantly as we expand production and operate -- and our operations.
Throughout 2021, Mohawk has delivered exceptional results with higher sales growth, margin expansion and robust cash generation.
For the fourth quarter, we anticipate that industry seasonality will be more typical unlike last year when demand was unusually high.
In the period, we'll run our operations at high levels to support our sales, improve our service and increase our inventory.
Our sales in some categories are being limited by our manufacturing capacities, and we're increasing investments to expand the production of these growing categories.
We are continuing to implement additional price increases and manage staffing, supply and transportation constraints across the business.
We're maintaining aggressive cost management, leveraging technology and enhancing our strategies across the enterprise.
In Ceramic Europe, record gas prices are increasing the net cost by approximately $25 million in the fourth quarter, and it will take some time for the industry to adjust to the higher cost.
In addition, our fourth quarter calendar has 6% fewer days than the prior year.
Given these factors, we anticipate our fourth quarter adjusted earnings per share to be $2.80 to $2.90, excluding any restructuring charges.
Despite temporary challenges from inflation and material availability, our long-term outlook remains optimistic with new home construction and residential remodeling projected to remain robust, and the commercial sector improving as businesses invest and grow.
Next year, our sales should grow with capacity expansions and new innovative product introductions.
Our strategies to optimize our results continue to evolve with the economic and supply chain conditions.
Our balance sheet is the strongest in history and it supports increased internal investments and strategic acquisitions. | q3 earnings per share $3.95 excluding items.
sees q4 adjusted earnings per share $2.80 to $2.90 excluding items.
q3 earnings per share $3.93.
q3 sales rose 9.4 percent to $2.8 billion. | 1 |
Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Erik and I have worked together for a long time, and I know he will do a great job.
For the second quarter 2019, Hilltop reported net income of $57.8 million or $0.62 per diluted share, which represents a 77% increase compared with the $0.35 reported during the same quarter last year.
Additionally, Hilltop delivered a return on average assets of 1.74% and a return on average equity of 11.6%.
This quarter reflected the strength and diversification of our business model with the bank, mortgage business and broker-dealer all delivering significant year-over-year pre-tax income growth.
Average loans held for investment excluding broker-dealer loans grew by $740 million or 13% compared to the prior second quarter.
The large drivers were our Bank of River Oaks acquisition in Q3 2018 and our national warehouse lending business, which increases average balance by $225 million or 81% from second quarter 2018.
We continue to make paying a healthy pipeline of unfunded commitments and aim to prudently grow our loan portfolio by fostering our bank value relationships.
This was a strong quarter for PrimeLending as reflected by improvements versus Q2 2018 in both gain-on-sale margin and operating costs.
Also, the structured finance business at HilltopSecurities yielded a net revenue increase of $31 million compared to prior year from optimal market conditions and the strategic alignment with the capital market business.
Through the first six months of 2019, we have returned $40 million to our stockholders in dividends and share repurchases.
Under our Board-authorized share repurchase program, $25 million remains available through January 2020.
Credit quality remains a high priority, and we continue to focus on maintaining our underwriting discipline.
For the second quarter, nonperforming assets were $53 million, down slightly linked quarter and down $32 million compared to the second quarter 2018.
Moving to page four.
The bank had a healthy quarter with pre-tax income increasing by $13.5 million or 41% from prior year.
This increase was partially driven by a reduction in noninterest expense of $7.3 million attributed to a wire fraud and indemnification asset amortization in Q2 2018 as well as operational efficiency within the business.
Additionally, higher yields on higher loans balances delivered net interest income growth of $5.5 million despite lower accretion during the period.
In the second quarter, the bank closed two underperforming branches resulting in 62 full service branches.
Mortgage pre-tax income of $21.8 million for the quarter, an improvement of $8.4 million from Q2 2018, was the result of disciplined pricing and expense management despite a 4% decline in origination volume.
Multiple initiatives implemented during the second half of 2018 resulted in $6 million lower fixed cost and $4.3 million higher origination and closing costs fees.
Gain-on-sale margins increased by 15 basis points from Q2 2018, though remained stable over the trailing 12 months.
With elevated refinancing volume, we expect margin compression to persist and remain focused on delivering profitable volumes through the second half of 2019.
The broker-dealer reported a very strong quarter with a pre-tax margin of 18.9% on increased net revenues of 35% versus prior year.
The increase was largely driven by structured finance, which experienced higher production levels and strong secondary market margin at 10-year rates decline.
We feel good about the path of our new CEO, Brad Winges, and his leadership team are on to build upon HilltopSecurities established business line.
Results were relatively stable compared to prior year in our insurance business as we reported a pre-tax loss of $2.8 million for the quarter with a combined ratio of 113%.
Notably, we have begun to realize written premium growth in Texas and other core states.
In January, we introduced our platform for growth and efficiency initiatives, which includes a broad set of projects to operate -- to lower operating cost and build a foundation for future growth.
During the quarter, we benefited from the previously referenced mortgage efficiency and capital market strategic alignment initiatives as well as realized savings from our consolidated shared services and strategic sourcing.
While we expect the benefits to largely materialize in 2021, we are encouraged by the profits being made.
This past quarter, I traveled with several of our business leaders to our major markets in Texas and nationwide and met with employees from across all lines of businesses.
It gave us the opportunity to have candid roundtable discussions and learn about what our people are seeing in the market.
I came back inspired by our leadership and overwhelmed by the quality of our people in the field.
The strength of Hilltop is in our talented people and the impact they have on our customers and communities.
I'm starting on page five.
As Jeremy discussed, for the second quarter of 2019, Hilltop reported $57.8 million of income attributable to common stockholders equating to $0.62 per diluted share.
During the second quarter, Hilltop reported a $700,000 recovery and provision for loan losses.
In the quarter, the bank recaptured $6.2 million of allowance for loan loss, principally related to ongoing improvement in the oil and gas portfolio and a significant recovery from a previously classified oil and gas loan.
The second quarter provision includes approximately $3 million of net charge-offs or 18 basis points of average bank loans on an annualized basis.
Credit quality during the quarter remains solid.
But even with the recent strong performance, we are monitoring our portfolio rigorously to evaluate areas that may be experiencing any weakness.
Currently, we do not see any industries or concentrated exposures that are experiencing material deterioration.
During the second quarter, revenue-related purchase accounting accretion was $6.4 million and expenses were $2 million, resulting in a net purchase accounting pre-tax impact of $4.4 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization of deposits and other intangible assets related to prior acquisitions.
Related to the purchase loan accretion, as the purchase portfolio balances continued to decline, we expect scheduled interest income related to purchase loan accretion to average between $4 million and $6 million per quarter for the remainder of 2019.
Hilltop's capital position remains strong with a period in Common Equity Tier 1 ratio of 16.32% and a Tier 1 leverage ratio of 13%.
I'm moving to page six.
Net interest income in the second quarter equated to $108 million, including $6.4 million of purchased loan accretion.
Net interest income increased $3 million or 3% versus the same quarter in the prior year.
The growth in net interest income was driven by asset growth, including the acquired loans in Houston and improvement in net interest margin, which expanded by three basis points versus the prior year period.
Net interest margin equated to 3.49% in the second quarter and included 23 basis points of purchase accounting accretion.
The prepurchase accounting taxable equivalent net interest margin equated to 3.26%, which improved by eight basis points versus the same period in the prior year.
On a linked-quarter basis, taxable equivalent prepurchase accounting net interest margin declined by 12 basis points, resulting from lower yields on loans held for sale and the six basis point increase in the interest-bearing deposit costs.
During the second quarter, long-term interest rates and more directly 10-year rates continued to decline that began earlier in the year.
Year-to-date, the 10-year treasury yield has declined by approximately 65 basis points, which has a direct impact on Hilltop's loans held-for-sale yields, albeit on a lag basis.
Overall, the average yield on loans held for sale during the second quarter dropped by 32 basis points to 460 basis points, putting pressure on net interest margin during the quarter.
Given the continued declines in the 10-year rates during the second quarter, we expect that yields on loans held for sale will continue to decline further during the third quarter.
In addition, bank loan yields have increased as compared to the same period prior year, but the competitive pressure continues to intensify on both new and renewed loans.
As expected, we've seen deposit betas continue to increase even as the Federal Reserve did not move short-term rates higher.
Hilltop's cumulative beta for interest-bearing deposits in December of 2015 has been approximately 46%, remaining below our through-the-cycle model ranges of 50% to 60%.
With the change in market sentiment and the market's indication that the Fed could reduce rates throughout the remainder of 2019, we expect the deposit cost will reach peak levels later this year.
With the combination of lower loan held-for-sale yields and somewhat higher deposit costs, we expect additional pressure on net interest margin for the remainder of the year.
Therefore, we are maintaining our full year average prepurchase accounting net interest margin outlook of 3.25% plus or minus three basis points.
We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset liability flows across our portfolios.
Quarterly average gross earning assets increased by $268 million versus the same period in the prior year.
Second quarter earning asset growth was driven by the BORO acquisition and growth in our national warehouse lending business, which provides warehouse financing to third-party mortgage companies.
Growth was impacted by lower average loans held for sale, which declined by $282 million versus the prior year period.
I'm moving to page seven.
Total noninterest income for the second quarter of 2019 equated to $313 million.
Second quarter mortgage-related income and fees increased by $2.8 million versus the second quarter 2018.
During the second quarter of 2019, the competitive environment in mortgage banking remained intense as Hilltop's mortgage origination volumes declined by $147 million or 4% versus the same period in the prior year.
While mortgage volumes were challenged, gain-on-sale margins remained relatively stable during the second quarter at 333 basis points.
With the recent decline in the primary mortgage rate, the business experienced improvement in the refinance market as refinance volumes grew by 28% versus the prior year.
Given the improvements in the market related to lower long-term rates, we expect that full year origination volume in 2019 will be in line with full year 2018 production levels.
Regarding mortgage gain-on-sale margins, given the current competitive dynamics, our projected mix of origination business and our expectations on market rate, we expect the gain-on-sale margins will trend lower throughout the balance of 2019.
Other income increased by $35 million, driven primarily by improvements in sales and trading activities in both capital markets and structured finance services at HilltopSecurities.
Favorable market conditions resulted in a 25% increase in structured finance mortgage-backed security volumes and improved secondary spreads.
These businesses continue to realize the benefits of the investments we've been making to improve our structuring and distribution capabilities since the third quarter of 2018.
I'm moving to page eight.
Noninterest expenses increased in the same period in the prior year by $5 million to $344 million.
The growth in expenses versus the prior year were driven by an increase in variable compensation of $18 million at HilltopSecurities and PrimeLending.
This increase in variable compensation was going to strong fee revenue growth in the quarter.
Over the past five quarters, we've continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise.
Through these efforts, headcount, nonvariable compensation, professional services costs and marketing and development expenses continue to trend lower as we make progress against our efficiency initiatives.
During the second quarter, Hilltop incurred $2 million in costs related to the ongoing core system enhancements, and we do expect that these related expenses will increase for the remainder of 2019.
Moving to page nine.
Total average HFI loans grew by 11% versus the second quarter of 2018.
Growth versus the same period in the prior year was driven by loans acquired in Houston during the third quarter of 2018 and growth in our mortgage warehouse lending business.
Based on current production trends, seasonal and scheduled paydowns, the current competitive environment and our focus on high-quality conservative underwriting, we continue to expect the full year average HFI loans will grow between 4% and 6% in 2019.
Turning to page 10.
As previously noted and as shown on this chart on the top right of the slide, Hilltop's businesses have maintained solid credit quality as nonperforming assets have declined $32.5 million from the same period in the prior year.
The allowance for loan loss to HFI loans ratio equates to 83 basis points at the end of the second quarter of 2019 and the decline from the first quarter of 2019 reflects the aforementioned allowance recapture.
It is important to note that we maintain approximately $90 million of remaining discounts across the purchase loan pools, and these discounts provide additional coverage against future losses.
Moving to page 11.
Average total deposits are approximately $8.3 billion and have increased by $483 million versus the second quarter of 2018.
Interest-bearing deposit costs have risen by six basis points from the first quarter of 2019 as competitive pressures remain and clients are actively seeking higher rates of return on their deposits by migrating monies from noninterest-bearing and savings products into higher-yielding money market, CD and investment products.
We continue to focus on growing deposits through the expansion of existing relationships and new client acquisition while managing overall deposit cost as aggressively as possible while remaining competitive.
Moving to page 12.
During the second quarter of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability, generating approximately $47 million of pre-tax income during the quarter.
The quarter's results reflect the benefits of the growth in the Houston market, the affirmation allowance recaptured, which equated to $6.2 million and improvement in the efficiency ratio versus the prior year period of 10.6%.
The improvement in the efficiency ratio was driven by both revenue growth and lower expenses versus the prior year period.
Of note, the second quarter of 2018 included $4 million of expense related to the previously reported wire fraud and $2 million loss share related expenses.
The focus at PlainsCapital remains consistent: provide great service to our clients, drive profitable growth while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue growth and expense efficiency.
I'm turning to page 13.
PrimeLending generated a pre-tax profit of $22 million in the second quarter of 2019 driven by the efficiency efforts that the leadership team at PrimeLending executed during the third and fourth quarters of 2018 and has continued in the 2019.
While origination volumes declined by 4% versus the same period in the prior year, the combination of back-office efficiencies and branch performance management have yielded significant reduction in operating expenses, which declined by approximately $6 million versus the same period in the prior year.
Further supporting the improved results is our focus on pricing and fees.
Mortgage origination fees have increased from the same period in the prior year by 12 basis points, which yielded a small increase in fees versus the prior year even as origination volumes declined.
The focus for PrimeLending is to generate profitable mortgage volume, continue to focus on operational efficiencies and successfully launch our new mortgage loan operating system.
Turning to page 14.
HilltopSecurities delivered a pre-tax profit of $22 million for the second quarter of 2019, driven by solid execution in the structured finance and capital markets businesses, which have benefited from both our ongoing investments in structuring, sales and distribution and improved market conditions.
While activity was strong in the quarter, results from both of these businesses can be volatile as market rates, spreads and volumes can change significantly from period to period.
Related to Public Finance, while revenues declined modestly versus the same period in the prior year, we are investing in our franchise to support long-term growth by strategically hiring bankers to support client expansion and acquisition.
Based on current market activity, we expect results in this business to continue to improve throughout the remainder of 2019.
The focus for HilltopSecurities is to grow profitable revenue, optimize operating expenses, manage marketing liquidity risks within a moderate risk profile and finalize the deployment of the new core operating system.
Moving to page 15.
National Lloyds recorded a $3 million pre-tax loss for the quarter, which reflects seasonal increases in storm activity and client-related losses.
During the second quarter, the business delivered modest improvement in written premiums in our core states.
Growth in these core states remains the primary focus for 2019.
I'm moving to page 16.
For 2019, we're maintaining the full year outlook for our key balance sheet items, loans and deposits.
Given the actual changes in market interest rates and our expectation for rates over the coming quarters, we are adjusting our full year net interest income range lower to reflect our asset-sensitive position at PlainsCapital, the impact of lower market rates on loan-held-for-sale yields and our expectation of increasing deposit costs.
To reflect the strength in our fee businesses, we are adjusting our noninterest income outlook higher to reflect the results during the first half of 2019 and the improvement in current market conditions.
Our noninterest expense outlook range is slightly higher as variable expenses will continue to be correlated to our fee revenue businesses.
Lastly, as credit quality has remained solid and as a result of performance in the first half of 2019, we are adjusting our full year provision outlook range lower.
This outlook represents our current expectations with respect to the markets, rates and overall economic activity.
These, however, may change throughout the remainder of the year, and we will provide updates as necessary on our quarterly calls going forward. | hilltop holdings q1 earnings per share $1.46 from continuing operations.
q1 earnings per share $1.46 from continuing operations. | 0 |
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. | 1 |
Our consolidated earnings for the second quarter of 2021 were $0.20 per diluted share compared to $0.26 for the second quarter of 2020.
For the year-to-date, consolidated earnings were $1.18 per diluted share for 2021 compared to $0.98 last year.
Now I'll turn the discussion over to Dennis.
I hope your summer is going well and that you're staying safe.
On June 30, Washington State officially lifted most of the remaining restrictions that have been in place during the pandemic.
We're excited to see our local economies continue to recover.
We're experiencing increased loads, and customer growth is steady.
Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variants and case count in our communities.
We're ready and able to successfully adjust our business as needed and also continue to provide care and compassion for those who are struggling.
Now let's look at some highlights from our second quarter.
We had a challenging second quarter, which included an unprecedented heat wave that brought with it several consecutive days of triple-digit record-breaking temperatures across the region.
On June 29, Spokane temperature soared to 109 degrees, setting new record -- a new record high temperature and was even higher in many of our neighborhoods.
That same day, Avista experienced a major increase in customer usage, which resulted in the highest energy usage in our company's 132-year history.
The intense temperatures, combined with record high usage, strained parts of our electrical system and caused some of the equipment that runs our electric grid to overheat.
Six of our 140 distribution substations were impacted.
To prevent the equipment from overloading and to avoid extensive and costly damage to our electric system, we implemented protective outages for customers served by the equipment that was most impacted by the heat.
Over the course of the event, we were able to reduce the impact to customers through system modifications.
We appreciate our customers' patience for those who experienced outages.
Higher customer loads, related to the extended heat wave, were the primary driver for an increase in net power supply cost to serve our customers, which negatively affected the Energy Recovery Mechanism, or ERM.
Overall, we've experienced hotter and drier-than-normal weather across the Pacific Northwest, which contributed to lower-than-normal hydroelectric generation and increased power prices.
For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads.
As a result, Avis Utilities' earnings were below expectations for the second quarter.
AEL&P's earnings met expectations in the second quarter, and they are on track to meet the full year guidance.
It was a strong quarter for our other businesses, which exceeded expectations due to gains on our investments and the sale of certain subsidiary assets associated with Spokane steam plant.
Wildfire resiliency continues to be a focus for Avista.
Our region has experienced extremely dry conditions all spring and summer.
And combined with high temperatures, wildfire risk is high.
In response to these conditions, Avista has been operating in, what we call, dry land mode since late June, and dry land mode decreases the potential for wildfires that could occur when reenergizing a power line.
Normally, under normal conditions, these lines, located in rural and/or forested areas, are generally reenergized automatically.
However, during the current dry weather conditions, Avista's line personnel physically patrol in outage area before a line is placed back into service.
This can require more time to restore service, but it decreases a potential fire danger.
This practice is in line with Avista's wildfire resiliency plan, which was released last year, building on prevention and response strategies that have been in place for many years.
Avista has committed to a comprehensive 10-year wildfire resiliency plan that includes improved defense strategies and operating practices for a more resilient system.
In regards to regulatory matters, we are pleased to have reached an all-party settlement in our Idaho general rate case.
The new rates are fair and reasonable for our customers, the company and our shareholders and will allow Avista to continue receiving a fair return in Idaho.
Our Washington general rate cases continue to work their way through the regulatory process.
Our hearings have been held, and we expect a decision by the end of September.
In Oregon, we expect to file a rate case in the fourth quarter of 2021.
We are confirming our 2021 earnings guidance with a consolidated range of $1.96 to $2.16 per diluted share.
While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista Utilities by $0.10 per diluted share and raise other by $0.10 per diluted share.
For 2022, we are lowering consolidated earnings guidance by $0.15 per diluted share to a range of $2.03 to $2.23 per diluted share.
For 2023, we are confirming our earnings guidance with a consolidated range of $2.42 and to $2.62 per diluted share.
Although we expect to experience headwinds in 2022 from regulatory lag, we are confident that we can meet our earnings guidance for 2023 and earn our allowed return.
Looking ahead, we'll continue focusing on our utility operations, while prudently investing in the necessary capital to maintain and update our infrastructure to provide safe, reliable and affordable energy to our customers and our communities.
I know everybody is sitting on the edges or seat waiting for the Blackhawk's next acquisition, which is a Spokane native.
We got Tyler Johnson, a 2-time Stanley Cup Champion, who is a Spokane native.
So we're pretty excited about that.
There's your Hawks update.
As Dennis mentioned, we're confirming our 2021 earnings guidance, lowering our utility guidance for '21 and also '22 and confirming '23 consolidated guidance.
Our guidance -- I'll spend a little time on that.
Our guidance assume, among other things, a timely and appropriate rate relief in our jurisdictions.
That's very important as we need -- Dennis mentioned, we settled our Idaho case.
We're still awaiting approval from the commissions, which we expect before those rates go into effect September 1.
For 2021, we expect Avista Utilities to contribute in the range of $1.83 to $1.97 per diluted share, and the lower end of our guidance in '21 and '22 for the Avista Utilities is primarily due to increased regulatory lag.
That's due to increase capital expenditures primarily due to growth and higher-than-expected depreciation expense.
But that is, we believe, all timing, and we begin -- as we begin to plan for our next Washington general rate case to be filed early in the first quarter of '22, we expect that to be a multiyear rate plan as required under the new law.
We will seek to include all capital investment through the end of the rate plan period in rates in an effort to earn our allowed return by 2023.
In addition, we have experienced an increase, as Dennis mentioned, in actual and forecasted net power supply cost.
Although the midpoint of our guidance range does not include any benefit or expense under the ERM in Washington, the increase in power supply cost has reduced the opportunity for us to be in the upper half of the guidance range.
And our current expectation for the ERM is a surcharge position within the 90-10 sharing -- company sharing band, which is expected to decrease earnings by $0.08 per diluted share.
And recall, last quarter, our estimate for the ERM for the year was in a benefit position, which was expected to add $0.06 per diluted share.
In addition, we are also absorbing more net power supply cost under the PCA in Idaho.
For 2021, as Dennis mentioned, we expect AEL&P to contribute $0.08 to $0.11.
And we increased the range in our other businesses by $0.10, which really offsets the utility reduction, and that's largely due to a range of $0.05 to $0.08 of diluted share because of investment gains and the gain we experienced from the sale of Spokane Steam Plant.
Our guidance generally includes only normal operating conditions and does not include unusual or nonrecurring items until the effects are known and certain.
Moving on to earnings for the second quarter.
Avista Utilities contributed $0.11 per diluted share compared to $0.26 in 2020.
Compared to the prior year, our earnings decreased due to an increase in net power supply costs, as Dennis mentioned, mainly due to higher customer loads from the heat wave, and we had lower-than-normal hydroelectric generation because of the hot and dry conditions.
Our hydroelectric generation is about 91% of -- our expectations are normal for this year.
The ERM in Washington also moved significantly.
Had a pre-tax expense of $7.6 million in the second quarter of '21 compared to a pre-tax benefit of $0.4 million in 2020.
Year-to-date, we've recognized $3.3 million of expense in '21 compared to $5.6 million in benefit in 2020.
In addition to the higher power supply cost, we also had higher operating expenses in the quarter, mainly due to the timing of maintenance projects, as many of those maintenance projects were delayed in 2020 because of COVID-19, whereas in 2021, we returned to our original schedules and performed that maintenance in the second quarter.
The higher maintenance costs were partially offset by lower bad debt expense as we are continuing to defer bad debt through our COVID-19 regulatory deferrals.
Moving on to capital.
As Dennis mentioned, we're committed to be continuing to invest the necessary capital in our utility infrastructure.
We currently expect Avista Utilities to have increased capital expenditures up to $450 million in 2021 and $415 million in 2022 -- or $445 million in '22 and '23.
That's a $35 million and $40 million increase in '21, '22 and '23, $40 million in '23 as well.
And this is really to support continued customer growth.
Our customer growth's about 1.5%, which is up from 0.5% to 1% in prior expectations.
We expect to issue approximately $140 million of long-term debt and $90 million of common stock, including $16 million that we've already issued through June on the common stock side in 2021.
The increase in long-term debt and common stock is to fund the increased capital expenditures. | compname reports q2 earnings per share $0.26.
q2 earnings per share $0.26.
reaffirms fy earnings per share view $1.75 to $1.95. | 0 |
This is Ned Zachar.
We very much appreciate your participation.
Part of my new duties includes covering the usual and customary safe harbor information for these calls.
So please bear with me for just a few minutes.
pb.com and by clicking on Investor Relations.
Our format today is going to be familiar.
Marc, the floor is yours.
Ned brings a wealth of experience to the role including investing and analyst experience.
Ned has also been an investor in our debt [Phonetic], so he is familiar with our company.
Turning to the quarter.
Given a return to pre-COVID top line seasonality, the distortions in last year results in supply and demand imbalances, there were many different crosscurrents running through the quarter and year-to-year comparisons.
While it's easy to get lost in the numbers, from my perspective, the headline is this.
Demand for our products and services remain strong, and we continue to make progress, repositioning our company for long-term success.
Our Presort business had an excellent quarter from both a top and bottom line perspective.
The Presort team was able to overcome labor and transportation inflation by managing price and productivity and moved back into our long-term profit model.
Importantly, the investments we have made in our network and technology have positioned us well to drive even more productivity and help more clients.
Our SendTech business performed close to the long-term model even though supply constraints hit the top and bottom line.
Equipment sales in our backlog both increased in the quarter, evidencing strong demand.
We will continue to battle through supply demand dynamics, but clearly our new product innovations are making it a very positive difference.
In addition, more of our business is moving to a subscription model.
While this depresses short term revenue, increased subscription revenue is a very positive harbinger for the future.
Within Global Ecommerce, while there are year-to-year aberrations, there are two things that are important to the long-term success of this business.
The first is service to our clients.
We have improved our end to end cycle times by 25% and since the beginning of the year, which is a significant improvement.
And secondly, gross margin.
It is notable that gross margin improved from prior year despite the fact that we had a substantial capacity and without the benefit of peak volumes.
We have foreshadowed that as volumes normalize, thus, margin improvement would happen, and it did.
We have been very disciplined about the kind of volumes we have committed to the fourth quarter, and we like what we have, both in terms of overall volume commitments, the economics and the kind of volume we anticipate receiving.
Like others in the industry, we saw volumes decreased year-to-year in the quarter, but we very much like how we are positioned for the fourth quarter and going forward.
However, to be clear, we expect there to be some challenges this peak season.
Daily headlines talk about the supply chain disruptions, and larger players are already carrying out an impact on the results or outlook.
We are not immune to these supply chain constraints more as it relates to our Ecommerce client supply levels and, to a degree, our SendTech products.
While it remains a level of uncertainty, our team is substantially better positioned this year based on the actions we have taken thus far.
Additionally and similar to the market, we're looking at pricing to help offset some of the higher costs, particularly as it relates to transportation and labor.
For example, within Ecommerce, we have put in place a surcharge for this peak season and recently announced our annual general rate increase effective for 2022.
And we've implemented pricing increases in other parts of our business where it's justified by the new and increased value we are delivering for clients through our new product portfolio.
So lots of moving pieces, but from my perspective, a successful quarter across many dimensions, but most importantly in terms of how the quarter sets us up for our going forward success.
Total revenue for the third quarter was $875 million and declined 2% from prior year.
Recall that the year-over-year comparisons include the impact of COVID on us and many other companies.
Last year's third quarter saw a very positive impact on Ecommerce revenue and an adverse impact on SendTech and Presort.
When we compare this year's third quarter to the third quarter of 2019, in other words, pre-COVID, our 2021 revenue grew over 10%, which illustrates that the bulk of the top line gains we made last year remain intact.
Adjusted earnings per share was $0.08, and GAAP earnings per share was $0.05.
EPS includes a $0.02 net tax benefit offset by a $0.03 charge related to a specific pricing assessment in Global Ecommerce, which I will discuss momentarily.
Free cash flow was $30 million, and cash from operations was $71 million, down from prior year, largely due to higher Capex and changes in working capital, which are in line with our previous commentary on this topic.
During the quarter, we paid $9 million in dividends and made $6 million in restructuring payments.
We spent $57 million in Capex, as we continue to enhance our Ecommerce network and drive productivity initiatives in both our Ecommerce and Presort businesses.
We ended the quarter with $743 million in cash and short-term investments.
During the quarter, we redeemed our 2022 notes for $72 million.
Notably, total debt has declined about $225 million since year-end 2020 to $2.3 billion.
When you take our finance receivables, cash and short-term investments into consideration, our implied operating company debt is $556 million.
Let me turn to the specifics in the P&L, starting with revenue versus prior year.
Equipment Sales grew 4%.
We had declines in Business Services of 1%, Support Services and Supplies of 4%, Rentals of 5% and Financing of 17%.
I would like to point out that as it relates to our Financing revenue, prior year results included investment gains related to the sale of securities, which represent about half of the year-over-year decline.
Gross profit was $286 million and improved across our Ecommerce and Presort segments.
Gross margin of 33% was flat to prior year.
SG&A was $225 million and approximately $14 million lower year-over-year.
SG&A was 26% of revenue, which is a 100 basis point improvement over prior year.
Within SG&A, corporate expenses were $49 million, $4 million lower than prior year largely due to variable employee-related costs.
R&D was $11 million or 1% of revenue.
EBITDA was $92 million, and EBITDA margin was 10.5%, both of which were relatively flat to prior year.
EBIT of $50 million was down about $4 million from prior year, while EBIT margin of 6% was flat to prior year.
Total interest expense was $36 million, down $3 million year-over-year.
Our tax rate of 1% includes net benefits associated with the resolution of tax matters.
And we expect our rate will return to more normalized levels going forward.
Shares outstanding were approximately 179 million.
Let me turn to each segment's performance.
Within Ecommerce, revenue in the quarter declined 4% to $398 million.
However, recall that last year's third quarter saw a surge of new revenues driven by the effects of the pandemic.
If you compare this quarter to third quarter of 2019, revenues for the Ecommerce segment are up over 40%.
Said another way, we kept the vast majority of the revenue gains we experienced post COVID.
Inside of Ecommerce, revenue growth from Cross Border and Digital Services was offset by lower revenues from Domestic Parcel services.
Domestic Parcel volumes were 41 million in the quarter, down from prior year on a tough compare, but up from 2019 levels.
Aside from the tough compare, the decline in volumes can be attributed to the return of a more normal seasonality, where third quarter is typically softer than second.
Additionally, we made a strategic decision to take on volumes that fit our desired partial profiles and drive improved service levels, which also had an impact on volumes.
Demand for our services continues to be strong, as we signed over 130 client deals in the quarter and were able to bundle additional services with 40% of those signings.
Gross margin improved 100 basis points from prior year despite higher labor and transportation cost and inclusive of the previously mentioned pricing assessment.
EBITDA for the quarter was breakeven, which is an improvement of $3 million versus the same period last year.
EBIT was a loss of $21 million.
As I referenced earlier, our results in the quarter include an $8 million charge associated with a pricing assessment, which was mainly caused by lower-than-anticipated volumes that originate outside of the U.S. for our domestic delivery services.
This assessment encompasses the first three quarters of the year.
The impact from this pricing assessment has been factored into our full year guidance.
It is also important to highlight that since the beginning of the year, there has been a 25% improvement in our end-to-end cycle time from induction into our system to the actual delivery of the parcels.
Looking ahead, we have taken numerous steps to be ready for this year's holiday peak season.
We have brought in new leadership with deep industry expertise across virtually every facility in the network.
Additionally, last year's peak called for a change in our approach to hourly labor, and we have made very good progress heading into this year-end.
We have more than doubled the ratio of our permanent hourly workforce from a year ago, and we are seeing promising results from new wage programs, resulting in a more effective recruiting process and improved employee retention, both of which will further improve service quality.
We have increased our PB fleet by 42% over prior year, which reduces our reliance on third-party transportation including use of the spot market.
Lastly, we opened three new facilities and are expanding another to create more effective network footprint with enhanced coverage.
Additionally, all of our new facilities now have some element of induction and/or sortation automation with plenty of opportunity for further automation still in front of us.
The net of all these items is that we believe we are well-positioned to handle peak volumes and deliver appropriate service levels to our clients.
Presort had a terrific quarter.
Revenue was $139 million, 9% better than prior year.
This is the third consecutive quarter of positive revenue growth, illustrating the resilience of a business that has recovered nicely from the impact of COVID.
Revenue growth was driven by several factors including higher revenue per piece, strong sales performance and growth in overall volumes.
In addition, we are realizing clear financial benefits from network investments we made to capture greater work share discounts around five-digit sortation.
While volumes and revenue grew, so did variable cost to support that growth.
On a positive note, the strength of our management systems, as well as the investments we have made in technology, have enabled us to hold productivity levels flat to prior year.
In the end, we are pleased that volumes and revenue growth more than offset the market-driven increases in our Presort costs.
We will continue to invest in automation and productivity in order to help us continue to grow EBIT dollars and expand profit margins.
For the quarter, Presort EBITDA was $27 million, and EBITDA margin was 20%.
EBIT was $21 million, and EBIT margin was 15%.
All of these are significant improvements from prior year and aligned with our long-term targets.
Moving to the SendTech segment.
SendTech revenue was $338 million, which was down 5% from prior year.
As noted earlier, last year's third quarter included investment gains which benefited financing revenue and created a challenging year-over-year comparison.
Last year's investment gains represent about 200 basis points of the year-over-year revenue decline for SendTech in the quarter.
Inside SendTech, I'd like to highlight Equipment Sales, which is a leading indicator for future revenue streams.
For the quarter, Equipment Sales saw 4% growth despite some supply chain challenges in obtaining product.
I'd also highlight our efforts to shift our business mix to the growth areas of the shipping and mailing markets.
Our new SendTech products and offerings have been gaining traction in the marketplace led by the SendPro family, which is an all-in-one system that offers multi-carrier alternatives to find the best rates and delivery options, track parcels, gain postage discounts and manage spend.
In North America, more than 25% of our revenue comes from these new products, and we have begun to launch these products in select international markets.
We are also seeing strong demand for our SendPro mailstation product, which we launched in April 2020 and have shipped over 40,000 of these devices to date.
Our SaaS-based Subscription revenue grew 21%, and paid subscribers for our SendPro online product were up 58% over prior year.
I am also pleased to report that we have been able to satisfy the strong demand for our products, while managing supplier and transportation disruptions that have become prevalent across global supply chains.
SendTech EBITDA was $107 million, and EBITDA margin was 32%.
EBIT was $99 million, and EBIT margin was 29%.
Margins reflect the decrease in high-margin financing results as well as increased freight and shipping costs that have become a theme across the corporate sector.
It's important to note that we have implemented pricing actions where it is justified by the new and increased value we are delivering for clients through our newer product portfolio.
Let me now turn to our outlook.
As Marc discussed, we expect there will be some supply chain disruptions.
We are not immune to the marketwide supply chain challenges, but we believe our outlook takes this into consideration, and we are reaffirming what we have previously communicated.
We still expect annual revenue at constant currency to grow over prior year in the low to mid-single-digit range.
We still expect adjusted earnings per share to be in the range of $0.35 to $0.42.
And we continue to expect Global Ecommerce to be EBITDA positive for the year.
We still expect free cash flow to be lower than prior year driven primarily by a rebound in Capex investments largely as it relates to the expansion of our Ecommerce network and productivity initiatives, along with a slower decline in our finance receivables.
We also expect our tax rate in the fourth quarter to return to a normalized level.
In summary, I feel that Pitney Bowes is in very good shape both operationally and financially.
We have taken important steps throughout the year to strengthen our network capabilities and footprint, our balance sheet and our human capital.
These actions leave us well-positioned to achieve our financial objectives for the year and going forward. | q3 adjusted earnings per share $0.08.
q3 gaap earnings per share $0.05.
sees fy adjusted earnings per share $0.35 to $0.42.
q3 revenue $875 million.
fy 2021 revenue still expected to grow over prior year in low-to-mid single digit range.
fy 2021 adjusted earnings per share still expected to grow over prior year and be in range of $0.35 to $0.42. | 1 |
I'll now discuss the financial results.
We generated revenue of $187.5 million during the second quarter of 2020 compared to $218.2 million during the second quarter of 2019.
The decrease was primarily attributable to softer demand in April related to the COVID-19 pandemic.
Volume began to decline in late March, which is also when our two manufacturing facilities in the UK were shut down completely to comply with government orders.
We've reported net income of $5.5 million or $0.17 per diluted share for the three months ended April 30, 2020 compared to a net loss of $24 million or $0.73 per diluted share during the three months ended April 30, 2019.
The net loss in the second quarter of 2019 was mainly due to a $30 million non-cash goodwill impairment in our North American Cabinet Components segment.
On an adjusted basis, net income was $6.4 million or $0.19 per diluted share during the second quarter of 2020 compared to $6.3 million or $0.19 per diluted share during the second quarter of 2019.
The adjustments being made to earnings per share are for restructuring charges, impairment charges, certain executive severance charges, accelerated D&A, foreign currency transaction impacts, and transaction and advisory fees.
Adjusted earnings were essentially flat, with lower SG&A offsetting volume declines related to the pandemic.
On an adjusted basis, EBITDA for the quarter was $21.8 million compared to $23.4 million during the same period of last year.
Moving on to cash flow and the balance sheet, cash provided by operating activities was $2.5 million for the six months ended April 30, 2020 compared to $143,000 for the six months ended April 30, 2019.
Year-to-date, as of April 30, free cash flow was slightly lower than last year, mainly due to the negative impact the pandemic had on working capital during the second quarter, as it was hard to adjust the inventories quickly due to the speed at which it hit.
However, we expect an improvement in working capital in the second half of the year and have reduced our capital expenditure program.
We now plan to spend between $20 million and $25 million this year and currently expect to generate $30 million to $35 million in free cash flow in the second half of the year.
As previously disclosed, we drew down our revolver by $50 million during the second quarter as a precautionary measure.
We have subsequently repaid the $50 million and do not expect to have to draw on our revolver again for the rest of the year.
However, we may use our Swingline as necessary in the normal course of business.
Our balance sheet is strong, we have ample liquidity, and our leverage ratio of net debt to last 12 months adjusted EBITDA remained unchanged at 1.4 times as of April 30, 2020.
We will continue to focus on generating cash and paying down debt in the second half of the year, which should offset the decrease in forecasted EBITDA enough to keep our leverage ratio around 1.4 times for the remainder of the year.
Because of our strong liquidity position and confidence in the second half, we do not foresee a change to our current dividend policy.
As a group, they accepted the challenges of being an essential business and maintain production so that we could provide uninterrupted service and products to our customers.
They did this in an environment where the rules and regulations seem to change daily.
In addition, we witnessed countless examples of our employees giving their time, talents and resources to help others in their communities.
Similar to our first quarter, the second quarter started strong and our results were trending better than projections.
However, the COVID-19 pandemic and related regulations began to impact our business toward the end of March.
As such, our focus shifted to the following priorities: first, the health, safety and welfare of our employees; second, supporting our customers; and third, liquidity and cash flow management.
Companywide, we have a very robust enterprise risk management process that evaluates various risk scenarios and prepares action plans to mitigate those risks.
One such risk was a global pandemic, and when COVID-19 hit, we were able to react quickly as we already had a plan in place.
I will now discuss results from each of our operating segments.
I'll start with the North American Fenestration segment.
Each of our plants in this segment was deemed an essential business and operated throughout the entire quarter.
Revenue declined 5.9% from prior year Q2, but we were seeing revenue growth prior to the impact from the pandemic.
In fact, revenue was trending 3.1% above prior-year levels for the first five months of our fiscal year.
However, revenue in April declined by approximately 25% year-over-year due to the impact from COVID-19.
As we have stated in the past, our cost structure is highly [Phonetic] variable in nature.
And as such, when our volumes dropped, we acted quickly with furloughs, reduced work hours and reductions in discretionary spending, which enabled us to protect our margins.
In addition, SG&A reductions, lower medical expenses and lower incentive accruals, all favorably impacted results, and we were able to realize a margin expansion of approximately 100 basis points in this segment during the quarter.
Revenue in our European Fenestration segment decreased by 27.2% from prior year to $29.2 million, excluding foreign exchange impact.
Similar to our North American Fenestration segment, revenue was trending 2.4% above prior year levels for the first five months of our fiscal year.
However, largely due to the fact that the UK was shut down completely, revenue in April was down approximately 85% year-over-year.
As Scott mentioned in his comments, our UK manufacturing facilities were mandated to close on March 25 and just recently restarted operations.
Our German manufacturing facility remained operational but on reduced shifts and work hours.
Our North American Cabinet Components segment generated revenue of $50.7 million during the quarter, which was 19.4% less than prior year.
This volume drop was driven by COVID-19 related impacts and the previously announced loss of one customer, who exited cabinet manufacturing in late 2019.
Revenue in April decreased by approximately 37% year-over-year.
After adjusting for the lost customer, revenue was down 14.6% for the quarter and 34% in April.
The decrease in revenue in this segment was intensified due to the fact that some of our customers are located in states where cabinet manufacturing was not deemed essential.
As a result, they were forced to close for some period.
While each of our cabinet component plants was deemed essential and continued to operate throughout the quarter, the rapid pace of the customer closures in other states made it challenging to manage our fixed cost, while balancing the needs and delivery requirements of our operating customers.
We aggressively managed our variable cost structure by quickly implementing temporary furloughs and shortened work weeks, but the closure of some customers nevertheless had a negative impact on the segment's EBITDA and margins.
EBITDA was also impacted by a $1.8 million accrual for writing off a portion of the inventory associated with Chinese-sourced product for the customer that exited the cabinet business.
Absent this write-off, we would have realized margin expansion in this segment as well.
As I mentioned earlier, managing liquidity and focusing on cash flow has been a top priority.
As such, we are actively managing the line items that we can control.
We are proactively working with our suppliers on extended terms and payments.
We are also making progress in adjusting our inventory levels to match volumes, though this process does take some time, given the rapid drop in shipments.
Capex has been reduced in an effort to optimize cash flow.
However, because of our strong liquidity position, we will continue to spend capital on safety-related projects and growth-related strategic projects such as the vinyl extrusion technology upgrade project that we have in Kent, Washington.
We continue to be confident in our ability to generate cash and manage working capital during the second half of this year.
These moves, combined with the normal seasonality of our business, should allow us to generate $30 million to $35 million of free cash flow for the full year, basically all of which will be generated in the second half.
Like most other companies, we withdrew our guidance for 2020 as soon as the negative impacts from the pandemic started to become apparent.
As mentioned, results for the first five months of our fiscal year through March were solid.
Revenue fell quickly though in April.
But we were prepared and we took the appropriate actions to minimize the impact to our business and margins.
We are beginning to see signs of recovery and optimism across the building products industry.
We currently anticipate Q3 revenue will be down by 20% to 25% year-over-year in North America and adjusted EBITDA margin will be down 350 basis points to 400 basis points.
For the third quarter in Europe, we currently expect revenue to decrease by 40% to 45% year-over-year with adjusted EBITDA margin contracting by 550 basis points to 600 basis points.
This forecast assumes a slow recovery in Europe, no second wave of COVID-19 and no further shutdowns or restrictions on our facilities.
While we have very little visibility into our fourth quarter, we anticipate volumes will improve over Q3 but will not recover to prior-year levels.
We will provide an updated view on the full year when we report third quarter earnings in early September, but we are very encouraged by what we are seeing and hearing from our customers.
In summary, although we expect negative impacts from the COVID-19 pandemic to continue throughout this year, we are optimistic that we are seeing signs of a recovery.
We will stay focused on managing all items under our control with a continued emphasis on generating cash and maintaining a strong balance sheet.
With that being said, operator, we are now ready to take questions. | quanex building products - decrease in net sales during q2 of 2020 was primarily attributable to softer demand in april related to covid-19 pandemic.
qtrly net sales $187.5 million versus $218.2 million.
quanex building products q2 earnings per share $0.17.
q2 earnings per share $0.17.
qtrly adjusted earnings per share $0.19. | 1 |
We expect the call to last roughly an hour.
In addition, during our call today, we will refer to certain non-GAAP financial measures that we believe provide additional information to enhance the understanding of the way management views the operating performance of our business.
Our third quarter performance reflects continued momentum across our business.
Global Client top line performance, which grew at 11% on a constant currency basis was once again driven by strong demand for Transformation Services, made up of analytics, digital and consulting.
Our strategic investments over the years in capabilities and talent, including the continuous training and development of our global workforce positions us well to address the pressing challenges and opportunities our clients are facing.
This quarter, we achieved the milestone of crossing the threshold of $1 billion in quarterly total revenue for the first time.
For the third quarter 2021, we delivered: total revenue of $1.02 billion, up 8% on a constant currency basis; Global Client revenue of $921 million, up 11% on a constant currency basis; adjusted operating income margin of 16.6% compared to 17.1% during the third quarter of 2020; and adjusted diluted earnings per share of $0.66 per share, up 18% year-over-year.
Global Client revenue growth in the quarter cut across almost all of our industry verticals with double-digit growth in consumer goods and retail, life sciences and healthcare, high-tech and manufacturing and services.
As expected, banking and capital markets growth continued to be muted due to the restructured relationship with one client that resized its asset management business in late 2020.
Our pipeline remains healthy with a mix of both large and regular-sized deals.
We continue to scale our revenue and bookings from existing relationships and add new logos, which sets the stage for future growth.
During the third quarter, we signed four large deals across life sciences, CPG, banking and capital markets and high-tech services.
As we deepen our role as a trusted advisor to our clients, we have seen sole-sourced deals, which was, for many quarters, above 50% of our bookings, now rising above 60%.
We are also seeing great traction build up in fintech, digital banking and other fast growth tech companies where our domain strength and agile development and deployment is helping them scale rapidly.
Global Client Transformation Services continues to grow at a 30%-plus rate and now accounts for more than 35% of total Global Client revenue, including the contribution from the Enquero acquisition.
Year-to-date, approximately 70% of Global Client bookings include a component of analytics, digital or consulting in them.
As a reminder, approximately half of Transformation Services bookings are annuity-based and often lead to large long-term intelligent operations engagements.
Analytics is not only the largest component of Transformation Services, contributing more than half of its revenue over the last several quarters, but is also its fastest-growing component, consistently growing well above 30%.
Many of our analytics solutions are deeply connected to high-growth areas where we are strategically focused, such as sales and commercial, supply chain, financial crimes and risk and SG&A.
Our sharp differentiation is our ability to orchestrate data and analytics in the cloud with deep industry and process knowledge.
The availability of high-quality data and the ability to derive actionable insights with analytics to drive decision-making is now more critical than ever.
It is at this insight to action level where we differentiate ourselves the most.
Our intelligence platform, Genpact enterprise 360 enables clients to do just that.
Genpact enterprise 360 harnesses the power of data and insights from our operations built on proprietary metrics and benchmarks we have deployed and developed over the past 20 years in our digital Smart Enterprise frameworks.
This enables clients to have radical transparency in their businesses.
The platform then uses AI to generate connective insights.
This further empowers clients to take actions, either themselves all through our work with them to deliver better outcomes today and to point transformation opportunities to unlock future growth.
Another differentiator for us is our ability to drive outcome-oriented value for clients beyond just cost and productivity, such as increased growth, lower receivables and inventory, lower losses in fraud and better pricing.
This is one of the key reasons why our Transformation Services solutions resonate so well with our clients.
Some examples include, for a large global CPG client, leveraging our experience and design thinking methodologies, we are using analytics to help them with better sales targeting and automating processes such as contract management and payment reconciliations.
This enables its sales teams to focus on much higher proportion of their time on business development.
For a large fintech client, we have designed, implemented and are now running a best-in-class anti-money laundering and transaction monitoring process to improve their regulatory risk compliance as they experience hyper growth.
For a large high-tech client using our Cora sales assist solution, we are leveraging data and analytics to proactively generate and prioritize advertising leads for small and medium business segment to grow the client's top line.
For a large client in the semiconductor ecosystem, we are using digital and analytics solutions to improve supply and demand forecasting, diversify their supplier base for greater resilience, conduct global inventory analysis and run spot price forecasting to optimize the timing of purchases.
These examples reflect the five trends we continue to see in every CxO conversation.
The five trends are: one, a significant shift from off-line to online across every industry; two, the virtualization of all technology services and solution delivery; three, an accelerated consumption of cloud-based services and solutions; four, an exponential growth in real-time predictive analytics; and five, the move to human-centered design that creates superior experiences for customers, users and employees.
Clients continue to tell us that our approach of bringing together our expertise in digital and cloud-based analytics solutions with our deep industry and process depth to drive actions that deliver outcomes is different.
We continue to see momentum in driving commercial models linked to these outcomes versus traditional input-based models that focus on the cost of FTEs.
These commercial models ensure goal alignment between us and our clients.
For example, being paid for the outperformance of predefined metrics, consumption of transaction-based models or fixed fee models.
As the world continues to adapt to the changes that I've seen over the last 18 months, companies across every industry are intensely competing for talent across the globe.
While this hot talent market presents challenges for our kind of a business, it certainly creates an interesting set of opportunities for us.
We see many engagements where we can help our clients access and nurture global talent, given our ability to scale across a range of skill sets and geographies as well as our focus on reskilling.
We are using our investments in our online on-demand learning platform, Genome, to build the critical skills businesses are looking for across digital, data and analytics.
Specific industry and process knowledge, use of Lean and Six Sigma as well as soft skill and personal development.
As an example, our data and analytics certification program equips our employees with the skills necessary to generate impact immediately after course completion by deriving insights from complex data sets.
To date, Almost 70% of our employees are enrolled with more than 43,000 fully trained and tested.
This is analytics at scale for our clients.
At the height of the pandemic in 2020, we saw historically low attrition rates.
In the third quarter, as expected, our attrition rate increased above our historical average.
This is a global trend that is impacting our peers and clients alike.
However, given our talent management practices to date, we have had no impact on our client engagements or our ability to convert new bookings.
This reflects the strength of our culture of curiosity, innovation and learning as well as the countless learning, development and career opportunities we provide for our employees, enabled by investments like Genome and our redeployment platform, Talent Match.
We are delighted to have had a state of recent recognitions for being a great destination for talent in the market, such as: Forbes 2021 World's Best Employers List; the Refinitiv's 2021 diversity and inclusion top 100; a total of 28 excellent awards from Brandon Hall Human Capital Management; International SOS' Duty of Care award for diversity and inclusion; Aptar's top 10 best companies for women in India.
And earlier today, Forbes 2021 America's Best Employers for Veterans.
We are also being recognized for the work we are doing to improve our communities.
For example, being named to Fortune's Change the World List as one of 100 companies celebrated for having a positive societal impact.
We are deeply committed to our environmental, social and governance initiatives and are proud to have been recently awarded a gold medal from EcoVadis, recognizing our efforts across environment, labor and human rights, ethics and sustainable procurement.
We also recently concluded our annual green-a-thon event with more than 25,000 participants to sponsor the planting of more than 14,500 tree saplings, underscoring our commitment to environmental sustainability.
ESG is not only an important focus for us internally as a company, but also for what we do with our clients.
Given our industry knowledge, strength in data and analytics, and deep familiarity with our clients' processes, we are in a meaningful position to help our clients achieve progress on their own ESG agenda through areas like responsible sourcing, supply chain optimization, financial crimes, climate footprint of equipment usage and many others were able to help our clients generate positive social and environmental impact.
We are very excited about the work we are doing on our pursuit of a world that works better for people.
Lastly, as our teams are beginning to return to the office globally and travel more frequently to collaborate in person or meet with clients.
We are taking every precaution to continue to ensure the health and safety of our own employees and their families.
We are happy to report that a large and increasing number of our employees are getting vaccinated globally.
For example, in our largest delivery ecosystem, India, approximately 80% of our workforce has received at least one dose of a COVID vaccine, and we continue to encourage participation for the rest of our population.
Today, I'll review our third quarter results and provide our latest thinking regarding our full year 2021 financial outlook.
Total revenue was $1.02 billion, up 9% year-over-year or 8% on a constant currency basis.
Global Client revenue that expanded to 91% of total revenue increased 12% year-over-year or 11% on a constant currency basis primarily driven by ongoing movement in Transformation Services led by analytics that grew more than 30% in the quarter as we continued underlying strength in our Intelligent Operations business.
Total Global Client growth included approximately one point contribution from revenue related to certain divested GE businesses that we began including in our Global Client portfolio as of January one.
During the quarter, we continued to expand the size of our Global Client relationships.
For example, during the 12-month period ended September 30, we grew the number of Global Client relationships with annual revenue over $5 million from 129 to 142 or a 10% year-over-year increase.
This included clients with more than $25 million in annual revenue, increasing from 23 to 26 or 13% year-over-year.
GE revenue declined 15% year-over-year driven by our delivery of committed productivity and the overall macroeconomic impact on GE.
Excluding the effect of revenue related to divested GE businesses I mentioned earlier, GE revenue would have declined 6% during the quarter, which is in line with our expectations.
Adjusted operating income margin at 16.6% declined from the first half of the year largely due to the increase in investment activity that we discussed with you last quarter as well as higher travel expenses.
As we move into the latter part of the year, we expect travel-related activity to increase as the macro environment continues to stabilize.
Gross margin in the quarter was 35.6% compared to 35.2% during the same period last year largely due to increased productivity from higher revenue and a more favorable mix.
We continue to expect our full year gross margin to expand 70 to 75 basis points year-over-year.
SG&A as a percentage of revenue was 21.3%, up 10% year-over-year and 60 basis points sequentially as we dialed up investment activity to be able to take advantage of long-term growth opportunities.
Adjusted earnings per share was $0.66, up 18% year-over-year compared to $0.56 in 2020.
This 10% -- $0.10 increase was primarily driven by higher adjusted operating income of $0.04, lower taxes of $0.03, a $0.02 impact related to FX remeasurement and a $0.01 impact related to lower year-over-year share count.
Our effective tax rate was 17.3% compared to 22.6% last year largely due to discrete benefits in the quarter as well as a nonrecurring prior period tax refund-related items.
Excluding this onetime tax benefit that equates to $0.03 per share, our effective tax rate for the quarter would have been 21.4%.
Turning to cash flow and balance sheet.
During the third quarter, we generated $210 million of cash from operation that corresponds to free cash flow being almost two times higher than net income.
As a reminder, during 2020, we experienced a lower-than-normal working capital impact to our cash flow given improved days outstanding as lower revenue growth related to the pandemic.
This helped drive cash flow from operations of $252 million during the third quarter last year.
Our days outstanding have remained in a consistent range with third quarter 2021 at 84 days.
Cash and cash equivalents totaled $922 million compared to $753 million at the end of the second quarter of 2021, and includes $350 million related to the 1.75% bond that we issued in the first quarter.
We continue to closely monitor market conditions for the optimum timing of the pay down of our 3.7% bond that is scheduled to mature in April 2022.
Our net debt-to-EBITDA ratio for the last four rolling quarters was 1.1 times.
With undrawn debt capacity of approximately $500 million and existing cash balances, we continue to have ample liquidity to pursue growth opportunities and execute on our capital allocation strategy.
While we continue to invest to drive organic top line growth, we have a solid M&A pipeline, and we remain vigilant in searching for companies that can strengthen our capabilities in our chosen service lines.
As our track record demonstrates, to the extent capital is available, we expect to repurchase shares, particularly when the valuation is attractive in comparison to our view of the intrinsic value of the firm.
As expected, capital expenditures as a percentage of revenue increased from levels we saw during the first half of the year due to investments related to deal ramp-ups and the measured pace of our global workforce return to office.
Given our year-to-date spending, we now anticipate capital expenditures as a percentage of total revenue for the full year to be in the range of 1.5% to 2%.
Let me now turn to an update of our full year outlook.
We continue to expect total revenue between $3.96 billion and $4 billion, representing year-over-year constant currency growth of 5.5% to 6.5%.
For Global Clients, the expected growth remains in the range of 10.5% to 11.5% or 9% to 10% on a constant currency basis.
There is also no change to our full year GE outlook of approximately 20% year-over-year decline.
Excluding the effect of approximately $40 million in revenue related to the GE divested businesses, we continue to expect GE full year revenue to decline 10% to 12%.
We continue to expect our adjusted operating income margin to expand to 16.5% for the full year.
Factored into this outlook is the impact of continued ramp-ups in investment activity in both sales and marketing, research and development, higher fourth quarter travel, and a higher level of transaction costs related to recent large deal signings.
To be clear, our approximate 16.5% adjusted operating income full year margin remains the baseline for which we think about our trajectory for 2022.
As a result of the nonrecurring tax benefit in the third quarter I referred to earlier, we now expect our full year 2021 effective tax to be approximately 22.5% to 23.5%, which compares to the prior year range of 23.5% to 24.5%.
Given the outlook I just provided, we now expect full year adjusted earnings per share to be in the range of $2.40 to $2.43, up from the prior $2.36 to $2.39 range due to the favorable impact of the nonrecurring tax benefit as well as the balance sheet remeasurement gains during the quarter.
Additionally, given our year-to-date performance, we can now expect our full year operating cash flow to be at least $550 million, up from our earlier outlook of $500 million, and we continue to anticipate free cash flow from operations of approximately 1.2 times to 1.3 times net income, above our historical 1:1 ratio.
Our results for the third quarter are a reflection of the focused long-term strategic choices we have made, the capabilities we have built organically and added inorganically over the years are resonating well in the market.
We are pleased with our performance that we believe reinforces our medium- to long-term trajectory of double-digit to low teens Global Client revenue growth driven by continued momentum in Transformation Services, particularly analytics with an expanding adjusted operating income margin and adjusted diluted earnings per share growing ahead of total revenue, all supported by strong cash flow generations.
Clients across all industries are increasingly looking to leverage data and analytics for predictive insights to drive actions and position themselves to compete in this new world.
This secular trend plays to our strengths in Transformation Services that continues to power our revenue growth led by its largest segment analytics that have been consistently growing more than 30%.
The majority of our Transformation Services engagements are longer-term annuity-based work that often leads to larger intelligent operations engagements that are, of course, annuity based by definition.
Our outcome-oriented solutions are resonating well with clients as we focus on generating value beyond just cost and productivity, which is helping us win many sole-source opportunities, both with existing client relationships that are growing as well as with new logos.
We are at the forefront of developing new ways of working.
We are conducting many experiments across the globe with and for our clients in a variety of hybrid flexible models that allows our talent to get the benefits of being able to work from home while coming together as a team in a set rhythm to collaborate, innovate and build on a strong team culture that we are known for.
Our clients value us for our talent practices and our ability to reskill globally and at scale.
These strengths differentiate us even more in the talent market we are today.
This is opening doors to many opportunities to help clients transform their business models with new cloud-based digital solutions that leverage newer commercial constructs given the changing nature of work away from traditional FTE modes.
I'm very proud of the work we are doing and the impact our global teams have for our clients, our colleagues, our shareholders and the communities we live in, and I'm very excited about the opportunities ahead of us.
Nika, can you please provide the instructions? | q3 adjusted earnings per share $5.65.
q3 sales rose 11.7 percent to $3.4 billion.
reaffirming guidance ranges previously provided for 2021. | 0 |
As we have done on our past calls, we'll be taking questions at end of Craig's comments.
There are also outlined in our related 8-K filings.
We will start on Page 3, with recent highlights from the second quarter and as you can imagine, I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn.
We've done a good job of keeping our employees safe, have delivered for our customers and certainly generated exceptional cash flow, all while flexing our costs at record rates.
Our results, while also of last year, certainly, in absolute terms, were better than expectations and we continue to make an important investments for the future.
Q2 earnings on a per share basis were $0.13 on a GAAP basis and $0.70 on adjusted basis, which excludes $0.20 of charges related to acquisitions and divestitures and $0.37 related to the multi-year restructuring program that we just announced.
Our Q2 revenues were $3.9 billion, down 22% organically.
As we noted on our Q1 earnings call, April was down approximately 30%, this was followed by slightly better volumes in May and then relatively strong finish in June, which was down, let's call it low double-digits.
And in fact, I mean, this has a point of maybe amplification, our Electrical business in the Americas, in Europe and Asia, all posted low-single digit organic growth in revenue in the month of June.
And so once again, our Electrical businesses are remaining very resilient in the face of this pandemic an economic downturn.
Segment margins were 14.7%, down 110 basis points from Q1 and our detrimental margins were at 25%, 5 points better than our guidance of 30%.
Once again a good indication of how well our teams have done in controlling the elements that are really within our control.
However, recognizing that some of our businesses could be looking at a slow and certainly what you could call it, prolong recovery, we announced a multi-year restructuring program of $280 million, including $187 million charge in Q2.
These actions will reduce structural cost for sure and are targeted in those end markets, including commercial aerospace, oil and gas, NAFTA Class 8 truck and North America and European light vehicle markets, where these markets have been certainly highly impacted.
The other clear highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of $667 million.
Both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of $2.3 billion to $2.7 billion and a midpoint of $2.5 billion.
So teams continue to do great in converting on cash as well.
Finally, as most of you know, we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals.
I thought it'd be helpful just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on Page 4.
I think, simply stated at Eaton, sustainability really is at the core of our mission.
We talk about our mission being to improve the quality of life in the environment.
And certainly, that means, sustainability.
In fact, if you think about all of our value propositions with customers, they're built around creating safe, reliable and efficient solutions, let's call them sustainable solutions and so as we oftentimes say, what's good for the environment is good for Eaton.
We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it certainly plays where we think Eaton should play a leadership role.
Sustainability, as we think about it, really presents growth opportunities to help our customers solve their business goals and to this extent and have been so subjective, we've laid out 10-year plans that include investing $3 billion in R&D to create sustainable products over this period of time.
This will also include reducing our emissions from our installed base of products and upstream sources by some 15%.
Just to maybe give you an example of where we think this really fits with our overall strategy, sustainability really is about capitalizing for Eaton on secular growth trends, around electrification for sure, across all of our businesses and also in energy transition.
Sustainability, I'd tell you is also an important part of how we run the company on a day-to-day basis.
Since 2015, we reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets.
By 2030, we now have committed to achieve science-based targets of 50% reduction of greenhouse gas emissions from 2018 levels.
And finally, to achieve these goals, we obviously have to continue to work on building a workforce that's engaged and passionate about making a difference.
So this will continue to be a large project for the company overall.
So hopefully, that's provided just a little context in terms of why we think sustainability is such an important initiative for Eaton and how we're going to convert on that and turn it into accelerated growth for the company.
Now turning to Page 5, we summarize our Q2 financial results and I noticed a couple of things on this page.
First, acquisitions increased sales by 2%, this was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%.
I'd also remind you that we now recognize all charges related to acquisitions, divestitures and restructuring at corporate rather than at the segment level.
And we did it because we would hope would make it easier for you to do your forecast by quarter, by segment without the volatility that comes with these types of one-time charges.
Next on Page 6, we show our results for Electrical Americas.
Revenues down 29%, 9% decline organic revenue,19% impact from M&A and this was primarily the divestiture of the Lighting business and a small impact from negative currency as well of 1%.
Operating margins increased 130 basis points to 20.7% and these margins were certainly favorably impacted by the divestiture of Lighting, but also our teams did a great job of controlling costs to really counter the impact of the economic impact of COVID-19.
This combination resulted in a very strong decremental margin performance, up 16%.
So this segment continues to prove to be highly resilient when you look at margins, but also when you look at orders and backlog.
Orders increased 2.1% on a rolling 12-month basis with strength in residential and utility in data centers.
And of note here, our data center orders actually were up some 7% on a rolling 12-month basis.
And lastly, our bookings remain strong.
They were up 11% versus last year.
Turning to Page 7, we have our results for the Electrical Global segment.
Revenues were down 16% with 14% decline in organic revenues and 2% headwind from currency.
Operating margins here declined some 160 basis points, but to a very respectable 16% and decremental margins here were also very well managed, coming in at 26%.
Orders declined 4.6% on a rolling 12-month basis, but with most of the significant declines coming, as you would expect in global oil and gas markets and in industrial markets.
So, not an unexpected result with respect to where we saw strength and weakness.
And lastly, our backlog for Electrical Global increased 2% on a year-over-year basis.
On Page 8, we summarized our Hydraulics segment.
For Q2, revenues were down 32%, with a 30% decline organically and a 2% currency impact.
Operating margins were 9% and orders for the quarter were down 33.7% year-over-year and this was driven really by weakness in both OEMs and the distributor channel both.
We continue to work closely with Danfoss in completing the customary closing conditions and regulatory approvals and I would tell you that Danfoss organization remains excited about owning the business.
We do however now expect the transaction to close at the end of Q1 next year.
The delay as you can imagine, due to the COVID-19 impact, which has impacted the pace of some of the regulatory approvals that we expect.
On Page 9, we summarize results for the Aerospace segment.
Revenues declined 27% with a negative 35% in organic growth offset by 8% increase from the acquisition of Souriau.
Operating margins declined to 14.8% and really this is due to lower sales, but also the acquisition of Souriau also had a dilutive impact on margins.
Orders declined 12.8% on a rolling 12-month basis with particular weakness in the quarter, as you would expect in commercial OEM and aftermarket, it is worth noting, I would tell you though that orders for the military aftermarket were up 13% on a rolling 12-month basis.
Backlog was down 5% year-over-year overall.
Certainly, as everyone here understands the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.
Next on Page 10, we summarize the results for the Vehicle segment.
Revenues declined 59%, 52% of which was organic in addition to the divestiture of the Automotive Fluid Conveyance business which impacted revenues by 4%, we had 3% negative impact of currency.
The decrease in organic sales was really driven by I'd say, widespread customer plant shutdowns due to COVID-19, which really resulted in lower Class 8 OEM production as well as continued weakness in light vehicle production.
Just once again, it's a little bit more color on this one, during Q2, most of light and commercial OEMs had shutdowns at range between six and eight weeks.
These shut downs, which really began, let's say in late March, occurred throughout the month of April and extended into mid-May and so many of our customers were shut down for almost half the second quarter.
But production is now certainly beginning to come back online.
Global light vehicle market production was down 55% in Q2 and Class 8 OEM build was down from 70% in Q2.
We now project NAFTA Class 8 production to be 175,000 units for the year, which is down slightly from our prior forecast 189,000 units.
But still down some 49% from 2019.
This steep reduction and certainly -- this sudden reduction in OEM production led to operating margins of a negative 6.4%, but I would add, this business has once again done a great job managing decrementals and despite this tremendous reduction in revenue delivered a respectable decremental margin of 33%.
Not surprisingly, and much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.
Moving to Page 11, we have our eMobility segment.
Revenues were down 33%, all of which was organic.
Organic margins of negative 3.6% -- excuse me, operating margins of negative 3.6% primarily due to lower volumes and a particular weakness in the legacy internal combustion engine platforms.
And once again, the ongoing increase in R&D expenditure.
We continue to be enthused by the way, about the long-term potential of the business and and quite frankly, have seen nothing but upward revisions in the expectation for the penetration of electric vehicles.
And so a market that we still think will be very attractive long-term.
We're very well positioned once again with the common technology platforms that we're creating, leveraging the strength in our core Electrical business.
A good example of this idea of everything becoming more Electric is one of the recent wins that we've had with the truck OEM, a $21 million program for export power inverter where major commercial truck customer and so, in almost every aspect of our business there is more electrical content and we're well positioned once again through this particular segment to participate in that growth.
Overall, we've won programs with a value of approximately $500 million of mature-year revenue.
On Page 12, we show the details of our plans to accelerate and I'd say, expand our restructuring actions.
And I say accelerate because for the most part, we're pulling forward a number of the restructuring ideas that we would have done anyway.
Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects.
We announced the $280 million multi-year restructuring program, as I noted, designed to eliminate structural costs and we've taken charges of $187 million in Q2 and then we expect to see additional cost of $93 million realized through 2022.
Just to characterize those additional dollars, we'd expect to deliver over the next three years some $33 million of charges in the second half of this year, $55 million in 2021 and $5 million in 2022.
We would expect to realize $200 million of mature-year benefits from these actions once they are fully implemented and we think full year implementation is 2023.
Approximately two-thirds of these costs are in our Industrial businesses, principally, Vehicle and Aerospace and the remaining one-third is with our Electrical sector, particularly with an emphasis on our oil and gas business that will report through our Electrical Global segment.
Naturally, we're focused on those businesses serving in the end markets that are more severely impacted by the pandemic.
And then, turning to Page 13, we do our best to provide Q3 outlook on revenues versus last year and while you can imagine that all these markets will be stronger than what we realized in Q2, this is really a year-over-year growth for Q3 versus last year.
For Electrical Americas, we expect organic revenues to be between down 2% and up 2%, so essentially flat.
With strength in residential, utility, data centers offsetting weakness in industrial markets.
For Electrical Global, our current view is organic revenues will decline between 10% and 14% with strength in Asia-Pacific.
And data center markets offset by declines in Europe and once again, in the oil and gas market.
For Aerospace, we expect organic revenues will be down between 28% and 32% with continued strength in Military offset by really significant declines in all of the commercial markets.
And Vehicle, we project revenues will decline between 30% and 34%.
Some markets are still very weak in absolute terms, but these markets will be up significantly from Q2.
And for eMobility, we expect declines of between 13% and 17%, once again pressured from legacy internal combustion engine platforms.
And lastly, for Hydraulics, we think market will be down between 23% and 27%.
Freight in overall, we're estimating Q3 revenues to be down between 13% and 17%, and so an improvement versus Q2, which was down some 20%, but still on absolute terms, where markets are still in decline.
Moving to Page 14, here we provide our best look at guidance for Q3 and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13% and 17% and this really does include what we know about July, where we saw low double-digit declines.
We've elected not to provide full year revenue guidance given the kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4.
As many of you aware, we are still dealing with the pandemic in various regions, the U.S. and around the world, we're still seeing a growth in the number of cases and so we're still living in this period of uncertainty.
We do think Q2 will be the trough for organic revenue declines and barring second wave of the pandemic, Q4 should be better than Q3.
For Q3 and full year, we expect decremental margins of between 25% and 30% and for Q3, we expect our tax rate on adjusted earnings to be between 15% and 16%.
We're maintaining our free -- 2020 free cash flow guidance, the range of $2.3 billion to $2.7 billion and I would note that this range does in fact, include now the impact related to the multi-year restructuring program that we announced, and that was not in our prior guidance.
As a point of reference, in the first half, just to give you some comfort around our ability to deliver this number, we generated some 35% of our $2.5 billion midpoint, that's in our free cash flow guidance and this number is very consistent with our performance over the last five years.
And so we do tend to be a bit back half loaded.
We're providing new guidance for share buybacks and we're seeing between $1.7 billion and $1.9 billion for the year.
And recall that we repurchase $3 billion of shares in Q1 with the proceeds in the lighting sales.
We continued to deliver free strong -- strong free cash flow and we now plan to buyback between $400 million and $600 million of our share is half of the year.
Number one, ensuring that we continue to move the company in the direction of becoming what we see as an intelligent power management company, that takes advantage of important secular growth trends and we talked about them being electrification, energy transition, LTE connectivity and blended power.
So these trends are continuing and despite whatever temporary hiccups we're experiencing, we think long-term it's the right place to be.
By doing so, we're working on creating a company that's going to deliver better secular growth and better growth through various cycles, higher margins and with much better earnings consistency.
Our long-term goals have not changed, it include 2% to 3% organic growth, 20% segment margins, 8% to 9% earnings per share growth and $3 billion a year of free cash flow, and with our strong cash flow we'll continue to be focused and disciplined in how we deploy it.
By investing in organic growth as a top priority, delivering top quartile dividends and ongoing program of share buyback and then actively managing our portfolio, while being a disciplined acquirer.
So we continue to remain excited by the Eaton's story, I hope you are as well.
Before we start our Q&A of our call today, I do see that we have a number of individuals in the queue with questions, so I appreciate if you can limit your opportunity just to one question and a follow-up. | compname says q2 sales fell 30%.
q2 sales fell 30 percent to 3.9 billion usd.
q2 earnings per share 0.13 usd.
qtrly organic sales were down 22 percent.
expect restructuring program to deliver mature year benefits of $200 million when fully implemented in 2023.
2020 full year free cash flow guidance reaffirmed at $2.3 billion to $2.7 billion.
adjusted earnings per share of $0.70 for q2 excluding charges. | 1 |
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. | 1 |
Today's discussion is being broadcast on our website at atimetals.com.
Participating in today's call are Bob Wetherbee, President and Chief Executive Officer; and Don Newman, Senior Vice President and Chief Financial Officer.
Bob and Don will focus on full year and fourth quarter highlights and key messages, but may refer to certain slides within their remarks.
These slides are available on our website atimetals.com and provide additional color in detail on our results and outlook.
During the Q&A session, please limit yourself to two questions.
No surprise, we're glad 2020 is over.
It was a challenging year amplified by a significant uncertainty, yet we made the best of it.
Our team persevered and focused on doing the right things quickly and decisively to position ATI to emerge from the crisis stronger, a company focused on aerospace and defense.
For the year, our free cash flow generation was positive overall at $168 million pre-pension contributions, free cash flow exceeded our full year guidance by 18%.
In today's call, my remarks will focus on three major things: the leadership priorities that drove our actions and results; our transformation to a more profitable aerospace and defense focused company; and our outlook for our key markets.
So, let's start with our leadership priorities.
2020 began with reasonably strong customer demand and without a hint of a looming global pandemic.
ATI posted solid first quarter 2020 financial results.
We enjoyed the benefit of stable jet engine demand bolstered by increased customer volumes that were delayed from the second half of 2019.
While these results were made for a difficult year-over-year comp in the first quarter 2021, it did help to offset the significant headwinds we've faced in the subsequent three quarters of 2020.
When the pandemic took hold late in the first quarter, we responded quickly and decisively.
The leadership priorities shown on Slide 4 drove our results and continue to guide our actions today.
First and foremost, we focused on keeping our people safe.
Safety is a core ATI value.
We quickly enacted policies and procedures around the world to ensure a virus-free work environment, mitigating the risk of spread.
Our efforts continue to be largely successful.
We remain vigilant to ensure our people go home safely each and every day.
Second, we took the necessary actions to preserve cash and maintain liquidity.
We ended the year with more than $950 million of total liquidity, including nearly $650 million of cash on hand.
We extended our debt maturity profile and now have no significant debt maturities before mid-2023.
Don will cover some additional achievements in more detail in a few minutes.
Third, we proactively and aggressively optimize our cost structure.
Our close customer relationships enabled us to match capacity with the rapidly declining demand expectations.
We did what was necessary to ensure ATI would not only survive the global recession, but emerged stronger in recovery.
By quickly reducing our costs, we've minimized detrimental margins limiting the steep demand drops impact on our bottom-line.
We eliminated approximately $170 million of costs in 2020.
We continue to pursue operational improvements.
We expect total cost reductions to grow to at least $270 million over the next few quarters as actions implemented in the second half of 2020 reached their full run rate.
Importantly, we expect about $100 million of these cost savings to become structural, continuing to benefit ATI as we return to growth over time.
It's worth noting that the additional savings we announced in December as part of our strategic transformation are incremental to these savings.
Fourth, we focused on supporting our customers through continued strong execution and operational excellence.
Our customers count on us to deliver the mission critical materials and components to keep their planes flying, vehicles moving, energy flowing and medical equipment and electronics working flawlessly.
I'm proud of how the team has led through 2020.
Focused on our people's health, our company's financial health and strengthening our customer partnerships.
Being recovery ready, our fifth leadership priority positions ATI to serve our customers and become a more sustainably profitable company over the long term.
We've been rewarded with more of our customers' business as a result.
In 2021, our share of jet engine materials and components on key programs is increasing.
We've also won new business on airframes and are well-positioned to win upcoming specialty energy projects.
The bottom line here, we've accomplished a lot in 2020.
Our actions created the necessary foundation for the transformation we announced in December.
You may recall, we're exiting standard stainless sheet products by year-end 2021 as we redeploy our capital to high return opportunities.
These actions are major steps to becoming a more profitable-focused aerospace and defense leader.
We're accelerating the creation of significant shareholder value.
In eight weeks since the announcement, we've hit the ground running and are executing.
On Slide 5, you'll see two of the leading indicators we're using to track our progress toward this transformation: a streamline footprint and an improved product mix.
We have a third metric that we'll share in future progress updates.
It attracts working capital release to largely self-funded projects' capital expenditures.
So, let me take a moment to review the major actions we're taking.
First, we're consolidating our Specialty Rolled Products finishing operations to create a more competitive flow path, focused on increasing production of high-value differentiated materials.
This includes closing five plants within the AA&S segment by year-end 2021.
In the fourth quarter, we closed two finishing facilities: one in Western Pennsylvania and the other in Connecticut.
The three additional closures are expected in the second half of 2021.
Second, we're on track to exit 100% of standard value stainless sheet products by year-end 2021.
In the fourth quarter, sales of these products represented 17% of AA&S segment revenues down from 22% in full year 2019.
And finally as a reminder, on the third action, we intended largely self-fund upgrades to our specialty finishing capabilities in Vandergrift Pennsylvania.
This investment of $65 million to $85 million spread over three years will be largely self-funded through working capital releases, triggered by the transformation.
We'll make progress on this initiative as we streamline our footprint and we'll report our results as part of our next transformation update later in 2021.
So let's cut to the chase here.
With these actions, we're on our way to a leaner, more competitive aerospace and defense focused powerhouse, poised to substantially increased margins in the AA&S segment and generate a significantly higher return on capital for ATI.
Success is largely within our control.
We know we have more work to do and we're doing it.
With the demand recovery that we know will come, we're confident we'll meet our longer term objectives.
Before Don provides detail about the fourth quarter financial results, let me share my thoughts about our recent experience in key end markets and provided near to mid-term outlook for each.
Let's start with commercial aerospace, our largest end market.
As predicted in our last update, demand for jet engine forgings increased modestly in the fourth quarter.
Demand for engine-related specialty materials principally ingot and billet continue to soften as customers destock to align inventories with near-term demand expectations.
Looking ahead, we expect jet engine product sales to recover slowly in the first half of 2021 with the pace increasing in the second half of the year.
We expect continued weakness in airframe sales throughout 2021 due to excess supply chain inventories.
This is consistent with the guidance we provided last quarter, which already accounted for decreasing widebody production rates.
Next up, defense sales.
In the fourth quarter we returned the year-over-year double-digit percentage growth.
Each of ATI's defense market verticals expanded.
Naval nuclear products in support of the U.S. Navy's increased long-term demand for new ships grew by nearly 50%.
Military aerospace and ground vehicle armor each grew at a strong double-digit rate versus the prior year.
We expect continued defense growth in 2021 albeit at a slower pace due to uneven demand levels across major platforms supplied by ATI.
Let me give a couple of examples to illustrate what I mean by uneven demand across platforms.
In naval nuclear, we expect continued demand growth.
In ground vehicle armor, we expect a temporary contraction due to a one-year pause in demand on the customer's major program.
Longer term, we expect ATI's advanced materials to be integral to the success of future government defense initiatives such as hypersonics.
We're also pursuing increased participation and defense applications in other parts of the world.
Shifting to our energy markets.
Sales continue to decline in the fourth quarter compared to prior year, but at a slower pace than in the third quarter.
Our fourth quarter oil and gas and chemical processing submarket sales dropped by more than 35%.
Sales to our specialty energy markets were more resilient declining only 6% versus the prior year.
Growth continued in our civilian nuclear and pollution control product sales while demand for electrical energy generation products remained weak.
We expect fourth quarter trends to hold in the coming quarters as demand for oil and gas remain soft, especially energy demand will improve due to ongoing nuclear refueling requirements and strength in Asia from land-based gas turbines, solar and applications to reduce fossil fuel emissions.
Robust demand for our consumer electronics products was driven by two factors: first, customer product launches in China; and second, the increased need for our specialty alloy powders to support the growth of next-generation consumer products globally.
We expect increased demand levels to continue in 2021 with first quarter sales falling sequentially mainly due to the impact of Lunar New Year shutdowns with our precision rolled strip operation in China.
Our medical markets continued to decline, both for MRIs and implant materials, primarily due to the effects of the pandemic.
Fewer elective surgeries and restricted hospital access to install new equipment have reduced end customer demand and created excess supply chain inventory.
We expect these negative trends to continue until vaccination programs reach critical mass.
Over the next few minutes, I will focus on highlights from two key areas: first, our Q4 financial performance; and second, our expectations for 2021.
2020 was a difficult year for all of us.
For ATI, it started with 737 MAX challenges that carried over from 2019.
Of course, those challenges grew exponentially with the global pandemic.
Its impact on our key end markets including commercial aerospace, energy, and medical was profound.
Even with those challenges, we took the strategic and tactical steps necessary to improve our business and position it for a healthy future.
Now, let's discuss Q4 performance.
For the third quarter in a row, our results exceeded expectations.
In the Q3 earnings call, we noted seeing signs of stabilization in the number of our key end markets by commercial aerospace.
At that time, we said we expected our Q4 performance to be similar to Q3.
In fact, Q4 revenue increased 10% to $658 million versus Q3 levels.
We see this as a further indication of stabilization in our key end markets and a sign that the worst of the lingering aerospace downturn is behind us.
Our adjusted EBITDA increased 39% to $23 million in Q4 from Q3 levels.
Adjusted earnings per share was a loss of $0.33 per share in Q4.
This was better than the optimistic end of our earnings per share guidance range, which was a loss of between $0.36 and $0.44 per share.
Our improved performance was largely due to stronger cost reduction actions and a higher-than-expected sales.
Speaking of cost reductions, in our early 2020 we announced targets to cut costs by between $110 million and $135 million for the year.
We increased those targets multiple times in 2020 as we built momentum.
In the last earnings call, we shared a target of $160 million to $170 million of 2020 savings.
The final tally, reductions near the high-end of our guidance and nearly $170 million in 2020.
That means a run rate of $270 million to $180 million of cost reductions that will benefit full year 2021.
Those cost reductions, continue to contribute to favorable detrimental margins, which are below 30% for the third consecutive quarter.
We expect approximately $100 million of those reductions to be structural.
Those take outs should continue to benefit earnings in the up cycle, increasing incremental margins in the future.
Working capital actions initiated in Q2 and Q3 gain momentum in Q4.
Our free cash flow was $168 million for full year 2020, well in excess of the top end of our guidance range of $135 million to $150 million.
We're extremely pleased that we closed 2020, with nearly $650 million in cash and more than $950 million of total liquidity.
That's a great outcome and one that we can build on in the future.
We ended Q4 with managed working capital at 41% of revenue, down 1,000 basis points from the end of Q3, great progress.
Our goal is to reduce managed working capital for less than 30% of revenue over time.
I can assure you this will remain a key focus in 2021 and beyond.
In addition to a strong cash and liquidity position, we continue to maintain a manageable debt maturity profile.
Our nearest significant debt maturity does not occur until Q3 of 2023.
Another area of success in 2020 was CapEx management as we adjusted capital spending to fit the new demand levels.
We started 2020 with a CapEx forecast $200 million to $210 million.
Actual CapEx spend in 2020 totaled $1.37 million, 33% below the initial forecast.
We manage that reduction by carefully analyzing future demand requirements, including recent share gains and adjusting timing on large growth-related projects.
We also ensured that our facilities were not over maintained in the current period of low demand.
We understand the importance of being recovery ready and we are prepared to handle our customer's desired pace of recovery.
Now, let's move to pensions.
Despite the broader demand challenges, we also made meaningful strides managing our pension glide path.
Our goal is to reduce our net pension obligations each year.
We ended 2020 with a net pension liability of $674 million that's nearly $60 million lower than the opening 2020 level.
Strong pension asset performance and Company contributions in 2020 more than offset an 80 basis point decrease in discount rates.
This drove the drop in net liability.
The lower net pension level at the end of 2020 brings multiple earnings and cash flow benefits in 2021 and the coming years.
I will detail that when I share the 2021 outlook.
2020 will be a year remembered for severe economic challenges and personal hardships for many.
As a company, we have worked through this crisis to improve the business and prepare for the upcoming recovery.
The team's work on strategic positioning, liquidity and cost structure's should benefit our shareholders into the future.
With that, let's look ahead to 2021.
While we are seeing stabilization there is still uncertainty in terms of end market recovery timing as the COVID vaccines are in the early stages of distribution.
With that uncertainty we are going to continue the guidance structure that we started in Q2 2020.
We will provide earnings per share guidance for the upcoming quarter, as well as certain elements of our full year cash flows that we believe we can reasonably estimate.
We'll also provide insights into what we're seeing as key trends and indicators in our business.
Bob shared his thoughts regarding our key end markets.
Let me recap our forward demand views and the pace of recovery within our business.
We expect jet engine product sales to recover slowly in the first half of 2020 with the pace increasing in the second half.
Weakness in airframe materials will continue throughout 2021 consistent with our prior estimates.
Our defense sales will likely grow it at a more modest pace, compared to 2020 rates.
Recovery in our other significant markets, namely, energy, and medical is dependent on the global pace of containing the pandemic.
Finally, our electronic sales should continue to expand.
We expect adjusted earnings to improve in Q1 of 2021 relative to Q4 2020 due to a modest demand pickup in segments, continued cost management and lower pension expense.
We expect to Q1 2021 adjusted earnings per share loss of between $0.23 and $0.30 per share.
Let's talk about free cash flow.
We expect to generate between $20 million and $60 million of free cash flow in 2021 prior to our required US defined benefit pension contributions.
Although we get there using the same disciplined applied in 2020 by managing our cost, being disciplined with capital investments and reducing manage working capital and pursuit of our working capital targets.
Now CapEx; we plan to spend between $150 million and $170 million on capital investments in 2021.
We adjusted our 2020 capital spending to reflect the new demand levels.
In 2021 we will maintain that discipline but plan to increase spending marginally in anticipation of coming market recovery.
As announced in December, we will also invest modestly to enhance specialty finishing capabilities within our specialty rolled products operations.
I have good news on our expected 2021 pension plan contributions.
As you know contributions to the US pension plans in 2020 were $130 million.
Due in part to strong 2020 pension asset returns required contributions to the US plans are anticipated to be $87 million in 2021, a reduction of more than $40 million year-over-year.
2021 pension expense will also decrease dropping $17 million year-over-year.
Pension expense will be $23 million in 2021, down from $40 million of recurring pension expense in 2020.
In regard to working capital, we expect to continue improving our levels in 2021.
We will pursue our goal of returning working capital levels to 30% of sales as our key end markets recover.
Working capital reductions related to our transformational project, but will also support the significant improvement.
Overall we expect working capital to be a modest source of cash in 2021 even after contributing significantly to our cash balances in 2020.
Finally, in terms of income taxes we do not expect to be a cash taxpayer in the US for years to come.
That said, we do anticipate paying taxes in certain foreign jurisdictions.
We are not able to provide an estimated annual tax rate for 2021 due to uncertainty of the rates and low earnings.
However we can say that we expect to pay between $10 million and $15 million in cash taxes during the year.
We are proud of what our team has achieved in 2020 and look forward to continuing to build on our efforts to make ATI a leaner and more profitable company.
We are well positioned to benefit from the coming aerospace recovery.
Well, there you have it some pretty good outcomes and we're proud of it, we accomplished a lot in 2020.
Even still great to be starting 2021 was a clear plan and were boosted by the first signs of favorable multi market trends we've seen in over a year.
As Don described, we ended the year with a strong performance in a challenging market environment.
Our progress in 2020 was a total team effort that delivered results.
We worked diligently to control what we could and responded nimbly to where we couldn't.
Our entire organization remains relentlessly focused on cash generation.
I'm proud of how we're living our values, guiding us every step of the way.
Today, in 2021 we still battle a fair amount of uncertainty but there is already a lot less turbulence than we saw last year.
We're gaining velocity aligned and accelerating in a clear direction as we move ahead.
We're well positioned to emerging this downturn leaner more profitable ATI.
A fierce competitor not waiting for markets to recover as we gain momentum.
Scott, back to you.
Operator, we are ready for the first question. | q4 adjusted loss per share $0.33.
q4 sales rose 10 percent to $658 million.
actions to exit standard stainless sheet products and enhance high-return capabilities on-track.
looking ahead to q1, we expect a continued difficult market environment.
q1 2021 compares to a robust pre-pandemic quarter for ati that included a surge in wide-body jet engine product sales.
for full year 2021, we are optimistic that worst is behind us.
expect our demand to improve in second half of year. | 1 |
Additionally, during this conference call, you will hear management make references to the estimated positive or negative impact that COVID-19 had on our operations during the fourth quarter and full year of 2020.
You'll also hear management make statements regarding intra-quarter business performance during the first quarter of 2021.
Management is providing this commentary to provide the investment community with additional insights concerning trends and these disclosures may not occur in subsequent quarters.
It's a pleasure to speak with you today.
I'd also like to take a moment to again recognize the Teleflex employees around the world.
This past year has been challenging, but our team has done a tremendous job serving our customers and patients globally, overcoming obstacles to manufacture and distribute our products to the people that need them most.
Now turning to our results.
Considering the volatile environment we operate in, we are pleased with our Fourth quarter performance as our business did better than we expected and trends continued to improve across many of our product categories and geographies.
We saw better-than-expected sequential improvement from quarter to 2 quarters and from quarter 3 to quarter 4.
Despite a rising number of COVID-19 infections that occurred throughout the fourth quarter, the recovery in our business was led by product lines that were initially most negatively impacted by COVID-19, those being our Interventional Urology, Interventional Access and Surgical businesses as well as continued strength within our Vascular Access and other product categories.
While from a regional perspective, we saw strength within the Americas as well as positive growth within EMEA and improving trends in Asia.
Quarter four revenues totaled $711.2 million, which represents an increase of 2.3% as compared to the prior year period on a constant currency basis.
Growth in the quarter was aided by 2 additional selling days, which we estimate contributed approximately 3% points.
Excluding the impact of the additional selling days, we estimate that our constant currency revenues declined approximately 1%.
The days adjusted declines reflect continued recovery progression relative to the 4% decline we experienced during the third quarter of the year and the 12% decline we experienced during the second quarter of the year and it was ahead of the expectations we had at the time of the third quarter earnings call.
During the fourth quarter, we estimate that headwinds associated with COVID-19 caused a net negative impact of approximately $61 million or approximately 9%.
if we were to normalize for the negative impact, we estimate that our underlying business grew by approximately 11% on a constant currency basis, or 8% when normalizing for the selling day impact.
In addition to seeing continued sequential improvements in our constant currency revenue performance during Q4, we also saw a significant sequential improvement within our adjusted gross and operating margins as compared to the second and third quarters of the year.
This improvement drove adjusted earnings per share, which exceeded our internal expectations.
Lastly, I am happy to announce that on December 28th, we closed the acquisition of Z-Medica a market leader in hemostatic products.
We are pleased to be able to deploy capital for a differentiated product portfolio that leverages the existing Teleflex call points and is immediately accretive to our revenue growth rates, adjusted gross and operating margin profile and our adjusted earnings per share.
Turning to a more detailed review of our fourth quarter results.
As I just mentioned.
Quarter four revenue grew 2.3% on a constant currency basis and 4.4% on an as reported basis.
The increase in revenue was driven by our Vascular Access Portfolio, which saw some tailwinds in terms of COVID- related purchasing and solid mid single-digit growth of Interventional Urology and our other segment.
From a margin perspective, we had generated adjusted gross and operating margins of 58% and 26.6% respectively.
This translated into a year-over-year declines of 120 basis points at the gross margin line and 50 basis points at the operating margin line.
However, from a sequential standpoint, this represented an improvement of[Phonetic] AZ[/Phonetic] and 150 basis points respectively compared to quarter three levels.
On the bottom line, adjusted earnings per share was $3.25.
Overall, our financial performance in the quarter demonstrates the sustained resilience of our diversified global product portfolio and it gives us confidence in our ability to achieve our long-term financial objectives once we get past COVID-19.
Let's now turn to a discussion of our quarterly revenue trends, which will be on a constant currency basis.
The Americas delivered revenues up $419.5 million in the fourth quarter, which represents an increase of 5% over the prior year period.
Growth within the Americas was driven by Vascular Access and respiratory products which both saw elevated demand driven by COVID.
In addition, Interventional Urology was a strong contributor as UroLift continues to be our fastest recovering procedure.
However, there were offsets with declines in other product categories.
We estimate that the Americas would have grown approximately 12% excluding the impacts that COVID-19 had on the region.
EMEA reported revenues of $161.4 million in the fourth quarter, representing growth of 4.1%.
During the quarter, EMEA benefited from a one-time order of tracheostomy products and from the [Phonetic]extra [/Phonetic]selling days, the combination of which more than offset our estimated 1% COVID headwinds.
Revenues totaled $78.6 million in the fourth quarter, which represents a decline of 7.2%; however, we estimate that we would have had positive constant currency revenue growth in the mid-single digits, if not for the impact of COVID-19.
Additionally during the fourth quarter, we finished transitioning a distributor in Japan.
When normalizing for both COVID and the distributor change, growth in the region would have been in the mid to high single-digit range.
And lastly, our OEM business reported revenues up $57.7 million in the fourth quarter, which was down 6.9% on a constant currency basis.
As we anticipated during the fourth quarter, our OEM business saw aligned impact related to COVID relative to our other businesses.
Investors familiar with Teleflex will be aware that our OEM business supplies device companies with complex catheters and surgical sutures and the quarter four impact reflects reduced orders from these customers whose business is tied to non-emergent procedures.
Excluding the impact COVID-19 had, the business grew roughly 31%, which includes a benefit of approximately 13% from the acquisition of HPC.
As it relates to HPC, I am pleased to report that we remain on track with our integration efforts.
Let's now move to a discussion of our revenues by global product category.
Starting with Vascular Access, fourth quarter revenue increased 16% to $182.5 million.
We estimate that COVID-19 positively impacted the growth rates of our vascular products during the fourth quarter by approximately 5%.
Key drivers of revenue growth included PICC, which increased approximately 20%, CVCs which increased approximately 16% and EZ-IO which grew approximately 14%.
Moving to Interventional Access, fourth quarter revenue was $106.7 million or down 6.9% as compared to the prior year period.
The decrease was largely due to the delay in the recovery of certain non-emergent procedures because of COVID 19 along with the negative impacts stemming from a catheter recall and distributor conversion in Japan, both of which began last quarter.
We estimate that the recall and distributor issue impacted our business negatively by approximately $3 million.
We expect the impact on the recall to continue to linger for the next few quarters as we do not expect to be back on the market with this product until September of this year while the distributor inventory headwind should reverse and be a modest tailwind for us in 2021.
When normalizing for the impact that COVID had along with the aforementioned headwinds, we estimate that underlying growth was in the high single digits consistent with our long-term growth outlook for the segment.
In addition, we are pleased that Manta grew 33% globally in quarter four.
Now turning to Anesthesia, revenue was $86.1 million, which is lower than the prior-year period by 2.1%.
The revenue decline was the result of lower sales of laryngeal masks and endotracheal tube products.
We estimate that COVID had an approximate 1% negative impact in the quarter, implying flattish performance on an underlying basis.
Since we closed the Z-Medica acquisition just days before year-end, it's impact was immaterial on quarter four results.
Revenues declined by 5.7% to $92.3 million driven by lower sales of our ligation portfolio.
We estimate a 9% headwind from COVID during quarter 4 indicating recovery as compared to the estimated 13% COVID headwind in quarter three.
Moving to Interventional Urology.
Quarter four revenue increased by 5.3% to $93.9 million, which represents a new high watermark in terms of revenue dollars in any given quarter.
On a year-over-year basis, the business faced a difficult growth comparison but sequentially, it grew by 15% versus quarter three.
We estimate an approximate 28% COVID-19 related headwind during quarter four.
Notwithstanding the significant headwind on our growth in quarter four, we are pleased with the path to recovery for this business unit and are also happy with the impact of the national DTC campaign, which is exceeding our expectations.
Additionally, we are encouraged that we trained approximately 130 new urologists in quarter four moving to a cadence that is consistent with our expectations prior to COVID and a positive leading indicator for future growth.
And finally, our other category, which consists of our respiratory and urology care products grew 6.1% totaling $98.1 million.
We estimate the growth during the quarter was partly due to increased demand for certain humidification and breathing products resulting from COVID-19 mainly in the Americas.
That completes my comments on quarter four revenue performance.
Turning to some recent clinical and commercial updates.
Starting with UroLift, the response to our national DTC campaign is exceeding our expectations.
The strategic role of DTC is important as about half of the 12 million men being treated for BPH believe prescription medications are their only solution.
Overall, we view the pilot national DTC as a successful campaign.
Key statistics include a doubling of brand awareness among men age 45 are higher post campaign versus pre-campaign levels.
Approximately 150% increase in visits to UroLift.com during the campaign and direct response numbers that exceeded our internal projections by a wide margin.
Lastly, we know that Google search trends demonstrate a significant and sustained increase in response to the campaign.
As such, we expect to continue the national DTC effort in 2021 and beyond.
Turning to UroLift too.
We have completed the market acceptance test and received positive feedback across more than 100 procedures completed by 20 urologists.
We have begun a full controlled launch.
The launch is controlled due to restrictive access caused by COVID-19.
This will ensure we don't disrupt growth recovery with a more fulsome rollout beginning in the second half of 2021.
We remain confident that conversion to the UL2 will occur over time and we continue to expect to generate significant margin expansion as the revenue base is fully converted.
Regarding Japan, we remain on track for reimbursement decision in 2021 and view the approximate $2 billion addressable market as an incremental growth driver, that will be a positive catalyst for seeable future.
Overall between nationwide DTC, Japan rollout, and the launch of UL2, we have multiple drivers to build momentum as we seek to further expand our leadership position in BPH.
Turning to the next slide on key clinical updates.
Recently a comparative analysis of sexual function outcomes from UroLift studies and the Medical Therapy of prosthetic symptoms trial was published in the peer-reviewed journal European Urology Focus.
The comparison reveals that UroLift is superior to BPH medical therapy in preserving erectile and ejaculatory function and sexual satisfaction.
Importantly, this study challenges the idea that medical therapy is the most conservative treatment option for BPH.
Over time, we believe that more clinical research like this publication consider UroLift as a first-line therapy for treating BPH.
Turning to an update on Interventional Access.
Regarding the CTO-PCI study that we mentioned on our Q2 earnings call, I am pleased to announce that we have completed enrollment for this study.
This is a prospective, single-arm IDE study of 150 patients across 13 sites to evaluate the performance of the entire range of Teleflex coronary guidewires and specialty catheters in chronic total occlusion percutaneous coronary intervention procedures, which is the most demanding PCI environment.
Once the study results are finalized, we anticipate updated labeling for our Guidewire and Specialty Catheter products which can address an estimated 100,000 CTO-PCI procedures.
Overall, we continue to invest in clinical and commercial catalysts that will help to sustain our upper single-digit revenue growth aspirations in a normalized environment.
Lastly, turning to EZPlas.
I am happy to update the investment community that we successfully submitted our BLA to the FDA in late January.
We recently performed a market assessment update and still see a $100 million initial market opportunity for EZPlas.
We are increasingly confident in our ability to address this commercial opportunity with revenue likely ramping in early 2022.
In addition, we believe there are potential revenue synergy opportunities with Z-Medica to leverage their sales reps as well as our channel strength across the healthcare and government call points which could add to our baseline expectations, which brings me to an update on our latest acquisition.
On December 28th, we completed the acquisition of Z-Medica, an industry leading manufacturer of hemostatic products, that is a classic Teleflex deal and a great strategic fit.
Investors familiar with Teleflex will be aware that we aim to invest in innovative products and technologies that can meaningfully enhance clinical efficacy, patient safety and comfort, reduce complications, and lower the overall cost of care.
Given their differentiated products and attractive end markets, we view the Z-Medica acquisition like that of Vidacare from a few years ago.
Since we acquired Vidacare in 2013, we have more than double the sales which are still growing in the healthy double-digit range.
One difference is that Z-Medica is growing into a $600 million addressable market while Vidacare is addressable market was closer to $250 million.
Regarding our long-range financial targets.
Z-Medica only reinforces our ability to get to those goals, and we remain committed to delivering constant currency revenue growth of at least 6% to 7% on an annual basis and reaching 60% to 61% and 30% to 31% adjusted gross and operating margins once we return to a more normalized environment.
We plan to hold an Analyst Day event in the fall of this year, at which time we intend to provide updated long-term financial goals and timetables.
Given the previous discussion of the company's revenue performance, I'll begin with the gross profit line.
For the quarter, adjusted gross margin was 58%, a decrease of 120 basis points versus the prior year period.
The decrease in gross margin was primarily due to COVID-related impacts, including unfavorable product mix and higher manufacturing costs along with a modest foreign exchange headwind.
In total, we estimate that COVID negatively impacted our adjusted gross profit by approximately $44 million in the quarter.
We continue to tightly manage discretionary spending, partially offset the reduced revenue and gross profit resulting from COVID.
As a result of the efforts, we estimate that operating expenses were reduced in the fourth quarter by approximately $13 million.
For full year 2020, we managed opex lower by an estimated $78 million.
Fourth quarter operating margin was 26.6%, were down 50 basis points year-over-year.
Continuing down the income statement.
Net interest expense totaled $18.5 million, which is an increase of 10% year-over-year and reflects higher average debt balances versus the prior year period due to the acquisitions of HPC and Z-Medica.
Moving to taxes, for the fourth quarter of 2020, our adjusted tax rate was 10.1% as compared to 7.7% in the prior year period.
At the bottom line.
fourth quarter adjusted earnings per share declined modestly to $3.25 from $3.
28 a year ago.
Included in this result is an estimated adverse impact from COVID of approximately $0.55 and a foreign exchange tailwind of approximately $0.05.
Turning to select balance sheet and cash flow highlights.
In 2020, cash flow from operations was flat as compared to 2019 totaling $437.1 million.
We are pleased with this outcome given COVID headwinds and increased contingent consideration payments that flowed through cash flow from operations in 2020 as compared to 2019.
Overall as we exited 2020, the balance sheet remains in good shape.
At year-end, our cash balance was $375.9 million as compared to $301.1 million as of December 2019.
Over the course of the year, we deployed more than $750 million for external business development opportunities.
We'll continue to balance our investments across both organic, inorganic initiatives to fuel our growth and drive margin expansion with M&A as our primary focus for capital deployment.
Inclusive of Z-Medica financing, we net leverage ended 2020 at [Phonectic]2.98 times[/Phonetic ], which remains well below our 4.5 times covenant.
Lastly, we have no near-term debt maturities of material size.
In summary, despite facing the challenging operating environment during 2020, the organization adapted quickly and executed well.
We remain optimistic toward the future and expect to recovery beginning in the second half of 2021.
As such, we are reinstating financial guidance for 2021.
To begin, I'll provide a framework of key assumptions underlying our financial guidance.
Our outlook contemplates COVID disruption continuing through much of the first half of the year, with the second half of the year much closer to a normal operating environment.
Our baseline assumption assumes that healthcare systems can manage through incremental COVID surges while applying past learnings to avoid widespread procedure shutdowns.
It also excludes any material regulatory, healthcare or tax reforms, as well as any future M&A.
Lastly from a selling day perspective, we will have 2 fewer selling days in the first quarter as compared to the year-ago period, we will have one additional day in the 4th quarter as compared to the year-ago period, and there will be no differences in the number of days during the second and third quarters.
In 2021, we project constant currency revenue growth between 8% and 9.5% as compared to 2020.
We expect our Interventional Access, Surgical and Vascular Access product offerings to be key contributors to our constant currency revenue growth during 2021.
We also expect our Interventional Urology business to increase at least 30% over 2020 levels.
Additionally, Z-Medica is expected to contribute $60 to $70 million of revenue or approximately 2.5 points of growth.
We expect foreign currency exchange rates will be a tailwind to revenue growth of approximately 2%.
As a result, we expect our as-reported revenue to increase between 10% in 11.5% over 2020 and this would equate to $1 range of between $2.791 million and $2.829 million.
Turning next to gross margin.
During 2021, we anticipate that adjusted gross margin will increase between 130 and 230 basis points to a range of between 8% and 59%.
We expect gross margin expansion will be driven primarily by a favorable mix of high margin products primarily, Interventional Urology as well as the acquisition of Z-Medica which will add approximately 50 basis points to gross margin.
Moving to adjusted operating margin.
During 2021, we anticipate that adjusted operating margin will increase between 110 and 210 basis points to a range of between 26% and 27%.
The increase in adjusted operating margin will be sourced from the gross margin expansion, partially offset by normalization of certain 2020 COVID-related spending reductions, which were temporary in nature as well as further strategic investments into UroLift and Manta.
Additionally, the acquisition of Z-America is expected to provide a modest tailwind to year-over-year operating margin expansion.
Given the relatively higher opex cost structure of Z-0Medica versus Teleflex, operating margin accretion from Z Medica will be less than the 50 basis points of gross margin accretion.
That takes me to our adjusted earnings per share outlook for 2021.
This slide serves as a bridge for our full-year 2020 adjusted earnings per share results to our full-year 2021 adjusted earnings per share outlook, beginning with the 2020 adjusted earnings per share of $10.67.
From an operating standpoint in 2021, we project additional earnings between $1.58 and $1.66 per share or an increase of approximately 15%.
Our 2021 earnings per share guidance also assumes the following: Foreign exchange is planning to [Indecipherable] for key currencies including a full year euro to dollar exchange rate of $1.21.
For 2021, foreign exchange is expected to provide a tailwind of approximately $0.35.
We now project Z-Medica to contribute between $0.21 and $0.26 of adjusted earnings per share in 2021, and this is an increase from our original expectation, which call for contribution of between $0.07 and $0.15.
The increase in the Z-Medica accretion is due to the change in our planned approach for financing the acquisition, which we now believe to be done through a combination of borrowings under our revolver and free cash flow versus a previous expectation for bond offer.
In 2021, we expect interest expense to range between $63 and $65 million/.
The year-over-year reduction in interest expense is expected to contribute between $0.17 and $0.19 of earnings accretion if you would exclude the incremental financing costs for Z-Medica.
During 2021, we project that our adjusted tax rate will be in the range of 13.5% and 14% and will result in adjusted earnings per share headwind of between $0.33 and $0.38.
The projected year-over-year increase and the adjusted tax rate is a result of a greater expected mix of US taxable income principally resulting from UroLift growth and certain 2020 tax benefits that we do not expect to reoccur in 2021.
Additionally, our assumption is that 2021 windfall benefit from stock based compensation is at a reduced level versus the typically high level realized in 2020.
We estimate that weighted average shares will increase to $47 million for full year 2021 which is diluted by approximately $0.10.
Despite several headwinds, our adjusted earnings per share outlook of $12.50 to $12.70 is robust, representing growth of between 17.2% and 19% versus 2020.
Given the expectation of continued COVID impact into 2021, I'll highlight some considerations regarding quarterly expectations.
As I mentioned previously, our outlook is predicated on the assumption that COVID will continue to cause disruption during the first half of the year with a particular negative impact during the first quarter.
Additionally, the first quarter of 2021 has few fewer selling days as compared to 2020.
In closing, we delivered solid fourth quarter results as our diversified portfolio showed continued improvement relative to the second and third quarters of the year on both the top and bottom lines.
Excluding the impact of COVID, we see our underlying business performance as encouraging and while the next several quarters still will have elements of uncertainty, we remain confident in our ability to execute in 2021 and are up [Technical Issue] and we'll continue to focus on serving our hospital customers and working with our key stakeholders.
We are excited about the prospects for our business.
We have several revenue drivers including UroLift, Manta, Z-Medica, PICC, Vidacare, EZPlaz and HPC to name but a few.
We will manage the business prudently while staying focused to capitalize on the long-term potential of our global product portfolio.
As an organization, we remain well positioned to create value for all our stakeholders. | estimates negative impact from covid-19 on q4 emea revenue of about $1 million (not sees q4 2020 revenue about $1.0 million).
q4 adjusted earnings per share $3.25 from continuing operations.
q4 revenue $711.2 million versus refinitiv ibes estimate of $687.7 million.
sees fy 2021 adjusted earnings per share $12.50 to $12.70 from continuing operations.
sees fy 2021 revenue up 10 to 11.5 percent. | 1 |
Actual results could differ materially from expected results.
I hope you are all remaining safe and staying healthy.
The loss and anxiety caused by the pandemic is extraordinary.
And on behalf of everyone at RGA, I would like to express profound depreciation for those on the front lines in the fight against the pandemic and offer our deepest sympathies to those who have lost loved ones.
Through these tough times, I remained incredibly proud of the role that RGA has played in an industry that helps to safeguard the financial futures of millions of families from the unforeseen tragedies of life.
Our purpose has never been made clear during this past year.
Let me now move to our results.
Last night we reported adjusted operating earnings per share of $1.19, which we consider another solid quarter in the context of the pandemic.
In this quarter, we were able to absorb estimated total COVID-19 related claim costs of $300 million globally and delivered profitable earnings due to the underlying strength in many of our businesses.
These include our Asia business, our US group and individual health operations and our US asset-intensive business.
Additionally, excluding the impact of claims attributed to COVID-19.
Our US individual mortality experience was again favorable this quarter.
Reported premium growth was strong, driven by results in EMEA and Asia.
We completed a number of transactions in the quarter and deployed approximately $100 million of capital.
The transaction pipeline is very good overall and includes opportunities in all our regions.
Our investment portfolio held up well, and we ended the year with a strong balance sheet, an excess capital of $1.3 billion.
Our approach to capital deployment during this crisis remains prudent, disciplined and balanced.
As I step back and consider our full year results, we reported adjusted operating earnings per share of $7.54.
This includes absorbing estimated total COVID-19 related claim costs of $720 million globally.
And when adjusted for COVID-19 related offsets, including longevity and reduced expenses, we estimate the full year impact of COVID-19 to be roughly $6.80 on adjusted operating EPS.
I'm encouraged by the fact that our underlying fundamental performance and client relationships remained strong.
This speaks to the resilience of our global franchise, the benefits of our diversified business and to the success of our client-focused strategy.
As we look forward, it is clear that COVID-19 remains both the global health and economic challenge.
And we expect to see a meaningful level claims in the first half of 2021.
But we believe that the impact will be manageable, given our strong balance sheet and our underlying earnings engine.
We are optimistic that we will begin to see the benefits from the global vaccination programs as we move into the rest of the year, after which we expect to see some normalization of results.
In the meantime, we will continue to remain focused on protecting our employees, serving our clients and supporting the industry and our communities.
The quality, strength and resilience of our business give us confidence that we will emerge from the pandemic, position to take advantage of the opportunities ahead and continue to build on our long track record of value creation.
And I hope you all continue to remain safe and well.
Beginning with consolidated premiums.
For the quarter, we reported premium growth of approximately 9%, somewhat higher than recent quarters as we saw good business growth in some areas in addition to some client catch-ups have benefited the reported premiums.
The effective tax rate on pre-tax adjusted operating income was 18.3% for the quarter.
Below the expected range of 23% to 24%, as a result of utilizing foreign tax credits and tax benefits associated with differences in bases and foreign jurisdictions.
The US and Latin America Traditional segment reported pre-tax adjusted operating loss of $89 million in the quarter.
Our individual mortality experience for the quarter, excluding the estimated COVID-19 claim cost were favorable.
Let me provide a little more detail.
Approximately $230 million of claims are attributed to COVID-19, including $100 million of IBNR claims.
The approach is to attribute COVID-19 claims is consistent with that used in the second and third quarter, which continues to track quite well.
We also continue to see excess mortality in the quarter consistent with CDC, reporting a significant levels in the general population.
Although, we believe a portion of this is likely related to COVID-19, we have chosen not to include it in our estimated COVID-19 claim costs.
Overall, when we simply adjust for 2019 specific death, our experience this quarter would have been favorable, primarily due to lower large claims.
I would also note that our 1999 to 2004 business, excluding COVID-19 continues to perform in line with our mortality expectations as we set back in 2015.
Also our Group and Individual Health business performed well in the quarter.
Our Asset-Intensive business reported a good result for the fourth quarter, benefiting from higher variable investment income and strong equity markets.
US Capital Solutions reported fourth quarter pre-tax adjusted operating results that were better than our expectations, albeit the decrease against the strong prior-year period.
The Traditional segment fourth quarter results were in line with our expectations and reflected modestly unfavorable individual mortality experience, primarily due to the impact from COVID-19, offset by favorable underwriting experience in other lines of business.
Our Financial Solutions segment performed well in the quarter, reflecting favorable longevity experience.
In the Europe, Middle East and Africa segment our Traditional business fourth quarter results reflected unfavorable mortality experience, partially explained by COVID-19.
The COVID-19 claims are concentrated in South Africa and the UK.
Additionally, as we've seen in the US, there's significant level of excess mortality experience in the population in South Africa, over and above reported COVID-19.
EMEA Financial Solutions business fourth quarter results reflected modestly unfavorable longevity experience.
Turning to our Asia Pacific Traditional business.
In the fourth quarter, Asia had a favorable underwriting experience across most of the region.
While we did see some COVID-19 related impacts, these were offset by favorable non-COVID experience as well as some data catch-ups on client reporting.
Australia experienced a loss of approximately $26 million.
This reflects a number of one-off, including an increase in reserves to reflect our recently updated industry table and in IBNR for estimated COVID-19 claims.
Without these one-off, we would have been near breakeven for the quarter.
For the year, we saw a much improved result over 2019 and when excluding the Q4 one-offs, would have reported a small profit this year.
While there remains some uncertainty in the Australian market, we saw progress in 2020 and we continue to be prudent about new business and focused on actions to improve results.
Our Asia Pacific Financial Solutions business continued to produce good results in the fourth quarter, benefiting from the growth of business in Asia.
The Corporate and Other segment reported a pre-tax adjusted operating loss of $24 million, relatively in line with the average run rate.
The nonspread portfolio yield for the quarter was 4.2%, a significant improvement relative to that in the third quarter, primarily due to above average run rate for variable investment income as we experienced a high level of commercial mortgage prepayments and some realizations in our various private partnerships.
We believe our portfolio will defensively positioned coming into the crisis, credit performance continues to benefit from diligent security selection as well as economic reopening and policy responses.
Our portfolio average quality of A was maintained and credit impairments were minimal in the quarter.
RGA's leverage ratios remained stable at the end of the year, following the second quarter senior debt issuance and our liquidity remains strong with cash and cash equivalents of $3.4 billion.
Looking forward, we expect to see some level of ongoing COVID-19 impacts that will negatively affect our earnings until this crisis is resolved.
However, we continue to view this as manageable and believe that our strong balance sheet, the power of our earnings engine and the benefits of our global franchise positions us to emerge from the pandemic in good shape to continue to produce attractive returns to our shareholders over time.
I'd also like to comment on Slide 13 of the earnings materials.
As you know, we are very proud of our track record of book value per share growth over the years.
And while 2020 was a difficult year as a result of the pandemic, we have every confidence that we will continue creating value for our shareholders.
I also want to comment on the topic of financial guidance.
We have historically provided intermediate-term financial guidance in conjunction with our fourth quarter results.
However, given the near-term uncertainty surrounding the COVID-19 pandemic, we have decided not to provide guidance at this time.
COVID-19 mortality claim costs for Q4 continue to be toward the lower end of our model expectations relative to general population reported COVID-19 deaths and we continue to see lower insured mortality relative to the general population.
The US still accounts for the majority of our estimated COVID-19 claim costs.
Our ongoing mortality model updates did not result any material changes in the quarter.
So we are reiterating our mortality rules of thumb for our major markets as shown on Slide 14.
Overall longevity experience was modestly favorable in the quarter, but less than the prior quarter run rate.
This lower offset was expected due to lower longevity -- sorry, due to longer longevity reporting lives and differences in country specific mortality rates over the period.
We expect elevated claim cost to continue in the first half of 2021 based on the level of ongoing COVID-19 death in the general population.
Although, uncertainty exists and the ultimate impact of new COVID-19 variance, it is good to see some recent positive signs as well.
Many countries are experiencing decreases in new case counts and deaths from the peak of the holiday season waves and the preliminary data from the global rollout of vaccines looks promising.
We expect the vaccines will have a material beneficial impact on general population mortality in particular as those that are most vulnerable to severe outcomes are vaccinated.
We continue to closely monitor all of these developments, and we'd expect to update our views if needed, as new data emerges.
Let me now hand it back to Todd. | q4 adjusted operating earnings per share $1.19.
global estimated covid-19 claim costs of approximately $300 million for q4.
q4 and full-year results were negatively impacted by a significant level of covid-19 mortality claim costs. | 1 |
Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance and actual results on developments may differ materially and we are under no obligation to update them.
We may also refer to some non-GAAP financial measures which help facilitate comparison across periods and with peers.
We really appreciate you joining us on the call today for our discussion.
We delivered another strong quarter, both financially and operationally.
In addition, we financed, closed and integrated the Indigo acquisition, a transformative opportunity that positions us well in the two premier US natural gas basins.
By way of one example we just surpassed 4 trillion cubic feet of responsible natural gas production in our Pennsylvania asset in Northeast Appalachia which continues to deliver great value to the Company.
Our strategy is comprised of four interdependent pillars including creating sustainable value, protecting financial strength and progressing our leading operational execution.
Results delivered by our teams in these first three pillars allow us to execute the fourth pillar, capturing the tangible benefits of scale.
Our strategic intent is to be the preferred investment vehicle for institutional investors to gain exposure to responsible natural gas development.
The acquisition of GEP announced earlier today directly supports that intent.
It also meets all the criteria of our disciplined acquisition framework as any deal must.
GEP brings large scale core Haynesville assets with stacked pay Haynesville and Middle Bossier inventory.
The 226,000 net effective acres are adjacent to SWN's newest operations in the Haynesville.
The addition of GEP increases SWN's total production to 4.7 billion cubic foot a day [Phonetic] equivalent per day, including 1.7 Bcf per day from Haynesville making us the largest operator in the Haynesville.
It will also increase SWN's expected year end 2021 SEC proved reserves to approximately 21 trillion cubic feet equivalent.
The transaction had 700 economic locations to our high quality inventory with the scale adding acquisitions, well cost reductions, performance enhancements and commodity price improvement.
The Company now has approximately 6800 economic locations across the enterprise.
Given the strength and complementary nature of our portfolio, we expect to have investment activity across all of our operating areas in 2022 as part of our maintenance capital program.
With the expanded exposure to LNG -- the LNG corridor and the growing demand centers along the Gulf Coast, this acquisition will further improve the Company's overall basis differentials and increase our margins.
The access to high value global markets will supplement our premium Appalachia outlets [Phonetic].
As part of our leading ESG practices, we plan to implement a responsibly sourced gas program in the Haynesville.
Beyond the clear ESG sustainability benefits, we believe that responsibly sourced gas will ultimately lead to enhanced margins and improved economics from greater access to global markets.
Turning to the terms of the deal, the $1.85 billion total consideration is comprised of $1.325 billion in cash and approximately $525 million of SWN stock.
The cash portion will be debt financed and the equity portion will consist of 99 million shares of SWN stock calculated per the agreed 30 day VWAP of $5.28 per share as of November 3.
The purchase price implies an enterprise value to projected '22 EBITDA of 2.9 times, a meaningful discount to where SWN currently trades and at a discount compared to other recent natural gas consolidation transactions.
Given this attractive valuation, we expect that the transaction to be immediately accretive to SWN's margins, returns and key per share metrics.
Cash flow per share, free cash flow per share and earnings per share all increased by approximately 15%.
Included in these accretion estimates are the already identified $25 million of synergies in 2022.
We expect our synergy capture to increase to $50 million per year starting in '23.
The integration of GDP will be enhanced by our recent experience integrating Indigo as well as with a six-month transition services agreement negotiated with the seller.
We expect to close the deal by year end subject to customary closing conditions, including regulatory approvals.
Before I get to some operational details related to the acquisition, I want to touch on the third quarter results for our team hit the ground running in Haynesville and continue to deliver in Appalachia.
In 3Q, which included 30 days of Haynesville, we reported total production of 310 Bcfe at the top end of our guidance range.
We exited the quarter producing 4 Bcfe per day including 1 Bcf per day in Haynesville.
Total production included 106,000 barrels per day of NGLs and oil which is flat with the previous two quarters.
During 3Q, we averaged four drilling rigs in Appalachia and there were six rigs running in the Haynesville with two completion crews in each area.
We have now been operating the Haynesville for two months.
Our new employees in Houston and Louisiana have been integrated into the business and operations have been running smoothly.
Our initial focus in Haynesville has been to leverage the operational expertise that our combined teams bring to the table.
In September, we brought our first five wells online, all of which were in the Middle Bossier with an average initial production rate of 24 million cubic feet per day and an average c lat of approximately 6300 feet.
These results are indicative of the quality of our existing Haynesville position and with today's GEP acquisition announcement, we increased the scale of that high quality position.
As Bill mentioned earlier, the proximity of the GEP acreage to our existing Haynesville position will allow for operating economies, marketing synergies and contract optimization realizing the benefit of our enhanced scale.
GEP is currently running four rigs and one completion crew and expect to exit the year running three rigs.
We will issue formal 2022 guidance early next year and maintain our commitment to maintenance capital program with investment of approximately 1.9 billion holding production flat.
I'll close by acknowledging the continued high-end performance of our technical and operating teams who are driving improved performance through efficiency gains, innovation and knowledge transfer.
We have established a track record of leading operational execution in Appalachia and we expect to do the same in Haynesville as we move forward with our 2022 development plan.
During the quarter, we generated $105 million of free cash flow.
We expect our free cash flow to materially increase in the fourth quarter.
We ended the third quarter with $4.2 billion in total debt, reducing our leverage by 0.4 times to 2.2 times.
Turning to today's announcement, we plan to finance the acquisition in the manner that A, protects our financial strength; while B, minimizing equity dilution.
From a debt perspective, the deal is essentially leverage neutral with our expected year end leverage near 2.0 times.
And as Bill referenced and I'll discuss further, we have a clear and appropriately de-risked path to materially lower total debt and leverage ratios.
From an equity perspective, the transaction should drive immediate double-digit accretion across key [Indecipherable] maintenance.
Given our increased scale, with the current commodity price outlook, we would expect approximately $2.3 billion in free cash flow over the next two years.
We intend to apply our disciplined hedging approach to the acquired production.
We should go a long way to safeguarding this expected cash flow.
Using this cash for debt repayment, we'll reduce our total debt to approximately $3 billion, our leverage ratio to near 1.0 times, our debt would then be at the low end of our announced $3.0 billion to $3.5 billion target range and our leverage ratio at the lower end of our newly announced 1.0 times to 1.5 times target range.
We added the absolute debt range to the updated leverage target range to provide better clarity to the market about how we're thinking about the right hand side of our balance sheet.
Importantly, as we approach our total debt and leverage targets, we would look to initiate a return of capital program.
The Company's hedging strategy remains a core part of our enterprise risk management process.
We would like to clarify the execution of some aspects of our hedging approach.
Given the Company's improved financial strength, going forward, we will target hedging at a level sufficient to cover the Company's expected costs and capital program assuming conservative pricing on unhedged production.
In general, with this dynamic construct, where hedging levels will shift to lower or higher inversely with commodity prices, and directly changes to our cost structure and capital investment.
We believe our hedging approach protects the Company's financial strength while retaining appropriate exposure to potential commodity price upset. | qtrly reported total production of 310 bcfe, or 3.4 bcfe per day, including one month of haynesville production. | 1 |
On the call, we have Zane Rowe, CFO and Interim CEO.
Raghu Raghuram, COO, Products and Cloud Services; and Sanjay Poonen, COO, Customer Operations, will join for Q&A.
Actual results may differ materially as a result of various risk factors described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC.
In addition, during today's call, we will discuss certain non-GAAP financial measures.
These non-GAAP financial measures, which are used as measures of VMware's performance should be considered in addition to, not as a substitution for or in isolation from, GAAP measures.
Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax and employee stock transactions, acquisition, disposition, certain litigation matters and other items as well as discrete items impacting our GAAP tax rate.
Our first quarter fiscal 2022 quiet period begins at the close of business, Thursday, April 15, 2021.
We realize you're used to hearing Pat's voice as we start these quarterly conference calls.
Pat is a true partner and a friend, and of course, will still be a VMware Board member.
We're pleased with our Q4 financial performance, as it was a good finish to the fiscal year.
Q4 total revenue increased 7% year-over-year, with non-GAAP earnings per share up over 8%.
We finished fiscal 2021 with $11.8 billion in total revenue and non-GAAP earnings per share of $7.20 a share.
This past year was one of unprecedented disruption and uncertainty, and we're proud of what the team accomplished.
As we quickly adapted to a distributed workforce, we helped our customers accelerate their work-from-anywhere journey and their application and cloud monetization initiatives.
We're seeing customers continue to choose VMware to help them deliver the digital foundation to power their apps, clouds, security and user experiences.
Large global customers continue to align and partner with us, and the nature of our strategic relationships with our largest customers continues to grow.
In Q4, we closed deals with significant aerospace and telco customers and saw particular strength in the financial sector, including wins with HSBC and Wells Fargo.
We see financial services customers utilizing a combination of franchise solutions, ranging from modern apps and cloud infrastructure, to networking in our digital workspace offerings.
We also continue to see momentum with key communication service providers, such as NTT DOCOMO and Telia increasing their focus on VMware solutions, as well as new and expanded contracts with additional Tier 1 communication service providers globally.
In the retail sector, a large customer that's standardized on our technologies in their private cloud is leveraging VMware as a platform for their cloud migrations, while also investing in edge cloud infrastructure and using Tanzu for containers in their retail edge locations.
We see this as a repeatable use case for other retailers, along with other e-commerce app development use cases, retailers are building on top of Tanzu.
Our work with life sciences and healthcare customers is enabling their critical apps to run on our hybrid cloud and is helping to secure their user devices for employees working from anywhere.
In addition, our partner ecosystem is driving momentum for VMware solutions.
We're expanding the reach of our solutions through key strategic partnerships from our VCPP partners to hyperscalers, to system integrators.
For example, earlier this month, we announced an expansion of our partnership with Accenture, resulting in the launch of their dedicated VMware business unit.
The group will bring together approximately 2,000 professionals across a variety of industries with expertise in hybrid cloud and cloud migrations, cloud-native and application modernization, as well as security.
We also recently formed a joint innovation lab with Lumen, designed to drive edge computing, security and secure access service edge or SASE for customers in a number of industries.
Looking at the broader portfolio, we continue to further our multi-cloud strategy and are seeing traction as customers align app requirements to the cloud of their choice, whether it's private, hybrid or public.
This quarter, we expanded our resell program with AWS to include additional VMware technologies and services such as VMware Cloud, Disaster Recovery and vRealize.
Additionally, VMware Cloud on Dell EMC, a Dell Technologies cloud service from VMware expanded to the EMEA market with immediate availability in the UK, Germany and France.
We continue to deliver on innovation with Tanzu.
With the announcement of general availability of Tanzu Advanced edition, we now have three Tanzu additions in the market; Basic, Standard and Advanced.
Each addition is targeted at a common customer challenge of modernizing infrastructure and applications.
Tanzu Advanced includes all the capabilities that enterprises need to embrace DevSecOps and manage complete container life cycle.
We continue to see strong positive reception to all three Tanzu additions.
We also added container security to VMware Carbon Black Cloud, leveraging technology from our recent Octarine acquisition to provide visibility into on-prem and public cloud Kubernetes clusters.
Our NSX portfolio offers a comprehensive set of L2 to L7 capabilities, implemented completely in software.
We recently released the latest version of NSX, which included enhancements across routing, identity firewall, load balancing and cloud.
In FY '21, VMware was recognized by top industry analyst firms as a leader in 13 key reports across cloud management, networking, hyperconverged infrastructure and end-user computing.
In November, Forrester named VMware a leader in the Forrester Wave Hybrid Cloud Management Q4 2020.
More recently, we were named a leader in December's 2020 Gartner Magic Quadrant for Hyperconverged Infrastructure Software.
And in January, VMware was positioned as a leader in three IDC Marketscape reports related to the end-user computing space, including the Worldwide Unified Endpoint Management Software 2021 Vendor Assessment.
From a broader corporate perspective, I'm personally pleased to highlight that we recently unveiled our 2030 agenda, which encapsulates how we will drive ESG goals into every aspect of our business.
Our 2030 agenda is integrated into the business and is focused on three business outcomes; trust, equity, and sustainability.
Recently, we also performed well in the areas of sustainability, earning the distinction of being included in the 2020 Dow Jones Sustainability Index among the world's leading ESG benchmarks.
Now, let's move to more detail on our business performance as well as our forecast.
In Q4, the combination of subscription, SaaS, and license revenue grew 8% year-over-year to $1.721 billion.
We saw large enterprise demand strength throughout the quarter, which allowed us to close a record 35 deals over $10 million.
This was balanced with good performance in our commercial business as well.
Subscription and SaaS revenue increased 27% year-over-year for the quarter, with strong growth in our VMware Cloud Provider Program, end-user computing, Carbon Black, and VMware Cloud on AWS offerings.
We continue to invest and expect to see further growth in this important area for us in FY 2022 and beyond.
Our focus is on scaling existing offerings as well as adding new solutions.
VMC on AWS once again had a great quarter, with both workloads and revenue nearly doubling year-over-year as we continue to expand functionality and use case adoption.
As of the end of Q4, ARR for subscription and SaaS was $2.9 billion, an increase of 27% year-over-year.
License revenue for the quarter declined 2% year-over-year to $1.014 billion.
Now, this was better than expected as we had a strong deal closure rate throughout the quarter.
Non-GAAP operating income increased 8% year-over-year in Q4 to $1.133 billion, primarily driven by better-than-expected revenue growth.
Non-GAAP operating margin for the quarter was 34.4%, with non-GAAP earnings per share of $2.21 on a share count of 423 million diluted shares.
We ended the quarter with $10.3 billion in unearned revenue and $4.7 billion in cash, cash equivalents, and short-term investments.
Cash flow from operations for fiscal 2021 was $4.4 billion, which was well ahead of our expectations.
Q4 cash flow from operations was $1.324 billion and free cash flow was $1.242 billion.
Now, this strength was primarily due to our emphasis on closing certain deals prior to calendar year-end, which resulted in receiving the associated cash in FY 2021 rather than FY 2022.
In addition, we benefited from early collections and advanced payments from partners and customers as well as certain other expenditures which were lower than expected in FY 2021.
With subscription and SaaS becoming a larger share of total revenue, we're now providing our end-of-period total and current RPO.
For Q4, RPO was $11.3 billion, up 10% on a year-over-year basis and current RPO was $6.2 billion, up 12% year-over-year.
Total backlog was $93 million, substantially all of which consist of orders received on the last day of the quarter that were not shipped that day and orders held due to our export control process.
License backlog at quarter-end was $23 million.
Overall, our product portfolio performed well in Q4, with customers continuing to purchase solutions that contain multiple products.
Core SDDC product bookings increased 12% year-over-year in Q4, highlighted by strength in our vRealize management offerings, which are now available both on a perpetual and SaaS basis.
Compute product bookings also performed well, growing in the low single-digits year-over-year.
NSX and vSAN had single-digit year-over-year declines, which was an improvement for both versus Q3 of FY 2021.
These two technologies continue to be further integrated into our broader solutions.
Three quarters of our EUC product bookings are now SaaS.
EUC's ACV SaaS growth rate was 30% year-over-year in Q4, driven primarily by Horizon and our initiatives related to anywhere workspace.
Given our focus on SaaS ACV, EUC product bookings decreased in the high-single digits year-over-year.
Carbon Black Cloud once again grew in the high-double digits year-over-year, and we continue to make progress in expanding our endpoint and workload protection capabilities and delivering intrinsic security value to our customers.
Our Tanzu portfolio exceeded expectations and had a strong attach rate in eight of the top 10 VMware deals in Q4.
In Q4, we repurchased 2.7 million shares in the open market at an average price of $140 per share.
At the end of Q4, we've utilized over $1.4 billion from our current repurchase authorization of $2.5 billion.
Turning to guidance for fiscal 2022.
We expect total revenue of approximately $12.700 billion or a growth rate of 8%, which is consistent with the early outlook provided on our last call.
We expect to generate approximately $6.300 billion from the combination of subscription of SaaS and license revenue or an increase of 12% with approximately 55% of this amount from subscription in SaaS.
We expect non-GAAP operating margin of 28% with non-GAAP earnings per share of $6.68 under diluted share count of 422 million shares.
As I mentioned earlier, we had very strong cash flow from operations in Q4 due to a number of initiatives that resulted in exceeding our cash flow guidance by over $650 million.
While we're extremely pleased with this result, the bulk of this over-achievement was accelerated from our upcoming fiscal year.
Taking that into account for FY 2022, we currently expect cash flow from operations of $3.8 billion and free cash flow of $3.42 billion.
On a normalized basis, taking into account the acceleration of cash into FY 2021, cash flow from operations would be roughly flat on a year-over-year basis for FY 2022, in line with our operating performance.
For Q1, we expect total revenue of approximately $2.910 billion or a growth rate of 6%.
We expect approximately $1.320 billion from combined subscription and SaaS and license revenue in Q1, an increase of 7% year-over-year, with over 55% of this amount from subscription and SaaS.
Our expected growth rate for Q1 license revenue was impacted by continued growth in subscription and SaaS and the strength we saw in Q1 last year.
We expect non-GAAP operating margin of 27.5% for Q1, with non-GAAP earnings per share of $1.49 on a diluted share count of 422 million shares.
In closing, we're pleased with our Q4 performance, the improvements we're seeing in the macro environment, and are expanding opportunities to engage with our customers and partners.
We're committed to executing at scale as we continue to build our subscription and SaaS business and invest in our future growth, while delivering technologies and solutions today that help our customers and partners with their digital transformations.
Before we go to questions, I'm pleased to tell you that we are making progress on the potential spinoff of VMware from Dell.
While our special committee of Independent Directors continues to evaluate the spin-off, we believe that it could be value-enhancing to VMware and its stockholders.
We will not be commenting further on these discussions until there's more definitive news to share.
Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible.
Raghu and Sanjay are joining us now for Q&A.
Operator, let's get started. | q4 non-gaap earnings per share $2.21.
qtrly combination of subscription and saas and license revenue was $1.7 billion, an increase of 8%. | 1 |
First, I'll begin by providing an update on how we are navigating our business through the COVID-19 pandemic, while supporting our employees, customers, communities and shareholders.
Secondly, I'd like to briefly comment on a few points about our first quarter financial performance and finally, I'd like to revisit several key strategic initiatives and programs.
Our company's existing pandemic preparedness plan and ongoing pandemic exercises enabled F.N.B to stay at the front of this escalating crisis.
Dating back to 2018, our management team went through a pandemic simulation and collaborated with our business continuity team to develop a formal pandemic response plan.
During this process, sustainability was thoroughly evaluated and ultimately formed the foundation of the comprehensive plan currently in place.
Additionally, our ongoing commitment to invest in our digital channels and technology played a critical role in our ability to provide convenient banking options for our customers, who were not able to leave their homes.
Our investments in technology also enabled us to build and establish an automated process to handle nearly 15,000 business applications for the SBA Paycheck Protection Program in just one week's time.
Our efforts resulted in approving and processing 75% of those applications in the first round of funding, representing $2.1 billion in loans.
We anticipate processing the remaining applications during the second round of funding.
As I mentioned, when Phase 1 of F.N.B's technology initiative called clicks-to-bricks began, we had previously introduced online appointment setting and we're able to quickly make specialized COVID-19 content and offerings available in our solution centers.
We tapped into the strength of our established communication channels for both customers and employees, keeping both audiences informed of any update.
Our employees' response to this crisis has been exceptional.
Their professional, compassionate, positive, and resilient attitudes have been a bright light in helping each other, our customers and our communities while navigating these unprecedented times.
Protecting the health, safety, and financial well-being of our employees remains critical as we find ways to address any impact to their health or the health of their families.
For example, F.N.B provided our team with up to 15 days paid leave and also expanded our existing paid caregiver leave program.
Additionally, to assist with any possible financial hardships resulting from the coronavirus, F.N.B provided a special assistance payment to essential employees working on the front line and in our operations areas, who ensure that our customers continue to receive vital financial services.
We also leveraged our IT infrastructure by making accommodations to give employees the ability to work remotely where appropriate.
To-date, we have approximately 2,200 colleagues working remotely, which represents about half of our workforce and largely non-retail position.
This capability also speaks to our investment in technology and IT infrastructure.
As we focus on our communities, the F.N.B Foundation committed to provide $1 million in relief in response to COVID-19, benefiting food banks and providing essential medical supplies.
Many of our employees began reaching out to our clients and our communities to provide support.
At our Pittsburgh headquarters, F.N.B's vendor management team has been using our vetting process to assist Allegheny County and quickly researching new vendors, offering medical supplies and services to combat COVID-19.
With respect to our retail branches, we have focused on drive-up services and closed our lobbies, reverting to appointment only practices, which are supported by the appointment setting capability within our clicks-to-bricks platform.
As you can imagine, the monumental commitment of our leadership team and employees to operate in this challenging environment required to sustain 24/7 effort.
I would like to commend our employees for the actions they've taken to execute and abide by our safety measures, while continuing operations.
With these key priorities and actions in place, let me pivot and comment briefly on our first quarter performance.
Given all that's happened in a noisy quarter, our underlying core performance remained solid.
Our philosophy is to maintain our approach to risk management through varying economic cycles and serve as the primary capital provider to our clients.
While F.N.B like many banks will be subject to a difficult economic environment, this philosophy and the actions we have taken to strengthen our balance sheet and reduce risk should position F.N.B well as we move through the current crisis.
Looking at the quarter's result, GAAP earnings per share of $0.14 included $0.15 of bottom line impact from significant items primarily related to COVID-19 and the adoption and implementation of CECL in the corresponding reserve build under these macro economic conditions.
Topline results were solid as revenue increased to more than $300 million, driven by strong loan and deposit growth and positive results across our fee-based businesses.
Average commercial loans grew $225 million or 6% as we saw activity pick-up in late March, particularly in C&I with growth of 17%.
I'll note there was limited impact to average balances from anticipated liquidity draws.
Compared to the first quarter of 2019, average deposits increased 5% with growth in non-interest-bearing deposits of 7%, leading to an improved funding mix.
The net interest margin expanded to 3.14%, supported by strong loan growth, a 7 basis point improvement in total cost of funds and higher accretion levels compared to the prior quarter.
The fundamental trends in non-interest income were strong with capital markets revenues of $11 million, setting another record in the first quarter.
Insurance and mortgage banking income also had strong underlying performance.
Due to the significant shift in the interest rate environment, our non-interest income includes $7.7 million of impairment on mortgage servicing rights.
Excluding changes in MSR valuation, mortgage banking income totaled $6.7 million, up more than 50% from the first quarter of 2019 with significant pipelines moving forward.
On a core basis, expenses remained stable compared to the fourth quarter and disciplined expense management will continue to be a top priority as we move beyond this crisis.
Vincent and Gary will provide more detail on the implementation of CECL and additional details on the financials in their remarks.
We closed out the first quarter of 2020 with our credit portfolio remaining in a satisfactory position in the midst of the current global challenges that have come as a result of COVID-19.
The first quarter also marked the adoption of the CECL accounting standard, which as I communicated last quarter, brings additional changes to the reporting of credit quality metrics.
I will also review the steps we are taking to monitor the books and manage the emerging risks, while continuing to meet the credit needs of our borrowers and the communities in which we operate.
Let's now review our first quarter results.
The level of delinquency at March 31 totaled 1.13%, up 19 basis points over the prior quarter and included a temporary uptick in early stage, a majority of which has already been brought current NPLs and OREO totaled 64 basis points, a 9 basis point increase linked-quarter.
This increase does not reflect credit deterioration, but rather changes non-accrual reporting moving from the former PCI pool accounting to the new CECL standard.
Net charge-offs remained low at $5.7 million for the quarter or 10 basis points annualized.
Provision expense for the quarter totaled $48 million of which $38 million relates to a reserve build for adverse macroeconomic conditions tied to COVID-19.
The ending reserve stands at 1.44%, up 15 basis points compared to our day one CECL reserve of 1.29%, providing NPL coverage of 256% at quarter-end.
It's worth noting that inclusive of unamortized loan discounts, our period ending reserve represents 66% of our 2018 DFAST severely adverse scenario charge-offs.
Our teams have been working tirelessly over the last several weeks, meeting with borrowers, reviewing credits, tracking performance metrics and administering government-backed lending programs as part of our response to the COVID-19 crisis.
We entered the crisis with our credit portfolio in a position of strength due in large part to our core credit philosophies that I have discussed with you before, including consistent underwriting, proactive management of risk, attentive and aggressive work-out, and a balanced asset mix spanning our entire footprint.
We have taken many actions over the last several years to maintain a lower risk profile to position our book to withstand various economic cycles and adverse conditions, similar to those we are currently experiencing.
Over the last four years, we have sold approximately $700 million in loans to proactively de-risk the balance sheet, a large portion of which were higher risk acquired loans that we were able to move off the books at a financial benefit to the company.
We've also historically limited our exposure to highly sensitive industries like travel and leisure, food and accommodation and energy with exposure to these three industries remaining very low, totaling only 3.8% of our loan portfolio.
As it relates to relief programs, we were able to quickly mobilize our credit teams to review and approve payment deferral plans for qualified borrowers, which to-date totals approximately 6% of our loan portfolio.
As an SBA preferred lender, we have also been working diligently to support our small business borrowers in securing PPP financing that is fully backed by the SBA.
The volume and key performance metrics for these relief programs are monitored daily through a specialized set of reports developed in response to COVID-19.
Using our holistic credit systems, we have been tracking daily utilization rates, deferral activity, PPP loan volume and borrower impact assessments, which are broken down further to allow us to monitor our credit portfolio by line of business, loan product, geography, and industry.
In addition to expanded analytics, we have also leveraged our existing allowance and DFAST frameworks to conduct scenario analysis and stress testing including select loan portfolios.
All of the actions taken will help us manage through the challenging conditions faced by the industry today.
Above all, I would like to take a moment to recognize our team of bankers and credit support staff for all of their hard work and dedication to help meet the credit needs of our customers and communities during this challenging time.
We'll continue to draw on the leadership and experience of our credit and banking teams to manage through this challenging environment as we have in past cycles.
Today, I'll cover our results for the first quarter and provide an update on the current environment.
As noted on slide nine, first quarter GAAP earnings per share totaled $0.14, which includes $0.15 of significant items.
The TCE ratio ended March at 7.36%, reflecting 16 basis points of CECL adoption impact and another 15 basis points for the $48 million of after-tax items.
These significant items are listed in the reconciliation tables with the biggest piece being the COVID-19 related reserve build of $38 million during the first quarter.
We used a pandemic driven recessionary scenario in evaluating the macroeconomic projections.
Let's start with the review of the balance sheet on slide 14.
Linked-quarter average loan growth totaled $278 million or 5% annualized, attributable to commercial growth of 6% and consumer growth of 2%.
The average commercial growth includes less than 1 percentage point annualized for COVID-19 related increases in commercial line utilization that occurred in the month of March.
Continuing on the balance sheet slide, on a linked-quarter basis, average deposits were relatively flat as normal seasonal outflows impacted average balances.
On a year-over-year basis, average deposits were up $1.2 billion or 5.2%.
From an overall liquidity standpoint, we are comfortable with our current position, including the benefit of opportunistically accessing the debt capital markets to raise $300 million in holding company liquidity at very attractive spreads on February 20th.
We also executed a portion of our previously announced share repurchase program, buying back 2.4 million shares prior to March 12th, representing 0.7% of our total shares outstanding.
Turning to the income statement on slide 15, net interest income totaled $233 million, up $6.2 million or 2.7% from last quarter.
The net interest margin expanded 7 basis points to 3.14%, driven by solid average loan growth, lower cost of funds, and higher discount accretion levels now that we are in a CECL environment.
During the first quarter, the higher discount accretion offset the pressure on variable rate loan yields, given the significant decline in the short end of the curve.
On the funding side, the total cost of funds decreased 7 points to 1.01% from 1.08%, reflecting lower borrowing costs as well as the shift in funding mix and a 10 basis point reduction in the cost of interest bearing deposits.
Slide 16 and 17 provide details for non-interest income and expense.
There continues to be strong performance in capital markets, mortgage banking, insurance and trust as well as for operating non-interest income as a whole.
As Vince noted earlier, we are consistently receiving positive contributions from our fee-based businesses, which diversifies our revenue base and helps to mitigate the impact of a volatile interest rate environment.
Looking at the first quarter, non-interest income totaled $68.5 million, a 7.4% decrease from last quarter, due mainly to the impact from the $7.7 million MSR impairment, given the moving down in interest rates.
Excluding the impairment, non-interest income increased $2.2 million or 3% with capital markets posting a record of $11.1 million, increasing 29% from the fourth quarter, driven by strong origination volume.
Turning to slide 17, non-interest expense on a run rate basis remained stable compared to fourth quarter levels.
This excludes $2 million of expenses associated with COVID-19, $8.3 million of branch consolidation costs, and $5.6 million of expense related to changes in retirement provisions for new grants under our long-term incentive program that do not affect the total cost of the grants, but do affect the expense recognition timing.
Bank shares and franchise taxes increased $1.7 million, reflecting the recognition of a $1.2 million state tax credit in the prior quarter and higher year-end 2019 bank capital levels while other increases and decreases essentially offset each other.
The efficiency ratio equaled 59% compared to 56% as the other unusual or outsized items increased current quarter's efficiency ratio by over 3 percentage points.
Regarding guidance, the outlook we shared in January is no longer relevant, given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover.
However, in the spirit of transparency into our short-term forecasts, we are providing our current directional outlook for the second quarter of 2020 on slide 18 based on what we know today, which is subject to change, given the very fluid situation we are all managing through.
We expect second quarter net interest income to decline mid-single digits from first quarter levels as the net interest margin reflects a full quarter's impact of the current interest rate levels.
We expect average loan balances to be up mid-to-high single-digits, reflecting higher March 31 spot balances and $2.1 billion of PPP loans from the initial phase of the program that are expected to fund during the quarter.
The second phase of the program would be additive to these figures as we strive to accommodate all of our customers that want to participate.
We expect expenses to be flat from the core level of $178 million this quarter.
We expect our core fee trends to continue from solid levels in the first quarter with service charges expected to decline due to COVID-19 impacts on certain products and services.
We expect the effective tax rate to be around 20%.
I'd like to touch on several initiatives that stand out as we move forward.
In January, we launched our new interactive website designed with enhanced functionality that creates a one-stop shopping and interactive digital experience.
Online appointment setting, a streamlined account opening process and deploying interactive teller machines throughout our footprint are just a few of the functionalities that our clicks-to-bricks digital strategy affords us.
Combined with our network of nearly 40 ITMs and 550 ATMs and our robust award winning mobile applications, we are well positioned to continue to provide service to our customers through multiple channels and meet their needs during this time of social distancing and economic challenges.
We've invested heavily in our mobile and online platform, which is critical during a time of limited operations in the physical channels.
Mobile deposits are up more than 40% in the last two weeks of March compared to the year ago period and pre-COVID-19 first quarter levels.
F.N.B will continue to build-out our digital capabilities as previously planned.
To protect our customers and communities from economic disruption, F.N.B was one of the first banks to develop a structured deferral program and announced several measures to support customers who may be enduring financial hardships and were directly impacted by COVID-19.
Furthermore, we instituted an outreach program and activated an outbound calling initiative to contact thousands of customers across all business units during the crisis, ensuring their needs were being met.
We also continue to participate in the previously mentioned Paycheck Protection Program and evaluate other COVID-19 related federal government relief programs to determine their suitability for our customers and communities.
Regarding our outlook, liquidity and overall capital position, we consistently run stress test for a variety of economic situations, including severely adverse scenarios that have economic conditions like current conditions.
Under these scenarios, our regulatory capital ratios remain above the thresholds and we are able to maintain appropriate liquidity levels, demonstrating our ability to continue to support all of our constituencies under stressful financial conditions.
As we gain more clarity on this evolving health pandemic and the resulting challenging economic environment, we will continue to update you on key business drivers and expectations.
In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those in need.
This is an unprecedented time for our nation and our industry.
Our mission has always been to improve the quality of life in the communities we serve.
Now more than ever, we must work together to support those impacted by this public health crisis. | compname reports q1 earnings per share $0.14.
q1 earnings per share $0.14. | 1 |
With me on the call are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO.
A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission.
In discussing the results of our operations, we will be providing certain non-GAAP financial measures.
Our Company delivered another strong quarter that exceeded our expectations on both top and bottom lines, outperforming 2020 and notably 2019.
With strong cash generation year-to-date, we were able to execute on our capital allocation priorities including returning capital to shareholders.
Our business has demonstrated resilience and we remain confident in our ability to deliver on Polaris strategy.
And as a result, we are raising and narrowing our full year 2021 guidance.
Our '21 results demonstrate the progress we've made with our Polaris strategy operating in a better economic environment as well as the strength of our digitally led omnichannel model.
We are poised for sustainable and profitable growth and we'll continue to build and invest in our retail ecosystem to both maximize and accelerate our opportunities.
Today, I'm pleased to announce that we are making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's, Inc. business fuel customer acquisition and drive growth across all of our channels.
We will partner with the enterprise marketplace technology company, miracle to build the platform.
Through this new digital marketplace platform which we'll launch in the second half of 2022, we will connect carefully selected third-party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation.
Now, I'll provide some highlights from the third quarter.
Comparable, owned plus licensed sales increased 8.7%, an improvement in trend from the 5.9% increase we saw in Q2, even after adjusting for changes in our marketing calendar.
Adjusted diluted earnings per share was $1.23, up significantly from Q3 2019 and adjusted EBITDA was more than 2 times better than 2019.
Gross margin for the quarter improved by approximately 100 basis points driven by stronger regular price selling, fewer markdowns due to leaner inventories and a number of pricing and promotion initiatives and offset by increased delivery expenses.
Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions.
When they first begin the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks and since then stayed agile and flexible, leveraging our strong networks and relationships with international carriers and variants and diversifying how we move product both up and downstream.
Significantly, as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season.
Total Company AUR was up more than 12% across our three nameplates.
SG&A dollars were significantly lower driven by a combination of ongoing expense discipline and unfilled open positions.
Looking at each of our nameplates, comparable sales for Macy's brand were up 8.4% on an owned plus licensed basis which represents a nearly 1 point improvement versus last quarter, when you take into consideration, the friends and family marketing shift.
Macy's brand full price sell-through improved 610 basis points while full price AURs increased by 6.9% driven by high demand and our gross margin initiatives.
Our Bloomingdale's business performed well with comp sales on an owned plus licensed basis up 11.2%, which was in line with the second quarter.
Results were driven by strong sales of luxury handbags, fine jewelry, home, men's shoes in contemporary apparel and both stores and bloomingdales.com outperformed 2019.
Bluemercury continues to recover outperforming versus 2020, but was down 2.2% compared to the third quarter of 2019.
We see strong sales performance of private brands, home fragrance and treatment.
Turning to the health of our customer base, we brought in 4.4 million new customers into the Macy's brand, a 28% increase compared to 2019.
Approximately 30% of these new customers were dormant customers over the last 12 months who have now reengaged.
In addition to growth in new customers, customer loyalty has also increased.
Star Rewards program numbers now make up nearly 70% of the total Macy's brand comparable owned plus-licensed sales, up approximately 10 percentage points compared to 2019.
During the quarter, we saw Platinum, Gold and Silver customers reengage with average customer spend in these tiers up 16% compared to the third quarter of 2019.
Bronze members who represent our youngest and most diverse loyalty tier continued to grow with the addition of 2.3 million members during the quarter and we're seeing average spend per customer increased 13%.
Bronze is one of our best customer acquisition vehicles with approximately 35% of members under the age of 40% and 57% ethnically diverse.
Our Star Rewards Loyalty customers have a more personalized and productive shopping experience with the most relevant offer presented to them, right down to the particular homepage they see.
This is leading to increased conversion, higher revenue per visit and a decreased rate of customers leading the site and through targeted personalization and pricing science, we've been able to reduce the number of raw based promotional days and increase AURs.
Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers.
The growth of our omnichannel ecosystem is powered by our thriving online business, relevant full line brick and mortar stores and growing off-mall format stores, all soon to be further accelerated by the new digital marketplace platform.
Our data validates that in markets where we have a physical presence, our online business is stronger.
The interplay between traditional and physical assets is more important than ever and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth.
Turning to merchandising which we think about in three buckets.
First, our products and categories were strong during the height of the pandemic such as fragrance, watches, jewelry, sleepwear and home continue to perform well during the third quarter.
Second, occasion based categories such as dresses and men's tailored and luggage are continuing to see renewed interest from our customers.
And third, our emerging categories and new brands are expected to drive sustainable and profitable growth in the future.
These complement our core categories, while satisfying the customer shopping journey and we're seeing encouraging results.
To give you an example, since bringing the Toys "R" Us business to macys.com in August, our toys sales have more than doubled in stores and online compared to 2019 and we continue to expand on our assortment in these emerging categories.
During the quarter, we had another important new brand partner, Fanatics which offers our customers, the largest selection of licensed sports products and increases our fan apparel offering 20 fold.
This expanded assortment drove a 22% AUR increase in sports apparel and head gear compared to 2019.
Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships.
One element of this is the B2B monetization of our advertising partnerships that we realized through our in-house media agency Macy's media network which continues to generate solid results and recently expanded the scope to include Bloomingdale's.
We see a lot of potential to further strengthen our relationships with vendor partners and cultivating greater customer engagement.
Overall through Polaris, we laid a solid foundation for digital growth and we're seeing that growth come to fruition.
We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagements, enhance our stores and further empower our colleagues who drive to the success of our business on every level.
Our important digital initiatives during the quarter included a refresh of Macy's mobile app, the launch of live shopping at both Macy's and Bloomingdale's and a fragrance finder.
We also rolled out our 3D Room Planning Expansion, added PayPal and Venmo to in-store and online payments and launched a sustainability product segment.
As a result of these and other investments digital conversion for the quarter was 4.25%, up 14% compared to the third quarter of 2020 and up 27% compared to the third quarter of 2019.
Turning from digital to stores, we also continue to invest in our brick and mortar business and are seeing ongoing trend improvement in store conversion.
During the quarter, sales in our non-downtown locations continue to sequentially improve.
But due to the slow return of international tourism and office workers, our downtown doors continue to significantly lag our other doors versus 2019.
A good example of stores recovery is our backstage store within store format with sales up 24 percentage points compared to the full-line stores.
Backstage store customers are more diverse with 56% of customers ethnically diverse and have a higher spend.
Across our ecosystem, everything we do starts with and is driven by our colleagues.
They are our most significant contributors to our success and we are pleased with the strength of our performance this year has made it possible for us to double down on our investment in talent.
Last week we announced the plan to launch a best-in-class benefit program to give our colleagues access to debt free education.
We are also raising our minimum wage rate to $15 an hour which will be in effect nationally by May of 2022.
This will increase our average total pay for hourly colleagues to about $20 an hour.
Our workplace culture and colleague engagement have never been stronger and we see it as a meaningful competitive advantage in this tight labor market.
Adrian will now summarize the financial details before I make brief closing remarks.
As Jeff shared, our third quarter results demonstrate the strength and momentum of our digitally led omnichannel Polaris strategy.
Top line sales continue to grow.
Gross margin continue to expand.
SG&A continue to gain leverage.
And as a result, we delivered EBITDA and earnings per share far above our expectations.
Additionally, we continue to successfully execute on our capital allocation priorities aimed at strengthening our balance sheet and returning capital to shareholders.
Our strong results combined with our continued confidence as we move into the holiday season are leading up to narrow and waiting for our full year of 2021 guidance, which I will expand upon in a few moments.
Now, as I review each quarter and summarizing our results I'll focus on the metrics that are most important to value creation, sales, gross margin, inventory productivity, expense management and capital allocation.
First, for the second quarter in a row, we have generated top line sales above 2019 levels.
In the quarter, net sales increased by $267 million or 5.2% to $5.4 billion while we posted comparable owned plus licensed sales of 8.7%.
Keep in mind that compared to 2019, October benefited from the pull forward of some sales from the fourth quarter into the third quarter.
The early start of our friends and family sale in late October contributed to this adding about 200 basis points to owned plus licensed sales comp.
Additionally, holiday shopping began earlier as it did last year, but we won't know the full extent of the pull forward until we get further into the season.
Nevertheless, even when adjusted for friends and family, we produced solid sales growth and continued to expand our trend of sequential improvement.
Now, I want to take a moment to highlight the progress we've made as a true omnichannel retailer as we have become increasingly focused on the sustainability of omnichannel sales growth.
The true performance and potential of our omnichannel performance is hidden when sales outcomes are viewed as digital results versus brick and mortar results.
Recall that Jeff said, we see stronger digital sales in those markets where we have physical stores and we certainly saw this to be the case in the third quarter.
Moreover, while digital sales continue to grow and store sales trends continue to improve, notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 levels which represented approximately 85% of Macy's brand comparable owned-plus licensed sales.
So digital isn't merely benefiting from a shift of sales from stores.
It is actually growing beyond that.
Within these markets, here is an added potential to expand our market share further with the addition of new off-mall locations.
During the quarter, we opened five new locations in the Washington DC, Dallas and Atlanta markets.
We've seen a strong sales response and solid net promoter scores from customers well above our current expectations.
We are very encouraged by the initial results and we now see a clear path to new store off-mall growth.
So, through a combination of difficult stores and the best malls, the most productive off-mall locations and a best in class e-commerce platform, our sales growth is accelerating as we meet customers whenever, wherever and however they choose to shop.
In addition, an omnichannel view has also highlighted the need for us to take a second look at the timing of when we close approximately 60 remaining stores we previously planned to close this part of Polaris.
Those markets that are performing best in aggregate include many of the stores previously slated for closure.
With this in mind, we are considering the fallen points as we approach the optimization of our store portfolio.
First, as it relates to underperforming mall-based stores, the lane [Phonetic] closure of certain stores allows us to maintain a physical presence in the market which is critical to our topline growth.
Second, these stores are cash flow positive and support the funding of investment needed to reposition our store portfolio over time.
And lastly, we're adapting our learning in the smaller off-mall formats to more quickly introduce these concepts to more markets with plans to open more of these stores next year.
Scaling our off-mall formats will allow us to reposition our brick and mortar assets within markets to more effectively support omnichannel sales growth.
As a result, we expect to announce about 10 closures in January with more details on the remaining stores to come later in 2022.
Moving on to gross margin.
We saw another quarter of rate expansion to 41%, an increase of 100 basis points compared to the third quarter of 2019.
We continue to generate very healthy merchandise margin which improved by 270 basis points to 45.3%.
The primary drivers were the consistent improvement we maintain in lower markdown and inventory productivity, which I'll expand upon shortly.
Markdown levels were the result of a combination of lower inventory levels and further scaling of pricing science including location level pricing and POS pricing work.
As Jeff noted, these efforts drove higher full price sell-throughs and full price AURs compared to 2019.
We continue to roll out additional initiatives including a new promotional effectiveness tool, given our teams access to advanced analytics to better understand the profitability of prior promotional events.
The improvement in merchandise margin was offset by a rise in delivery expense due to increased digital penetration.
Delivery expense was 4.2% of net sales, 170 basis points higher than the third quarter of 2019.
With regards to inventory productivity, inventory levels were down 15.4% compared to the third quarter of 2019, a product of ongoing market dynamics and our own Polaris initiatives.
Our sales to stock ratio remains healthy and the improved use of data science continues to enhance our inventory management practices from order placements, all the way to customer sales.
Inventory churn for the trailing 12 months improved by nearly 18%, while for the trailing six month, inventory churn improved by approximately 22%.
Additionally, given the macro challenges facing the retail industry, we're staying ahead by making further shift in our inventory management practices and implementing a number of initiatives.
As we noted on our last call, we do not anticipate improvements to many of the macro supply chain constraints until mid to late 2022.
Moving on, we again exercised strong expense management discipline, our net value creation metric.
SG&A expenses of $2 billion improved by about 10% or $229 million from the third quarter of 2019 levels.
As a percent of net sales, SG&A expenses were 36.3%, a significant improvement of 630 basis points compared to the third quarter of 2019 as we continue to benefit from permanent cost savings and reduced cost due to elevated job openings.
The impact of the labor shortages are transitory and we expect them to moderate going into the next quarter as well as into the next year.
Improved bad debt levels driven by strong customer credit health continued to contribute to the growth of credit card revenues to $213 million, up $30 million from the third quarter 2019 and ahead of what we expected.
Credit card revenues were also ahead as a percent of net sales increasing by 40 basis points to 3.9% and trending ahead of our prior annual guidance.
As it relates to our credit card program, we are close to finalizing our decision on a partner and expect to announce the decision in the upcoming weeks.
As a digitally led retailer, we must have a partner with strong digital capabilities today and a strong innovation pipeline with the prospect to further expand that pipeline in the future.
Our loyalty and personalization initiatives serve as key growth levers in our ability to obtain and retain more customers to drive omnichannel sales growth.
That said, over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales in the 3% or so that we have historically experienced.
Given our strong performance across these areas as well as the $50 million of asset sale gains recognized during the third quarter, we generated positive adjusted EBITDA of $765 million.
Notably, adjusted EBITDA margin of 14.1% exceeded the margin in the third quarter of 2019 by 780 basis points on the strength of expense management discipline and gross margin expansion.
After accounting for interest and taxes, collectively, these results helped to generate quarterly adjusted net income of $386 million and adjusted diluted earnings per share of $1.23 versus $21 million and $0.07 respectively in 2019.
Our final value creator is capital allocation and our meaningful free cash flow generation of $574 million year-to-date has served us well in this regard.
In the third quarter, we repaid approximately $1.6 billion of debt early, which brings our leverage ratio well under our year end target.
And while we drew on our credit facility to support the build of seasonal merchandise during the quarter we did so at a much lower interest rate than that of the debt we retired.
Going forward, we expect to use the facility periodically based on the needs of the business.
Now, we successfully regained an investment grade profile well ahead of schedule.
We will continue to pay down debt as debt matures with an aim to achieve a leverage ratio below 2 times in the upcoming years.
Additionally, we paid $46 million in cash dividends and announced our fourth quarter dividend earlier this month.
And we repurchased 13 million shares for more than 4% of total shares outstanding for a total share buyback of $300 million.
With $200 million of authorization remaining, we're trying to look for further opportunities to repurchase shares.
These actions underscore our confidence in our business and our commitment to our capital allocation priorities that create shareholder value in the near term and the long-term.
Turning to our outlook.
As mentioned, we are narrowing and raising our full year guidance.
We have strong momentum entering the fourth quarter, but the headwinds that we noted on the last quarter's call remain in place, the supply chain concerns, the tight labor market, elevated levels of holiday shipping surcharges and potential unforeseen impacts of COVID variants.
The low end of our guidance considers the impact of these headwinds.
But here are some of the highlights.
For the full year, we now expect net sales to be between $24.1 billion and $24.3 billion, which at the midpoint of the range is an increase of over $400 million from our prior guidance.
We now increased our adjusted earnings per share range to $4.57 to $4.76 from $3.41 to $3.75, an increase of more than a $1 compared to our prior guidance.
Now for the fourth quarter.
Comparable sales on an owned plus licensed basis versus 2019 are expected to increase between 2% and 4%.
This includes an approximately 125 basis point adverse impact due to the shift of the friends and family promotional event from the fourth quarter into the third quarter as compared to 2019.
Gross margin rate expectations are between 100 basis points and 150 basis points lower than 2019.
SG&A expense as a percent of sales is expected to improve by approximately 75 basis points compared to 2019 and adjusted diluted earnings per share is expected to be between a $1.67 and $1.87 events excluding the impact of any additional share repurchases other than those already executed in the third quarter.
Our progress to date combined with our Polaris initiatives already underway put us well on the path to profitable and sustainable sales growth.
As such, we have increased clarity on our business outlook over the next few years.
In 2022, we see several incremental tailwinds for our business beyond those from our Polaris initiatives.
The consumer mix is healthy, and we expect the strong demand to continue, particularly as people return to work.
As borders open, we anticipate an uptick in tourism, although we don't yet see tourism returning back to 2019 levels in 2022.
At the same time, we're keeping a watchful eye on headwinds.
As mentioned, we are actively managing supply chain disruptions with success.
We're continuing to navigate the labor shortages and competition for talent by investing in our current and future colleagues.
We are also focused on mitigating inflationary pressures on our customers by leveraging our pricing science while continuing to provide our customers with clear value.
In summary, our team is committed to accelerating and sustaining top and bottom line growth through the continued successful execution of our digitally led omnichannel Polaris strategy, which in turn will strengthen the health of our balance sheet and deliver strong returns to our shareholders.
Next quarter, we look forward to sharing with you further detail on our guidance for 2022 and our outlook for 2023 and beyond.
So in summary, we remain focused on executing our Polaris strategy to position Macy's Inc. for sustainable and profitable growth.
We regularly review the structure of our business and our strategy and are open to all options that are likely to create long-term shareholder value.
This past year, we conducted an analysis of our e-commerce and brick and mortar operations evaluating how each contribute to the value of the Company as well as how each benefits from being integrated and working together.
In collaboration with our Board and with assistance from our advisors, we look at multiple business models that would create long-term shareholder value, while always respecting the omnichannel behavior of the customer.
This work supported our digitally led omnichannel Polaris strategy that we are successfully executing.
That said, we also recognize the significant value of the market at this time in a pure e-commerce businesses.
And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy's Inc. To help in these efforts, we have recently engaged AlixPartners to work with our Board and financial advisors.
It is too early to tell what the result of this additional analysis will be, but we plan to update everyone after the work is complete.
I am confident that we have a lot more opportunity ahead.
Our colleagues focus on both strengthening the fundamentals of our business and driving innovation, gives me great confidence that a bolder and brighter future for Macy's, Inc. lies ahead.
And operator, please begin the Q&A. | qtrly diluted earnings per share of $0.76 and adjusted diluted earnings per share of $1.23.
added 4.4 million new customers into macy's brand in quarter, a 28% increase over 2019.
qtrly results were driven by effective execution of polaris strategy and an improved economic environment.
qtrly in quarter, macy's brand added 4.4 million new customers.
robust omnichannel ecosystem is showing resilience in face of labor and supply chain challenges.
encouraged by momentum of our business and its strong financial health.
inventory was up 19.4% in quarter from q3 2020 but down 15.4% from q3 2019.
sees 2021 net sales $24.12bln - $24.28bln.
sees 2021 adjusted diluted earnings per share $4.57 - $4.76.
implemented several measures to mitigate supply chain disruptions and does not expect to be materially impacted during q4 2021. | 1 |
Before we get started, I would like to wish everybody a happy Veterans Day.
In addition, we will also be presenting certain non-GAAP financial measures, particularly concerning our adjusted consolidated operating earnings performance and our adjusted diluted earnings per share, which excludes certain highlighted items.
Our second quarter results reflected a combination of record market demand across all of our segments, with Q2 '22 orders 36% higher than the same period pre-COVID fiscal year '20, but accompanied by continued inflation and supply chain challenges.
We reported second quarter adjusted earnings of $1.01 per diluted share, which was a slight increase over the second quarter of last year.
Our Motive Power and Specialty businesses delivered better than expected results, while Energy Systems continue to be disproportionately impacted by its Asia-sourced supply chain.
Strong demand led to our quarter end backlog reaching an all-time record exceeding $1 billion, which is more than double normalized levels.
The backlog growth primarily occurred in our Energy Systems and Specialty lines of business and is indicative of extremely robust end market demand over and above the COVID recovery.
Let me take a minute to provide you some added color of the current economic environment.
As has been a common theme among most industrial companies this earnings cycle, we are facing a number of challenges in the wake of the global economic recovery as businesses aggressively compete for labor, materials and transportation, all while still navigating isolated COVID disruptions.
The trend we saw in Q1 has continued with nearly $20 million of sequential cost increases in freight, wages, lead, non-lead commodities and semiconductors.
Our team continues to take aggressive actions to mitigate these pressures, including the implementation of additional price increases, resourcing of materials and engineering redesigns.
As these issues stabilize, our financial results will more fully reflect our record backlog, enhanced profitability and across-the-board demand for our products.
I'd now like to provide a little more color on some of our key markets.
Let's start with our largest segment, Energy Systems, which continues to see robust demand with Q2 '22 order rates increasing over 50% compared to pre-COVID Q2 '20.
We saw exceptionally strong demand in 5G mid spectrum and broadband.
We also received our first orders from the California Public Utilities' Public Safety Grid Shutdown Extended Network Backup Program.
Shipments for these orders are expected to ramp in Q3, Q4 and into fiscal year 2023.
In addition, we believe these programs may be extended to other states presenting another opportunity for future growth.
Countering the strong demand is the fact that Energy Systems has our longest and most complicated supply chain, which was therefore the hardest hit by the macroeconomic environment in the quarter.
The Energy Systems price recapture cycle is longer due to the project nature of this business while working through the contractual obligations of its lengthy backlog.
As a result, in Q2, ongoing pricing actions lagged inflation and were largely offset by mix with more service revenue offsetting higher margin electronics orders that could not be shipped or could not be delivered due to chip shortages.
Tariff mitigation strategies, including our efforts to move contract manufacturing out of China and closer to home, continue to be slowed by semiconductor availability.
Freight costs for Energy Systems alone rose sequentially an additional $6 million in the quarter, doubling the prior year level.
While Energy Systems' operating earnings this quarter were disappointing, market demand and macro trends, combined with additional price increases and the resourcing of electronics, still point to an extremely positive long-term path for the business.
However, due to the current state of the global supply chain, especially availability of semiconductors, our third quarter will remain challenged.
That said, as many of our commodities' inflation trends appear to have peaked, we are confident our price recapture initiatives will catch up in the near future.
Despite the challenges we noted in our Energy Systems business, one of EnerSys' core strengths is our diversification.
Our Motive Power business continued its positive momentum during the quarter outperforming both top-line and profitability expectations as demand returned to pre-COVID levels.
Revenue decreased $15 million from Q1 due to the traditional European summer holidays.
Nevertheless, we believe this business has not yet reached its full potential as our OEM customers' demand has been hampered by their ability to secure chips.
Margins improved as a result of price and mix improvements as well as ongoing opex efficiencies with Motive Power enjoying nearly 20% higher operating earnings than the same pre-COVID period in F '20.
Our NexSys TPPL and recently released lithium variants continue to generate enthusiasm in the market.
In addition, the restructuring of our Hagen Germany facility nears completion ahead of schedule on cost and timing, with savings beginning to be realized.
We will also continue to extract additional savings with further standardization of our legacy product offering and other business transformation initiatives.
We remain well positioned to benefit from a steady recovery in this business throughout the balance of the fiscal year.
Similar to Motive, our Specialty business delivered a solid quarter.
A&D is performing well and demand in the transportation business remains extremely strong, slowed [Phonetic] only by TPPL supply constraints in Americas and Europe.
We expect very robust transportation growth in Q3 as a result of our focus on aligning capacity with demand and our belief that the truck market will continue its growth into calendar year '22 as a result of the improving economic -- improving economy and their anticipation that chip shortages will improve.
Our Thin Plate Pure Lead production capacity continues to grow and we will exit the fiscal year at our planned run rate of $1.2 billion per year.
The financial performance for TPPL manufacturing has been under significant pressure all year long with COVID-related staffing and supply chain shortages hampering productivity.
We expect significant reductions in manufacturing variances next fiscal year as the supply chain issues slowly subside.
Reduced manufacturing variances combined with a record backlog and continued strong demand signals from our transportation customers gives us immense confidence in the future of our Specialty business.
Our product road map is one of the most exciting areas of our business as the technology advancement of our product pipeline has been long in the making, but well worth the wait.
We have fully launched 11 lithium variants for Motive Power Group and continue to expand our product portfolio.
We have received OEM approvals and the family has successfully completed, all witness to our testing.
The demand for lithium products throughout our Energy Systems Group also continues to grow.
In addition to the lithium portion of the California PUC success mentioned earlier, telecom and residential home energy products are all performing well on UL tests.
Progress on the development of the TouchSafe product with Corning continues to go well.
Customer plans for their high-frequency networks using this solution are accelerating.
Last but certainly not least, our EV fast charge and storage initiative is quickly moving forward.
Feedback from our potential launch partner customer has been very positive, including speed and development as well as the level of software maturity.
We should see our first revenue for this product next fiscal year.
EV charging is a key focus of the recently passed Infrastructure Bill.
Looking ahead, our near-term challenges revolve around addressing global supply chain issues as well as rising commodity and labor costs and shortages.
We are actively working to mitigate these pressures through incremental price increases, alternative sourcing, engineering redesigns and aggressive hiring actions.
We will remain nimble as we adjust to the changing environment.
Despite these hurdles, there is a lot about EnerSys to generate real excitement.
Current demand for our products is greater than I can ever remember, fueled by a massive 5G build-out and high growth categories such as transportation.
Our future growth opportunities include significant investments in rural broadband, high frequency small cell deployment, EV charging, home energy storage, transportation market share growth, increased defense allocations and material handling OEMs returning to normalized levels.
We will continue to execute on our strategic initiatives and look forward to providing you updates on our progress in the quarters ahead.
With that, I'll now ask Mike to provide further information on our second quarter results and go-forward guidance.
I am starting with Slide 10.
Our second quarter net sales increased 12% over the prior year to $791 million due to an 11% increase from volume and 1% from price, net of mix.
On a line of business basis, our second quarter net sales in Energy Systems were up 9% to $370 million, Specialty was down 3% to $101 million and Motive Power revenues were up 22% to $321 million.
Motive Power's improvement was mostly from 20% growth in organic volume and 2% improvement from pricing.
The prior year Motive Power second quarter revenues were significantly impacted by the pandemic, resulting in a 21% decrease in organic volume.
Our Motive Power revenues for H1 of this year, however, are comparable to the pre-pandemic levels of two years ago.
Energy Systems had a 9% increase from volume as well as 1% improvement from FX, but had a 1% decrease in price after including negative mix.
Specialty had a 5% pricing improvement that was offset by an 8% erosion in volume due largely to delayed shipments.
We had no impact on revenue from acquisitions in the quarter.
On a geographical basis, net sales for the Americas were up 14% year-over-year to $550 million, with 14% more volume.
EMEA was up 5% to $180 million from a 3% increase in volume and 2% in pricing.
Asia was up 10% at $661 million on 7% more volume and 3% currency improvements.
On a sequential basis, moving to Slide 11, our second quarter net sales were down 3% from the first quarter, largely due to the normal vacation holidays in Europe and supply chain shortages.
On a line of business basis, Specialty decreased 6% with supply constraints pushing out order fulfillments into Q3.
Motive Power was down 5% due to the European holiday season previously mentioned and EMEA was flat -- excuse me, Energy Systems was flat.
On a geographical basis, Americas was also relatively flat and Asia revenues were up 8%, while EMEA was down 11% mostly from lower volumes.
On a year-over-year basis, adjusted consolidated operating earnings in the second quarter decreased approximately $5 million to $61 million with the operating margin down 160 basis points.
On a sequential basis, our second quarter operating earnings dollars eroded $14 million from $75 million, while the OE margin decreased 150 basis points to 7.8%, primarily due to the persistent supply chain headwinds and inflation in Energy Systems, which Dave has addressed.
Operating expenses, when excluding highlighted items, were at 14% of sales for the second quarter compared to 15.7% in the prior year and 16.1% from two years ago as our revenue growth exceeded our spending growth and we have maintained a more efficient operating leverage.
On a sequential basis, our operating expenses were relatively flat.
Excluded from operating expenses recorded on a GAAP basis in Q2 are pre-tax charges of approximately $12 million related to $6 million in Alpha and NorthStar amortizations and $4 million in restructuring charges from the previously announced closure of our flooded Motive Power manufacturing site in Hagen, Germany.
Excluding those charges, our Motive Power business generated operating earnings of $41 million or 12.8%, which was 370 basis points higher than the 9.2% in the second quarter of last year due to strong demand and easing of pandemic-related restrictions, favorable mix from maintenance-free growth and ongoing opex constraint or restraint.
Operating earnings dollars for Motive Power increased over $17 million from the prior year and $6 million from two years ago.
On a sequential basis, Motive Power's second quarter OE decreased 220 basis points from the 15.1% margin posted in the first quarter due to the vacation season volume decline noted earlier, along with higher lead and other input costs.
Energy Systems operating earnings percentage of 2.3% was down from last year's 8.8% and the prior quarter's 3.5%.
OE dollars of $9 million were $5 million below last quarter and $22 million below prior year.
The cost from higher freight, tariffs and materials caused the OE erosion with unfavorable mix from supply shortages offsetting the lagging pricing improvement realization.
Specialty operating earnings percentage of 11.8% was up from last quarter's 10.6% and last year's 11.4%.
OE dollars were largely flat sequentially and year-on-year, driving the margin improvement from improving pricing was the lower sales volume.
Please move to Slide 13.
As previously reflected on Slide 12, our second quarter adjusted consolidated operating earnings of $61 million was a decrease of $5 million or 7% from the prior year.
Our adjusted consolidated net earnings of $44 million was in line with prior year but $11 million lower than the prior quarter.
Our adjusted net earnings reflect the changes in operating earnings along with the lower adjusted tax rate.
Our adjusted effective income tax rate of 16% for the second quarter was slightly below the prior year's rate of 17% and lower than the prior quarter's rate of 18%.
Discrete tax items caused most of these variations.
Second quarter earnings per share rose slightly year-over-year to $1.01, although it was slightly below the bottom of our guidance range.
We expect our weighted average shares in the third fiscal quarter of 2022 to be approximately 42.5 million versus the 43.3 million in the second quarter.
Our Board of Directors also recently renewed the $100 million share buyback authorization we had in place over the last two years that was completed with these recent October purchases.
Last week, we also announced our quarterly dividend, which remains unchanged from prior levels.
Slides 14 and 15 reflect the year-to-date results and are provided for your reference, but I don't intend to cover these at this time.
Our balance sheet remains strong and positions us well to navigate the current economic environment.
We have $408 million of cash on hand and our credit agreement leverage ratio is now at 2.0 times, which allows nearly $550 million in additional borrowing capacity.
In July, we extended and amended our credit facility on favorable terms, which now is in place through 2026.
We expect our leverage ratio to remain between 2.0 and 2.5 times in fiscal 2022.
Our year-to-date cash flow from operations was a negative $66 million.
Included in that amount was $28 million in spending on the previously announced restructuring of our Hagen, Germany Motive Power Plant, which is in the second quarters -- which in the second quarter started delivering on cost savings that should exceed $20 million annually.
The negative operating cash flow was also due to our inventory expanding $123 million to meet rising revenues as well as from higher input costs and transit times, along with the other inefficiencies induced by supply chain disruptions.
Capital expenditures of $35 million were in line with our prior guidance.
Our capex expectation for fiscal 2022 remains approximately $100 million and reflects major investment programs in lithium battery development and our continued expansion of our TPPL capacity.
We anticipate our gross profit rate to remain near 22% in Q3 of fiscal 2022.
As Dave has described, all three of our lines of business find their products in high demand.
Near-term supply challenges are restricting our ability to execute fully on these opportunities.
As a result, our guidance range of $0.96 to $1.06 in our third fiscal quarter of 2022 reflects the impact of these supply chain challenges, which we continue to see as temporary.
Please move to Slide 17.
On a longer-term basis, we recently renewed -- or reviewed our updated five-year plan with our Board of Directors.
We remain confident that our top-line growth and overall profitability goals are still achievable with respect to the final years' deliverables.
However, those targets, as previously communicated, will take an additional year to be achieved compared to our Investor Day model in reflection of the delays the pandemic and supply chain challenges have had not only on our own progress but that of our customers and their broader markets.
After more than 25 years with the company and 12 years as Chief Financial Officer, Mike has announced his intention to retire at the end of this fiscal year.
While we will miss his wisdom and experience, we are very confident that Andy Funk is the right person to fill this role and help EnerSys complete its transition from a battery maker to a world-class energy systems leader. | sees q3 adjusted earnings per share $1.17 to $1.23. | 0 |
Today's discussion is being broadcast on our website at atimetals.com.
Participating in the call today are Bob Wetherbee, President and Chief Executive Officer; and Donald Newman, Senior Vice President and Chief Financial Officer.
For today's call, we will not display or advance slides as Bob and Don speak.
Their comments will focus on highlights and key messages.
The slides provide additional color and details on our results and outlook.
They are available on our website at atimetals.com.
It's an understatement to say that 2020 has been a challenging year for all of us, especially those who serve the commercial aerospace market.
Despite these headwinds, the relentless ATI team continues to rise to the challenge, guided by the leadership priorities we established at the outset of the pandemic.
First, how we're taking control of what we can control, thus accelerating cost savings and strengthening our position.
Second, our strong balance sheet puts us in an excellent position to weather storms ahead as well as to fuel our growth.
So first, where we are today.
Our customer connectivity continues to give us the insights to assess market dynamics in the moment.
From this, we gain conviction to make critical decisions, aligning our cost structures and inventory levels with changing demand expectations.
We've acted thoughtfully and with urgency to reshape ATI for 2021 and beyond.
As a result of these proactive efforts, our third quarter financial results significantly exceeded our previous guidance.
We accelerated benefits from our cost savings initiatives through aggressive implementation.
This included capacity up, gold dark and quiet facility islands reduced our fixed costs, minimized variable costs with execution on our restructuring programs, eliminated costs to align with demand declines, reduced overhead.
We've intensely reviewed every administrative and nonproduction related expense continuing only what was critical.
Overall, we've significantly variabilized our cost structure.
Costs historically viewed as fixed are now turned on and off in sync with demand, which gives us tremendous control over our costs.
This will be a lasting impact of the actions we've taken during the crisis.
Through it off, our people have been extraordinary.
First and foremost, they're keeping each other safe, while efficiently and consistently delivering critical materials and components to our customers.
The frequent production adjustments we made in response to demand shifts and end market forecasts have not been easy for them.
Growing levels and shift schedules have fluctuated as a result.
I sincerely appreciate the entire team's effort and dedication and personal economic sacrifices.
Their continued actions demonstrate a shared commitment to ATI's future success.
The deliberate actions we've taken and will continue to take are crucial to our ability to emerge a stronger company as the economy recovers.
Looking ahead, we're confident demand will eventually recover.
We expect these difficult times to continue for several quarters to come, but we do believe we're reaching the bottom with some signs of upcoming stability.
Secondly, let's talk about our balance sheet and the solid position it puts us in.
We've worked diligently to ensure ample liquidity levels and a manageable debt maturity schedule.
Our strong balance sheet gives us confidence to manage through the COVID crisis and fuel our future growth.
We're fueling growth in three ways: first, based on customer commitments, we're investing capital to enable strategic share gains and new business awards that we'll start to see in 2021.
Next, organically expanding our presence in adjacent high-value markets, where our material science expertise is valued.
And finally, when the time and economics are right, we'll pursue acquisitions to rapidly build out scale, expand capabilities and capture profitable core market opportunities.
As we accomplish our growth goals, we'll intensify our presence in aerospace and defense, materials and components.
We'll continue leveraging our material science capabilities and advanced process technologies to generate aerospace like margins in adjacent markets along the way.
Looking forward, we're confident that the demand for commercial aerospace products will recover.
We see it as growth deferred, not lost.
No matter what form you believe the coming economic recovery will take, it could be a leak, could be a U, it could be L-shaped.
When you're at the bottom, it's difficult to predict when you'll reach the other side.
But we know we'll get there.
We're positioning ATI to emerge stronger, leaner and more efficient, no matter how the recovery comes.
There are some examples of how I believe we're doing just that.
We're expanding our presence in growth markets like defense.
We have solid positions in adjacent markets that are likely to recover faster than commercial aerospace and can generate aerospace-like profitability.
Lastly, our efforts to lower costs and streamline our manufacturing footprint while deploying growth capital will pay dividends for the long term.
Broadly speaking, and not surprisingly, our Q3 sales across most markets were negatively impacted by the ongoing pandemic and resulting economic downturn.
Defense remains a notable positive exception.
A little more color on our view of what we expect going forward.
Let's start with commercial aerospace.
Both jet engine and airframe continued to decline significantly versus the prior year.
Aggregate year-over-year sales were down 60% in the third quarter, driven by factors we're all familiar with: quarantines, travel restrictions and low 737 MAX production.
Aggressive jet engine customer inventory destocking in the near term will better align future production levels with demand.
Fourth quarter jet engine product sales will remain relatively weak as quarantines began to slowly recover.
Specialty materials will likely lag for an additional couple of quarters.
API sales into airframe applications will remain subdued for the balance of 2020 and likely throughout 2021 as the impact of announced future wide-body production rate reductions work their way through the supply chain.
In 2021, ATI will benefit from engine market share gains and new airframe business.
The positive impact from these wins will increase over time as aerospace industry volumes recover.
Our second core market, defense, remains a source of strength.
Excluding titanium armor, ATI's diversified defense sales were up more than 20% year-over-year, led by naval nuclear and military aerospace growth.
Titanium armor plate sales were down significantly due to timing for both a domestic and an international program.
We're investing resources to accelerate growth in the defense market, leveraging our material science capabilities and advanced process technologies to develop and produce materials and components to both power and protect.
Near term, we expect continued growth in the fourth quarter and into 2021.
Next, let's talk about my thoughts on three important adjacent end markets.
Third quarter sales were down significantly in the energy and medical markets and up in electronics.
When it comes to energy's oil and gas submarket, we saw a lack of end-customer demand and a resulting inventory glut, reducing exploration and downstream processing activities worldwide.
We expect this market to remain weak in the fourth quarter.
A bright spot within energy is the specialty energy submarket, including solution control, nuclear and renewables.
These sales grew year-over-year.
And we expect the specialty energy market to continue to outperform the larger hydrocarbon-based markets in the fourth quarter, mainly driven by large international pollution control projects.
Our medical market is principally comprised of biomedical implants and MRI materials.
Sales versus prior year were lower to customers in both categories, mainly due to the challenges presented by COVID.
Patients postponed elective surgeries and hospitals limited facility access to equipment suppliers.
Looking ahead, we believe medical sales will accelerate as patients regain confidence to reenter their medical facilities, either due to an effective COVID vaccine or disease treatment protocols.
Finally, electronic sales moved higher year-over-year.
This is mainly due to ongoing consumer goods production in support of new product launches and year-end holiday sales.
We anticipate modest growth trends to continue in the fourth quarter.
I'll spend the next few minutes sharing highlights in three key areas: one, our better-than-expected third quarter financial performance; two, our strong balance sheet and cash position; and three, a look at our Q4 and 2021 expectation.
From a performance standpoint, the adjusted earnings per share loss of $0.38 per share in Q3 is significantly better than our previous guidance of a loss of between $0.62 and $0.72 per share.
Our Q3 performance reflects accelerated cost reductions and an improved mix in portions of our business.
First and foremost, we are managing decisively.
We are making the most of external demand despite market headwinds, and we're controlling what we can, our costs and capital deployment.
Consider this, our third quarter revenue dropped by more than 40% versus prior year, including a 60% decline in our high-value commercial aerospace business.
The revenue drop was largely due to market factors that were not within our control.
When market declines became clear earlier this year, we responded quickly, focusing on cost containment.
Benefits of those efforts can be seen in our Q3 results.
Despite the 40% drop in revenue, we posted a 25% year-over-year decremental margin in Q3.
That's a meaningful improvement from the 28% decremental margins captured in Q2, clear improvement resulting from quick action.
Our cost actions are having meaningful impact and they're accelerating.
As Bob described it, we have significantly variabilized our cost structure.
Costs once considered fixed are now variable.
This means we are better prepared to deal with future demand fluctuation.
Also keep in mind that structural cost savings will accelerate profitability in the recovery, expanding margins and increasing our cash conversion.
Looking beyond the income statement, our efforts to preserve free cash flow are producing results as well.
We expect to be free cash flow positive in 2020.
This is made possible through capital spending discipline and our ability to convert working capital into cash.
They took quick actions to protect cash in the near term while maintaining our ability to grow and be recovery ready.
We ended the quarter with approximately $950 million of total liquidity, including $572 million of cash in the bank.
Our debt maturity profile also adds strength to our financial position.
Our next meaningful debt maturity does not occur until 2023, three fiscal years away.
We are focusing on three key levers to drive cash generation: cost structures, inventory levels and capex.
Expect to see continued focus on these three areas in 2021 as we adapt our business to fit dynamic end market demand.
At the same time, we'll continue to protect our strong balance sheet.
These actions will enable us to manage through the down cycle and capitalize on opportunities in the coming up-cycle.
In terms of outlook, looking ahead to the fourth quarter, we anticipate increasing demand stabilization in commercial aerospace.
This starts with jet engine OEMs working to better align production and demand levels.
Airframe OEM inventory destocking is expected to persist in the fourth quarter.
Beyond aerospace, some industrial markets are seeing modest recovery.
Others, namely oil and gas, will likely remain at low levels.
As a result, we expect a fourth quarter adjusted earnings per share loss in the range of $0.36 to $0.44 per share, similar to our third quarter's adjusted EPS.
Moving to our free cash flow guidance.
Our consistent efforts to generate and preserve cash have produced tangible results.
We reduced managed working capital by $115 million in the third quarter in the midst of the steep economic decline.
We expect to further reduce inventory in Q4.
Just as the team quickly pivoted to cost reductions, we managed our capex spending to better match demand.
To that end, we're again lowering our capital spending target for the full year.
Our updated capex forecast range is $125 million to $135 million, about 60% of the original 2020 projections.
We are raising our full year 2020 free cash flow expectations to a range of $135 million to $150 million before pension contribution.
We're able to do this because of the successful achievements in working capital, capex and cost structures, a great accomplishment in the midst of a very challenging environment.
Looking beyond the fourth quarter, we will stay diligent to preserve or even improve on the gains that we made in 2020.
First, we believe that working capital represents an opportunity for further cash flow improvement.
At the end of the third quarter, managed working capital was approximately 50% of revenue.
This compares to 30% at the end of 2019.
We understand what it takes to get back to those 2019 levels, and we plan to make further improvements in 2021.
Next, we'll continue to keep a close eye on our capital spending.
We'll balance the need to fund growth and improve manufacturing efficiency with ongoing lower demand levels.
Finally, we will stay disciplined on costs.
We will carefully preserve our structural reductions and minimize additions as volumes return to the business.
The way we operate today is fundamentally different than how we used to work.
We will strive to maintain the hard-fought gains.
Your points were right on.
It's been a real team effort in a very uncertain time and much appreciate the contributions of everyone who's part of ATI, our customers and our suppliers.
Our comments today focused on what matters most to our shareholders and to us.
These priorities are at the core of how we lead on a daily basis.
First, we're managing decisively in times of great market uncertainty.
That includes quickly and effectively adjusting our cost structures and inventories to match demand, and we're keeping our people safe.
Secondly, we're preserving cash and maintaining liquidity.
We're preserving our ability to deploy cash accretively for our shareholders.
We'll be recovery ready, capitalizing on industry volume growth as well as our strategic share gains and new business awards.
Finally, we're working with our customers, new and long standing, who value our material science capabilities and advanced process technologies.
Our goal is to be integral to their success, helping them grow, solving even greater challenges together, in so doing, earning an ever-increasing share of their business.
We're taking the actions necessary to emerge from this crisis a stronger, leaner and more focused ATI.
Scott, back to you.
Operator, we are ready for the first question. | q1 loss per share $0.06.
looking ahead to q2, expect continued modest demand recovery for our jet engine products.
expect to see continued margin improvement in our hpmc segment in 2021. | 0 |
With me is Bruce Caswell, president and chief executive officer; and Rick Nadeau, chief financial officer.
Please remember that such statements are only predictions.
Actual events and results may differ materially as a result of the risks we face, including those discussed in Exhibit 99.1 of our SEC filings.
Management uses this information in its internal analysis of results, and we believe this information may be informative to investors, engaging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons.
And with that, I'll hand the call over to Rick.
First, let me say that since the COVID-19 pandemic, Bruce and I have never been prouder to lead an organization with such heart, dedication, ingenuity, and collaboration at all levels.
Underscoring the critical nature of our work, many of our core program operations in the United States and abroad, have been deemed essential to ensure that vital government programs continue to operate and citizens continue to receive critical assistance at a time when the need for healthcare and safety net programs is rising.
The entire MAXIMUS team has met this challenge and worked tirelessly to ensure that we continue to support citizens during this unprecedented health pandemic.
Our employees are accomplishing extraordinary things during the COVID-19 pandemic.
Bruce will discuss in greater detail, but I would like to highlight some important accomplishments.
First and foremost, we implemented robust pay leave options to ensure the safety and well-being of those employees who experienced COVID-19-related absences.
We mandated social distancing across all operations, significantly enhanced our sanitation measures, and most importantly, we continue to transition more employees to work from home.
Outside the United States, we have partnered with the government in the United Kingdom to redeploy some of our healthcare professionals directly into the National Health Service, as well as case management and administrative staff into the Department for Work and Pensions to provide vital frontline support.
Our priority has been the health and safety of our employees and ensuring that we can continue to support our government clients in whatever model that takes, as demand for government services surges.
No one can predict with certainty the scale or length of disruption from the COVID-19 pandemic or how deep and severe economic impacts will be.
We completed our normal bottoms-up quarterly review in April and reinstating guidance for fiscal 2020.
We think it is important to give our investors a sense of our current expectations for the fiscal year.
Please note, however, that our actual results could vary from the guidance due to numerous factors, including a worsening of the pandemic; erosion due to budgetary pressures; additional steps were taken by federal, provincial, state, or local governments to restrict business operations or limit office occupancy; delayed or missed payments by customers or supply chain disruptions affecting IT or safety equipment.
The ranges we have used are wider than typical at the midpoint of the year and reflect the increased risk and variability we face.
It is possible that actual results could vary materially from our current expectations.
We anticipate that fiscal 2020 revenue will range between 3.15 to $3.25 billion and diluted earnings per share to range between $2.95 and $3.15 per share.
Cash from operations is now expected to range between 250 and $300 million and free cash flow between 200 to $250 million.
While we feel comfortable with this cash flow range, I will point out that delays in collections of receivables can cause significant variation at year end.
For the remainder of the fiscal year, we anticipate continued disruption across all segments with some offsetting favorability from new work.
This disruption is expected to be most pronounced in our outside the US segment.
We expect some positive impacts in the two US segments from opportunities that in some cases we have won and in other cases are pursuing.
Bruce will provide more detail in his remarks.
Let me touch on second-quarter results, COVID-19 impacts, as well as the challenges and opportunities that lie ahead.
Revenue for the second quarter of fiscal 2020 totaled $818.1 million, which included the full ramp-up of the Census contract in the US federal services segment.
Total company operating margin was 4.6% and diluted earnings per share were $0.43, reflecting two substantial impacts in the quarter.
First, we had a pandemic-related writedown of approximately $24 million or $0.28 per share related to the decline in estimates for future period outcomes-based payments on welfare-to-work programs in the United Kingdom and Australia.
Second, a change order for approximately $9 million or $0.11 per share was signed after quarter end in the US health and human services segment.
The related costs were incurred in the first two quarters of fiscal 2020, but the revenue will be recognized in the third quarter, which falls to the bottom line in that period.
I will now review the segments.
Second-quarter revenue for the US health and human services segment increased 6.2% over the prior year and all growth was organic, resulting from new contracts and the expansion of existing work.
Both revenue and the 15% operating margin were tempered largely by the change order previously discussed.
The COVID-19 pandemic impacted the last three weeks of March 2020.
Disruption to our US health and human services business has varied as local and state governments imposed different working requirements designed to ensure worker safety, leading us to, in some cases managed through temporary site closures.
To address social distancing requirements in our call centers, our work from home capabilities was scaled at a rapid pace to enable continued support of essential services and to meet deliverables on the predominantly performance-based contracts in this segment.
Our current assumptions indicate economics for this segment will continue to experience minor disruption, and we expect an operating margin between 17% and 18% for the full year.
Looking ahead, not only have the MAXIMUS operational teams been able to manage core operations in an ever-evolving environment, but they have also taken on new work associated with unemployment insurance and a variety of COVID-related work.
Further, the business development teams have launched rapid action plans to help states address needs, resources, and gaps with support services.
Revenue for the second quarter of fiscal in the US federal services segment increased to $393.4 million.
All growth in this segment was organic.
Excluding the citizen engagement centers' contracts, organic growth was 6.7%, driven by new work and growth on existing contracts.
The operating margin for this segment in the second quarter of fiscal 2020 was 7.7%, which was tempered by unfavorable impacts from the COVID-19 pandemic on performance-based work and ongoing investments in business development.
The majority of revenue in this segment is generated by cost plus contracts, which means that we can recover certain COVID-related costs, such as increased facility cleaning incurred on these contracts.
The Census contract is now approaching its peak level of operations and delivered approximately $140 million of revenue in the second quarter, yielding year-to-date revenue of approximately $210 million.
The teams have continued to solve unique challenges for our clients in our Census contract is no exception.
We implemented operational changes to ensure that our support is available to citizens so they can complete their census questionnaires and we will continue providing assistance through the Census Bureau's extended response period which now ends October 31.
As a result, our contract has expanded to support the new deadline and we now estimate that the Census contract will deliver between $430 and $450 million for the full year.
This is an increase from our previously expected revenue of $360 million in fiscal 2020 from this contract.
The economics of this segment are largely intact through fiscal 2020.
The US federal services segment is estimated to deliver a full-year operating margin between 8% and 9% resulting from a slightly greater mix of cost plus work from previously anticipated, as well as our continued investment in both business development and technical capability.
The COVID-19 pandemic has had the most pronounced effect on our outside the US segment.
Second-quarter revenue was $116.0 million and this segment had a loss of $26.7 million.
As a reminder, this segment has several significant performance-based contracts where payments are tied directly to job seeker outcomes with the primary goal of placing individuals into long-term, sustained employment to achieve economic independence.
Revenue was recognized based on our estimate of the number of individuals who we anticipate reaching these milestones.
As a result of the pandemic, we reduced our estimates of those job seekers who are likely to achieve employment outcomes.
The accounting rules require us to record our best estimate of the future outcomes and therefore the impact of those reestimates immediately.
This resulted in a pandemic related writedown of approximately $24 million or $0.28 per share related to a decline in estimates for future period outcomes-based payments on welfare-to-work programs in the United Kingdom and Australia.
Although we are continuing to service participants in these programs where we can, many participants have underlying health conditions that require them to self-isolate at home and the pool of available employment opportunities is currently significantly lower than before.
The remainder of fiscal 2020 is expected to experience impacts from the COVID-19 pandemic related to our HAAS contract in the UK.
While our face-to-face assessments work is currently suspended, we are working to introduce telephone assessments and continuing to process paper-based assessments.
We are proud to partner with the government to be a part of the solution to this worldwide health crisis.
In the last few weeks, many of our healthcare professionals have volunteered to be seconded to the National Health Service.
We will act in an agency capacity for those employees on secondment and will receive reimbursement of most of our costs, but we will not earn revenue or profit.
This segment is expected to end the full year in an operating loss position.
To give you more color, we expect the fourth quarter for this segment to come in a little below break-even.
Our objective is for a progressive improvement in the third quarter with an aim to cut the second-quarter loss in half.
Looking ahead, we are starting to see new opportunities develop to address the significant impact of the pandemic on global labor markets.
In fiscal 2021 and beyond, we anticipate we will see an expanded need for our services as we help our government's expand and adapt their employment programs to cope with widespread unemployment.
In the UK, we are in the process of transitioning some of our outcomes-based employment services contracts that are currently in a loss position to cost recovery contracts which should provide considerably more stability and flexibility.
We expect these contract changes will be temporary, as we work with the Department on transitioning to a new model with rising unemployment.
Turning to the balance sheet.
We finished the second quarter with cash and cash equivalents of approximately $126 million.
Cash provided by operations was $22 million.
Free cash flow was $13.4 million in the quarter.
Second-quarter cash provided by operations was tempered by a combination of lower income and a higher proportion of income taxes paid in the quarter and accounts receivable grew in the first half of the fiscal-year 2020 due to increased revenue levels.
DSOs were 72 days.
We are continuing to monitor collections closely and I would like to point out that one day of DSO is roughly $9 million receivables, which directly impacts estimated cash provided by operations and free cash flow.
We entered the COVID-19 pandemic with a strong balance sheet and a resolve to manage liquidity and maintain flexibility.
While we face uncertainties including state budgetary pressures, payments to date from our customers have continued without disruption.
Our historical experience during economic downturns is that our designation as an essential service provider in the United States puts us in a favorable position in working with our clients on invoicing and payments.
However, we recognize that our customers are experiencing significant disruption to their tax receipts, and we will continue to manage the company in a conservative manner.
Going forward, the management team and the board of directors intend to take a prudent and constructive approach to deployment over the coming months.
Currently, we do not anticipate disruption to our future quarterly cash dividends.
Our quarterly 10b5-1 Share Purchase Plan expired naturally in March when the cap embedded in the program was met.
We have paused share purchases in significant M&A activity until we see an easing of the uncertainties resulting from the COVID-19 pandemic.
We continue to work on smaller, tuck-in transactions that will support future organic growth in a meaningful way.
Bruce and I are optimistic the MAXIMUS will emerge from this disruption as a stronger company.
We have been able to demonstrate that we can navigate, innovate, and showcase our operational effectiveness during challenging events while continuing to support the most vulnerable populations and protecting our workforce during this world crisis.
We believe that our efforts over the past two months have further cemented our position as a trusted reliable partner that brings scale, talent and real business solutions to bear.
And with that, I will hand the call over to Bruce.
Like Rick, I could not be more proud of our employees' efforts during these unprecedented times.
COVID-19 is a global pandemic that impacts all of us.
We are working around the clock to ensure we protect our employees, while still serving government and the vulnerable populations who rely on the health and human services programs we operate; a demand, which is only increasing under the impacts of this pandemic.
In mid-March, we rapidly developed a response to fast-moving COVID-19 challenges and implemented new policies emphasizing paid sick leave, social distancing, and significantly enhanced cleaning regimens to keep our employees safe and healthy.
And I'll touch on some of the most salient actions taken in my remarks.
If you hover over each box, additional details will be highlighted for each initiative.
As part of our efforts, we are following the more restrictive recommendations outlined in the Federal Families First Coronavirus Response Act, and in some cases, we are exceeding the Act.
While the Act does not apply to MAXIMUS because we have more than 500 employees, we felt it provided a good benchmark for supporting and safeguarding our employees.
Our income continuity plans are fully funded by MAXIMUS and cover a variety of scenarios, including quarantine, child care, government-mandated restrictions, office closure, and employees who are in high-risk categories.
Under these leave options, an employee's health insurance is also protected and we are not requiring them to take their accrued paid time off or PTO in order to access these leave options.
We also realize that employee stress and anxiety is heightened during this time.
Balancing the strains of normal life during the crisis has been difficult for us all.
Consistent, frequent, and transparent communications to our staff remain vital.
To further support our team members, we've launched topical videos from our chief medical officer, mental health seminars, virtual development training classes, as well as wellness apps such as Headspace and Wellbeats.
Moving on to the next slide, one of the most impressive things we've done is the systematic and ongoing transition of employees to work from home.
This has been a heroic effort in procuring new equipment, increasing network capacity, and deploying new services, all while keeping operations running to meet program needs.
There are significant IT challenges in transitioning to a work from a home model, ranging from information security and privacy requirements to ensuring continuity of services.
Many government programs were never designed to be carried out in a remote environment, presenting high hurdles to immediately enable a remote workforce.
This transition is also taking place during a pandemic is driven global IT equipment supply chain shortage.
Equipment such as laptops and headsets are imperative for our customer service representatives to effectively serve citizens.
But we've been working diligently with suppliers and have made great progress.
MAXIMUS has also been able to overcome these challenges by capitalizing on the strategic investments we've made in our IT infrastructure including emerging technologies such as secure remote network platforms and cloud-based omnichannel telephony environments.
For example, we leveraged our planned migration to Amazon Web Services or AWS to provision nearly 9000 secure agent desktops through the Amazon WorkSpaces as a service model thus far, in addition to approximately 7500 VPN connection users.
Our ability to deploy HIPAA-compliant work from home capabilities enabled us to maintain operational continuity and assist program participants remotely for more complex services including clinical and social assessments required to access important government benefits and services.
Most importantly, we believe we are forging a path forward for government services longer term.
The pandemic offers us a unique opportunity to test and learn new models with full support from our clients.
It gives us the opportunity to trial new ways of serving and engaging citizens who now, more than ever, need access to vital services.
We also have gained an entirely new dataset related to citizen engagement, channel preferences, and agent performance, which enables us to optimize this model.
This also allows us long term to evaluate the optimal environment for each individual employee.
While not every employee is best matched to a remote work environment, the results of early pilots indicate no statistically significant reduction in agent performance on the contracts being measured.
This type of robust data will be meaningful in solutioning new delivery methods.
As we move into the next phase of this pandemic, we believe one of the most important ways to safeguard employees, keep operations running and ensure citizens can access the services they need is to implement an employee wellness check before and during their workday.
Our digital team developed a health assessment mobile application called Clear To Work.
An employee will use the app before coming to work each day, the app takes them through a series of questions, including a self-administered temperature check.
The app either clears the employee to come to work or instructs them to stay at home that day.
If the employees are cleared, they are given a time-limited digital credential to show when they arrive at work, and then complete a second temperature check during their day.
The app was developed and implemented in roughly two weeks and is being systematically deployed across operational sites to review other geographic rollouts based on local health guidance and requirements.
In concert with this, we've also implemented a mandatory face-covering policy across our US operations, while ensuring our servicing approach protects supplies to front-line health professionals.
And while we've talked about the operational disruptions and how we're tackling those, I've been pleased with how our teams have responded to the calls for support from our clients as they rapidly design and procure solutions to address the pandemic.
Our ability to quickly pivot has underscored the resilience of our business model and our position as a trusted partner to governments worldwide.
Over the last four weeks, we've been helping our clients solve real challenges of rising caseloads and reduced resources.
To this end, we've won a number of COVID-related contracts, as well as new work associated with rising unemployment.
Let's start with our Federal team, as you may recall Maximus was already supporting the CDC's information line.
At the beginning of the pandemic, the CDC requested that MAXIMUS provide bilingual support for COVID-19 phone lines and emails.
This 24/7 coverage began with 50 agents and has grown 250 plus more than 40 nurses.
Our most recent statistics show that we are responding to more than 16, 000, and 2000 emails per day.
We were also selected to deliver the Federal Health and Human Services community-based testing centers or result center.
Under this contract, MAXIMUS provides COVID-19 test results to patients that are tested at various federal testing centers across the nation.
Our team did an astounding job in solutioning a turnkey contact center in less than six days which has since seen enormous growth.
The contract launched with 260 call center agents, making outbound calls to patients to deliver test results from 47 emergency facilities across the US Today, a team of more than 2,000 agents now contacts 10,000 individuals per day and provides real-time geo-mapping of COVID-19 test results to the US Department of Health and Human Services.
MAXIMUS has played a critical role in supporting Federal agencies following the Cares Act implementation.
Firstly, MAXIMUS supported the IRS to ensure that the economic impact payments were paid in a timely manner while continuing our normal tax season support.
Secondly, as you may be aware, MAXIMUS operates the debt management project at Federal Student Aid.
We waived payment on student loans during the pandemic.
Within 10 days of this waiver, MAXIMUS sent more than 2 million letters to student loan holders and made system changes to support the waivers.
On the state level, we've partnered with the California Department of Public Health to answer phone calls from state residents and provide basic, general, non-medical information about COVID-19.
We are in the process of working to potentially expand our offerings to include digital channels such as webchat to further engage and support California residents.
Importantly, this project is using an entirely work from a home model, protecting our staff and helping employ residents who may have experienced job loss during the crisis.
Since mid-April, MAXIMUS has been providing New York State with dedicated COVID-19 support including ramping up the state's COVID-19 hotline to screen and schedule tests for New Yorkers, as well as helping the state manage outbound calls to reach healthcare workers to volunteer to help with the COVID-19 crisis.
Our call center representatives have managed to successfully connect more than 30,000 New Yorkers to critical COVID-19 testing resources and obtain more than 14,500 responses from healthcare workers through surveys.
And just last week, we won our first state contract in Indiana to centralize contact tracing for Hoosiers who test positive for COVID-19.
We'll hire and train an estimated 500 people under the supervision of the Indiana State Department of Health epidemiologists.
The remote call center is anticipated to be operational by May 11, and we'll support individuals at least through the end of the year, if not longer, dependent upon the pandemic needs of the state and its citizens.
Our Canadian team also quickly adapted and in only two days launched a COVID-19 information line for our British Columbia provincial government client.
Those team members answer important questions about testing locations, employment concerns, quarantine non-compliance reports, and the like.
Across the globe, unemployment benefit claims have skyrocketed.
As of May 1st, more than 30 million people in the United States filed claims triggered by the COVID-19 pandemic.
This forewarns of more downstream implications to governments at all levels.
Safety net programs like Medicaid, SNAP and others are expected to face similar surges in applications.
Government programs face staffing, process, and system challenges in meeting the demand.
Governments also face the daunting task of governing under a new normal, enabling citizens to return safely to a normal life under the continuing threat of new outbreaks and the consequences of a damaged economy.
MAXIMUS has rapidly responded to meet the immediate demand for information and application assistance while positioning to provide longer-term services as the economy recovers.
Let me give you a few examples of new work with compressed time scales that we have met with our response.
In only eight days, we launched a contact center to support the District of Columbia office of unemployment compensation.
In North Carolina, we launched a new project to support questions pertaining to the unemployment insurance program.
This was done in less than a week to support the division of economic security and has rapidly scaled to 1800 agents.
We are also doing similar work in Arkansas, Rhode Island, and Vermont, responding to frequently asked questions and assisting residents with their unemployment applications.
Across the country, other team members continue to support our health and human services clients, ensuring vitally important services are delivered to the public.
Moving on to new awards in the pipeline.
Our reported numbers reflect the status as of March 31st and much has changed since then.
Before I address some of these dynamics, I'll briefly cover the awards in the pipeline at March 31st.
For the second quarter of fiscal-year 2020, signed awards were $729.8 million of the total contract value at March 31st.
Further, at March 31st, there were another $215.8 million worth of contracts that had been awarded, not yet signed.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at March 31st was $29.2 billion, compared to $30.6 billion reported in the first quarter of FY '20.
Of our total pipeline of sales opportunities, 65.7% represents new work.
In regard to pipeline dynamics, we cannot accurately predict the pattern this pandemic may follow nor the timing and form of the recovery.
Certain clients impacted by COVID-19 are making awards in record time and relying heavily on existing contract relationships and trusted partners like MAXIMUS.
This comes in some cases at the cost of delaying other prior procurements that were in process.
In other instances, particularly in Federal, agencies not impacted significantly by the pandemic have stuck closely to procurement schedules.
Therefore, it's important to put all of this in context.
While we are excited about the new work, many of the new COVID-related programs are expected to be temporary, but provide flexibility to scale and extend services as circumstances warrant.
We also must be mindful that many of our government clients will likely face budgetary pressures as a result of a pandemic driven economic recession.
While we're cautiously optimistic, it's difficult to predict what impact these events may have on erosion, timing on new work, and simply getting some of our operations back to somewhat of a normal cadence.
The updated guidance, of course, incorporates all of these dynamics, based on what we know today.
We actively manage a portfolio of work and have earned a reputation as a trusted long-term partner, all of which enables us to adapt to changing economic times.
I've been inspired by the dedication, selflessness, and resilience seen across our business in recent weeks.
The resilience of our business model has also been impressive and of our employees, even more so.
As Rick mentioned, one of the most inspiring stories comes from our colleagues in the United Kingdom, where we're in the process of deploying nearly 1,000 volunteer doctors, nurses, and other clinicians to the NHS to provide vital support on the front line.
Dr. Paul Williams, division president of MAXIMUS, UK, volunteered to serve along with our team members.
In addition, non-clinical colleagues are preparing for redeployment in support of the national effort.
This represents the true heart of MAXIMUS and our more than 35,000 employees around the world.
It has been remarkable to witness how our colleagues are coming together to support the global effort against this pandemic, and the safety and well-being of our employees will continue to remain our top priority.
Governments are also planning for the time when as we emerge from this crisis, our core capabilities in finding jobs for the unemployed, ensuring access to healthcare, and administering critical safety net programs will be needed more than ever.
The world will be a different place for sure, but so will the landscape for services and how they are delivered.
The work we've done in helping clients innovate, scale, and still meet citizens' needs will be a game-changer.
New opportunities will also emerge and we are well-positioned to respond.
With that, we'll open up the line for Q&A. | q1 earnings per share $1.03.
raises fiscal 2021 guidance due to covid-response work.
fiscal 2021 revenue expected to range between $3.400 billion and $3.525 billion.
sees fiscal 2021 diluted earnings per share to range between $3.55 and $3.75 per share.
fy cash from operations are expected to range between $350 million and $400 million.
sees fy free cash flow between $310 million and $360 million. | 0 |
Today, I am joined by President and Chief Executive Officer Lal Karsanbhai, Chief Financial Officer Frank Dellaquila and Chief Operating Officer Ram Krishan.
Please join me on slide two.
Please take time to read the safe harbor statement and note on non-GAAP measures.
First, Mike Train, our Chief Sustainability Officer, will be attending this year's United Nations Climate Change Conference, COP26, in Glasgow.
Mike will be a panelist at the adjacent Sustainable Innovation Forum, participating in two notable discussions.
The first discussion will be how to support small to medium enterprises to adopt net zero pathways; and the second, on supporting breakthrough innovation to green, hard-to-abate sectors.
Mike has worked this year to drive many greening of, by and with Emerson initiatives.
One notable greening -- green by example is in the recent announcement between BayoTech and Emerson to accelerate production of and distribution of low-cost, low-carbon hydrogen.
In the agreement, Emerson will deliver advanced automation technology, software and products in support of BayoTech building hundreds of fully autonomous hydrogen units to enable hydrogen fuel cell commercial trucking fleet and abatement projects in steel and cement.
Another exciting initiative is our $100 million commitment to corporate venture capital, Emerson Ventures, designed to accelerate innovation by providing insight into cutting-edge technologies that have the potential to solve real customer challenges.
The investment commitment will advance the development of disruptive, discrete automation solutions, environmentally sustainable technologies and industrial software in key industries.
Finally, our investor conference historically has been in February.
However, due to the recent announcement with AspenTech, we have decided to move our investor conference to May.
It will be located at the New York Stock Exchange on May 17, 2022.
2021 was a phenomenal year for Emerson.
It developed very differently, obviously, than we planned a year ago.
For one, I was named CEO and brought a new value-creation agenda to the table.
But equally important, we operated in an environment which was both rewarding and challenging for the organization.
Through it all, our teams around the world did a fabulous job.
I want to express my sincere gratitude to all the Emerson employees around the world.
2021 was characterized by strong demand in our residential air conditioning business as well as our hybrid and discrete markets in automation.
Furthermore, we have experienced a recovery in process automation markets.
The automation KOB three mix for 2021 was up two points to 59%.
And Emerson's September three-month trailing orders were plus 16%.
We grew 5.3% underlying and leverage at 38% operationally, inclusive of a $140 million swing in our price/cost assumptions from November through to the end of the fiscal year.
The earnings quality of this company continues to be excellent with free cash flow conversion of 129%.
The fourth quarter, however, was challenged significantly by supply chain, logistics and labor challenges.
And that is not dissimilar from anything you've heard before.
This was experienced in the form of material cost inflation, notably steel, electronics and resins, and lead time extensions.
In addition, we experienced logistics challenges in availability of lanes and costs.
And lastly, U.S. manufacturing labor, which was characterized by higher turnover rates, absenteeism and overtime costs.
In the quarter, we missed sales by $175 million.
And alongside a challenging price/cost environment in our climate business, it resulted in a negative $0.14 impact to earnings per share for the quarter and a $0.19 impact to 2021 EPS.
Having said that, the company grew 7% in the fourth quarter and had 19% operating leverage.
Turning to 2022 and some initial thoughts.
The first half of the year will not look dissimilar from the fourth quarter with slight sequential improvement as we go to Q2.
Price/cost and supply chain challenges unwind in the second half of the year against the backdrop of continued strong demand.
The price/cost assumption in the year will be a positive $100 million for 2022.
I'm very optimistic for 2022.
The operating environment has unpredictability, but it is significantly more stable than a year ago and demand is much stronger.
The residential A/C cycle will moderate as we go through 2022.
However, we expect automation markets to continue to strengthen driven by digital transformation and modernizations, replacement in MRO markets and select LNG and sustainability-driven KOB one, most notably methane emissions reduction projects and carbon capture.
I have confidence that we will deliver 30% incrementals on our underlying sales in 2022.
This addresses execution, and as you know, that's one of the three pillars we identified as a management team for accelerated value creation.
We have equally taken significant steps in our journey to modernize our culture and advance ESG initiatives.
The Board named Jim Turley as the company's Independent Chair of the Board, we named Mike Train as the company's first Chief Sustainability Officer, and we hired Elizabeth Adefioye as Emerson's first Chief People Officer.
I'm very proud of the diversity targets we set for the enterprise, the changes to our long-term compensation and annual bonus structure to include ESG measures and the commitments we have made to accelerate greenhouse gas intensity reductions.
Lastly, turning to the portfolio.
We recently concluded a comprehensive portfolio review, which culminated in a two-day session with our Board of Directors in early October.
We left the meeting with a defined portfolio road map and pathways.
The key elements were as follows.
Firstly, in terms of the portfolio today and how we are thinking about it.
We will continue to divest upstream oil and gas hardware assets.
Secondly, we will action low-growth or commoditized businesses.
And lastly, we will action disconnected assets.
All three of these actions will take place over time with intentionality, with patience and a keen awareness of cycles and meeting the value-creation proposition to our shareholders.
Secondly, we identified four large, profitable, high-growth end markets, each with at least $20 billion of size and projected to grow higher than 4% a year into the future supported by macros.
The four end markets will be the hunting ground for our M&A activity.
Lastly, we defined two possible end states for the portfolio and the journey that we'll embark up and have embarked on.
One of the four markets is industrial software, a $60 billion segment that we identified growing at 9%.
The AspenTech transaction is an exciting step for Emerson and a very important transformational step for this corporation.
AspenTech is one of the best-run industrial software companies in the space with highly differentiated technology and a phenomenal leadership team led by Antonio Pietri for who I have the greatest personal admiration.
The AspenTech company will be a highly diversified business with transmission and distribution as its largest served market and is uniquely positioned to enable our energy customers to transition to a lower-carbon future.
I'm optimistic of the synergy opportunities that exist and believe the new AspenTech, which will be 55% owned by Emerson shareholders, will be a differentiated platform for future industrial software M&A.
I'm very excited about this, as I hope you can tell.
We expect to close the transaction in the second quarter of 2022 following the completion and approval of the customary regulatory items.
So we're really pleased with the financial results for fiscal 2021.
As Lal said, we ended the year with a great deal of uncertainty and far exceeded the expectations we had at the beginning of the year.
The underlying demand environment developed much as we thought it would.
There was continued strength in global discrete and hybrid automation markets, and the North America process markets began to gain momentum later in the year.
The global demand in our commercial/residential markets was strong and broad based, particularly in the U.S. residential air conditioning market, and it far exceeded the expectations that we had going into the year.
Our operations team successfully worked through labor and supply chain issues, particularly toward the end of the year, and delivered strong results that we're able to report to you today.
Toward the end of the year, the intensifying combination of rising material costs, supply chain challenges and labor constraints in the U.S. did begin to weigh on sales volume and profitability.
We've worked through that in the fourth quarter.
We will continue to work through that in the first half of fiscal 2022.
Despite these fourth quarter challenges, we're pleased to report that we achieved the key financial targets that we committed to you in August regarding underlying growth, adjusted EBIT margin, adjusted earnings per share and cash flow, and you can see all of that in the table.
This was achieved in the face of an unexpected increase in key raw materials, mainly steel and copper, that resulted in an unfavorable price/cost swing of $140 million during the year versus the expectation and the guidance that we gave you a year ago.
We're very grateful for the extraordinary effort of our operations teams at every level and the manufacturing employees who made this happen under some of the most challenging conditions that we have seen.
This slide highlights our strong 2021 results.
The continued recovery in our end markets drove strong full year underlying growth of more than 5%.
Net sales were up 9% year-over-year, including a one point impact from acquisitions, mainly OSI, which closed at the beginning of the fiscal year.
Adjusted segment EBIT benefited from strong leverage in operations, 38%, as Lal just mentioned, and adjusted EBIT from underlying volume and the benefit of cost reset actions that were begun two years ago.
These cost reductions more than offset price/cost headwinds, which, as I said, were $140 million versus our expectation at the beginning of the year, and the supplies chain challenges that raised costs and reduced availability.
Cash flow was robust, up 18% year-over-year attributable to the strong earnings growth and working capital efficiency.
Free cash flow conversion of net earnings was 129%.
Adjusted earnings per share was $4.10, exceeding our guide by $0.03 at the midpoint and up 19% for the year.
Automation Solutions grew -- underlying growth was flat year-over-year.
Growth turned positive in the second half driven by strong discrete and hybrid markets, while the later-cycle process automation markets delivered sequential improvement as we moved through the year.
Adjusted EBIT increased 230 basis points due to the strong leverage driven by cost reset benefits.
Commercial & Residential saw exceptional growth, up 6% underlying year-over-year due to broad strength across the residential and commercial markets with mid-teens growth in all world areas.
Adjusted EBIT increased 20 basis points versus prior year.
Price/cost headwinds worsened in the second half, particularly in the fourth quarter, as we anticipated on the call in August, but were offset for the full year by strong underlying leverage and spending restraints.
Operational performance was strong throughout the year, adding $0.59 to adjusted EPS, overcoming a $0.19 headwind from supply chain and $90 million of unfavorable price/cost.
Operations leveraged at more than 35% on volume and cost actions.
Nonoperating items contributed $0.02 in that, overcoming a significant headwind from the stock comp mark-to-market accounting.
Share repurchase totaled $500 million, as we guided, and added about $0.03.
In total, adjusted earnings per share was $4.10, as I said, an increase of 19%.
Regarding the fourth quarter, strong end market demand drove underlying growth of 7% with net sales up 9%.
This growth was achieved despite a $175 million impact from supply chain, logistics and labor constraints that affected both platforms in somewhat different ways.
Adjusted segment EBIT dropped 10 basis points, reflecting a 200 basis point impact from supply chain volume constraints across the company and from the increasingly negative price/cost headwind in commercial/residential.
Free cash flow declined 39% mainly due to higher working capital to support the growth versus the prior year.
Adjusted earnings per share was $1.21, exceeding the guidance midpoint by $0.03 and up 10% and versus the prior year.
Automation Solutions underlying sales were up 3% with strong recovery in the Americas, particularly in the power generation and chemical markets, partially offset by declines in other world areas.
Sales were reduced by about $125 million or four points due to supply chain constraints.
Our backlog was up 16% year-to-date and now sits at $5.4 billion, $100 million less than at the end of the third quarter.
Typically, our backlog would reduce more in Q4.
However, due to strong orders and supply chain constraints, backlog remains elevated above the levels we would otherwise have expected.
Strong leverage and cost reductions drove a 170 basis point improvement in adjusted EBIT.
Commercial & Residential underlying sales increased 13% and driven by continued strength in North America residential HVAC and home products as well as heat pump demand in Europe.
Sales were reduced by about $50 million or three points due to supply chain constraints, which, together with sharply increasing material cost headwinds, which were expected, perhaps a little worse than we expected in August but are expected, drove a 340 basis points decline in adjusted EBIT.
Clearly, as you can see, the operating environment is a challenge as commodity inflation, electronic supply, logistics constraints and labor availability continues to impact our global operations.
Net material inflation headwinds accelerated through fiscal 2021, as you can see on the chart, primarily driven by steel prices, with majority of the impact being felt by our Climate Technologies business.
North American cold-rolled steel pricing increased once again in October, extending the streak of monthly price increases to 14 months.
However, the magnitude of the increases have declined in recent months, and more importantly, hot-rolled steel prices dropped around $20 a ton in October, a positive sign for us.
We do anticipate steel prices to start to flatten out over the next few months and net material inflation to peak in the first half of fiscal 2022.
We continue to stay focused and diligent on our pricing plans by executing on our contractual material pass-through agreements, surcharges for freight and more aggressive annual general price increases.
We remain confident that price/cost will turn green and will be a strong positive for the second half of fiscal 2022.
Our current plans indicate that price/cost will be approximately a $100 million tailwind for the fiscal year.
Turning to the next slide.
On the commodity front, while steel prices are at elevated levels today, as I mentioned earlier, they are showing some signs of flattening, providing optimism that we will see North American cold-rolled steel prices start to decline in the coming months.
Plastic resin prices have remained elevated due to high price, inelastic demand and weather-related supply challenges.
Copper prices have also surged as of late, but our hedge positions will dampen the impact to the fiscal year.
Now while COVID-related restrictions are improving in Southeast Asia, capacity at key electronic suppliers remains constrained.
Several key component suppliers have extended lead times and pushed out delivery forecasts, which has increased shortages and decommits to our EMS suppliers.
Furthermore, we are closely watching the impact of industrial power outages in China, which have become a common occurrence at manufacturers and has led to an increase in silicon prices.
For us, electronic shortages are impacting multiple business units in both platforms, and supply is expected to remain a challenge into fiscal 2022.
Extended logistics lead times, particularly on ocean freight, has had an impact on our global operations, port congestion in the U.S., weather and COVID-related disruptions in China being the key drivers.
These dynamics are highlighting how critical regionalization is even on lower-variation parts and components, and the work we have done over the past many years to regionalize are clearly proving the importance of this strategy.
This is exemplified by several of our businesses with strong regional supply bases which have performed very well and avoided expensive airfreight and significant expediting costs.
Finally, hiring and retention challenges continue in many of our U.S. plants, predominantly in the Midwest, as competition for available labor is intense.
High levels of turnover and absenteeism in these locations have impacted productivity and driven increased overtime.
Now on slide 12, despite the unprecedented challenges, our supply chain and operations teams have worked tirelessly to continue to meet the needs of our global customers.
Many creative solutions are being implemented on a real-time basis to ensure continuity of materials supply to our global plants and availability of freight lines to make our shipment commitments.
Our teams have leveraged strong supplier relationships, utilized prequalified alternate sources, leveraged contractual agreements and stepped in to assist our suppliers where needed.
Our regional manufacturing footprint and the enhanced resiliency of our supply network through multi-sourcing that we spent years developing has certainly been an advantage for us in these challenging times.
Accelerated actions around hiring and production shifts to plants with stable workforces has ensured we continue to meet our customers' needs.
Many of our global plants are producing at record levels as our disciplined investments in factory automation have allowed us to unlock additional capacity to combat labor availability challenges.
And looking forward to 2022, demand continues to be strong across both of the platforms.
The trailing three-month orders for Automation Solutions were up 20% versus the prior year driven, as I said prior, by continued automation investments in discrete and hybrid markets, and we believe that will continue into 2022, and, of course, the strengthening of the process automation spend.
While KOB two and KOB three drove most of the orders growth in 2021, the new infrastructure bookings for LNG and decarbonization will improve, I believe, through 2022, providing further upside.
Increased site access will drive increased walkdown and shutdown turnaround activity in the business.
To give you perspective, 2021 walkdowns were up 50% year-over-year with more than 5,000 globally, with each walkdown driving substantial KOB three pull-through.
Shutdown turnaround bookings were up -- for -- in 2021 10% year-over-year driven by strong spring season that extended into the early summer.
2022 shutdown turnaround outage activity spend is expected to be up mid-single digits, led by chemicals and refining, leading to high single-digit bookings growth.
Turning to Commercial & Residential Solutions.
The U.S. and Europe order rates continue to be strong heading into 2022, while Asia has begun to moderate.
Overall, the trailing three-month orders were 9% in September.
And thinking a little bit further into 2022, many of our key climate technologies end markets will continue to have momentum, including aftermarket refrigeration, commercial HVAC, food retail and foodservice driven by new store builds and quick service restaurants and residential heat pumps.
Turning to slide 15.
Looking ahead to 2022, it will be a year characterized by strong underlying demand and an improving operating environment.
The late-cycle process automation business will continue its recovery with mid-single-digit annual growth.
Meanwhile, discrete and hybrid momentum will endure with high single-digit and mid-single-digit growth, respectively.
Growth will moderate in residential markets as demand stabilizes, but improving commercial and industrial environments will benefit Commercial & Residential Solutions.
Decarbonization and sustainability projects, as noted earlier, will provide further growth opportunities as budgets get allocated toward these projects.
Based on this macro landscape, we believe -- we continue to expect demand to be strong in 2022.
Supply chain and price/cost headwinds continue through the first half, pressuring first quarter leverage but turn to significant tailwinds in the second half and end positive in the year.
The team has done a significant amount of work progressing our restructuring programs.
Emerson's 2021 adjusted EBITDA of 23.1% surpassed our previous record.
Over 90% of our restructuring spend communicated in our investor conference is complete, and over 70% of the savings have been realized with remaining longer-term facility projects left to be completed.
Great work as a team.
So given this landscape, we expect underlying sales growth of 6% to 8% in 2022 and net sales growth of 4% to 6%.
Underlying sales growth for Automation Solutions will be 6% to 8%, while Commercial & Residential Solutions will be 6% to 9%.
As Ram discussed, we expect price/cost to turn into tailwind for the year of approximately $100 million.
$150 million of restructuring activities includes the minimal remaining spend on our cost reset program and additional programs, including footprint activities, that have been identified and are planned in the fiscal year.
Historically, our adjusted earnings per share excludes restructuring and other items like first year purchasing accounting in the calculation.
Looking at the 2021 column of the bridge to the right, our prior adjusted earnings per share of $4.10 increases to $4.51 when removing the impact of intangibles amortization expense of $0.41.
For 2022, the amortization expense is expected to be approximately $0.42 driven by -- driving, excuse me, our adjusted earnings per share to between $4.82 and $4.97.
Please note that all guidance does not include the impact of the AspenTech transaction, which is expected to close, as I said earlier, in the second quarter of calendar year 2022.
Turning to slide 17.
We expect a first quarter 2022 underlying sales growth of 7% to 9% with broad underlying strength across Automation Solutions and Commercial & Residential Solutions.
Automation Solutions will experience underlying sales growth in the mid to high single digits, while Commercial & Residential Solutions underlying sales growth will be in the high single digits to low double-digit range.
Adjusted earnings per share is expected to be between $0.98 and $1.02.
Amortization for the quarter is expected to be roughly $0.10. | sees fy 2022 adjusted earnings per share $4.82 to $4.97 .
emerson - fourth quarter net sales were $4.9 billion up 9 percent from the year prior.
emerson - expect that 2022 will be characterized by strong underlying demand.
emerson sees q1 adjusted earnings per share $0.98 to $1.02.
emerson - sees 2022 net sales growth 5% to 7%.
emerson - sees 2022 adjusted earnings per share $4.82 to $4.97.
emerson - qtrly adjusted eps, which excludes restructuring and first year purchase accounting charges, was $1.21. | 1 |
You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR Newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.
To begin my comments today, I'll review the highlights of our fourth quarter and full year 2020 financial performance.
Next, I'll cover some highlights from 2020, including some updates on the technology and innovation front.
And lastly, I'll review our 2021 financial outlook and our three-year new business backlog before turning things over to Chris.
After Chris covers the details of our financial results, we will open up the call for any questions that you may have.
AAM delivered solid operating financial results and cash flow performance in the fourth quarter and full year of 2020, as global production continue to recover, resulting in a strong EBITDA conversion.
AAM's fourth quarter 2020 sales were $1.44 billion compared to $1.43 billion in the fourth quarter of 2019.
Recall, last year, we were impacted by the GM work stoppage and we sold our US casting business.
For the full year 2020, AAM's sales were $4.7 billion.
During the year, we experienced slower sales coming from a decline in global production due to the COVID-19 and the sale of our US casting business.
From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2020 was $261.5 million or 18.2% of sales, a fourth quarter record for AAM.
AAM concluded a strong second half of 2020 with a solid fourth quarter financial performance, which I'm very, very pleased about.
For the full year 2020, AAM's adjusted EBITDA was $720 million or 15.3% of sales.
For the full year, we were impacted by COVID-19 production shutdowns and lower volumes.
However, we also managed through a difficult operating environment, delivering strong EBITDA margins in the second half, as production rebounded and our cost structure initiatives took hold.
AAM's adjusted earnings per share in the fourth quarter of 2020 was $0.51 per share.
And for the full year 2020, AAM's adjusted earnings per share was $0.14 per share.
AAM continued to deliver strong free cash flow performance in 2020.
AAM's adjusted free cash flow in the fourth quarter 2020 was $173 million.
And for the full year 2020, AAM's adjusted free cash flow was $311 million.
This is a fantastic result, considering the challenges that we faced during the year.
We also reduced our gross debt by nearly $200 million in 2020, paying down approximately $100 million just in the fourth quarter alone.
Furthermore, we are committed to reducing our debt and strengthening our balance sheet in 2021.
Chris will provide additional information regarding the details of our financial results in just a few minutes.
Let me wrap up 2020 with a look back on some of the key highlights, which you can see highlighted on Slide 4 of our slide deck.
The automotive industry faced significant challenges, but AAM worked through it with the dedication of our associates.
Operationally, we completed 17 program launches.
We received 13 customer quality awards and multiple Supplier of the Year awards from customers such as General Motors and Hyundai.
We flexed our cost structure in quick response to pandemic and generated robust EBITDA results throughout the year.
And generating significant free cash flow has strengthened our financial profile through gross debt paydowns.
From a technology perspective, we have benefited from a growing and expanding relationship with Inovance Automotive, a leading provider of automotive power electronics and powertrain systems in China.
Back in the second quarter of 2020, we won our first eDrive award with them for a new Chinese OEM.
Already this year, we announced three additional OEM programs with Inovance.
Our alliance with them has created significant value for us by enhancing customer relationships within the swiftly growing Chinese electrification Market.
In addition, and even more exciting, we've recently signed a technology agreement with Inovance to accelerate the development and delivery of scalable next-generation three-in-one integrated electric drive systems, which integrates the inverter, the electric motor and the gearbox.
By leveraging the partner's complementary expertise in electric propulsion technology, this collaboration will seek to enhance the power density, efficiency and cost-effectiveness of the electric driveline technology offered in the global electrification market.
Our cooperation with Inovance Automotive will add an exciting new offering to AAM's fast growing portfolio of scalable three-in-one electric drive systems and accelerate our ability to bring new cost-competitive technologies to the market.
We are excited to join forces with such a highly accomplished and innovative provider of power electronics technology.
At AAM, our goal is to be at the forefront of electrification technology.
We're also working together with REE Automotive, a leader in electric platform technology.
The company's core innovation includes integrating traditional vehicle components into the wheel, allowing for a flat and modular platform.
We have a small financial investment in REE, and we look forward to further opportunities to drive value from this partnership, utilizing our technology leadership and our operational excellence.
In addition to these exciting partnerships, we continue to make great progress in innovation -- in innovative electric driveline solutions.
As we mentioned earlier, we were awarded not only the Automotive News PACE Award for electric drive technology in the Jaguar I-Pace, but also a second award for our outstanding collaboration with JLR.
These awards further validate not only our technology, but also our commitment to our customers.
In addition, we have several important electrification launches in 2021, including our high-performance eDrive unit for a premium European OEM that we can't wait to tell you more about, as well as multiple electric powertrain component launches, including one for electric pickup trucks and also one for a commercial truck.
We are excited about our prospects in electrification as the industry has begun to pivot in that direction.
AAM is ready to support our customers with cutting-edge electrification products, and we look forward to keeping you up to date with our new developments.
On a separate note and ICE-related, we are also pleased to share that we have secured the next-generation Ram heavy-duty pickup truck business with Stellantis into the next decade.
Stellantis has been a great partner to AAM over the years, and we look forward to extending our mutually beneficial relationship.
This award, coupled with the current business that we enjoy today with Stellantis, exceeds several [Phonetic] billion dollars in sales and is a key foundational program for AAM.
This program, along with other customer next-generation program awards, will support solid cash flow performance for many years to come for AAM.
These are all key developments as we leverage our strong core business to support our electrification technologies as we work to bring the future faster.
I'm also very proud to share that AAM was named on Newsweek's List of America's Most Responsible Companies and to the annual Forbes list of the World's Best Employers for 2020.
We look forward to sustaining this positive momentum in 2021 to support our sustainability priority topics and diversity, equity and inclusion initiatives.
AAM expects our gross new business backlog, covering the three-year period of 2021 through 2023, to be approximately $600 million.
We expect the launch cadence of this backlog to be $200 million in 2021, $150 million in 2022, and $250 million in 2023.
And this also factors in the impact of updated customer launch timing and the latest customer volume expectations that we've received from our customers.
You can also see the breakdown of our backlog on Slide 7.
About 70% of this new business backlog relates to global light trucks, including crossover vehicles, and another 15% relates to hybrid electric powertrains.
Nearly half of this will be realized outside of North America, continuing our trend of diversifying geographically on an organic basis.
I'd like to turn to AAM's 2021 financial outlook, which can be seen on Slide 8, and is as follows.
AAM is targeting full year sales between $5.3 billion and $5.5 billion in 2021.
AAM is targeting adjusted EBITDA of approximately $850 million to $925 million in 2021.
And AAM is targeting adjusted free cash flow in 2021 of approximately $300 million to $400 million, which contemplates capital spending of approximately 4.5% of sales.
While launch activity decreases in 2021, there are still some key new programs we will be focused on during the year, including launching a number of our new electrified products that I mentioned to you earlier.
From an end market perspective, we see production at approximately 15.5 million to 16 million units for our primary North American market.
As it relates to our specific North American programs, we continue to expect favorable mix weighted toward pickup trucks, SUVs and crossover vehicles.
Light trucks made up 74% of the production in North America in 2020, and we see no signs of that changing or slowing down in 2021.
Clearly, 2020 was an unprecedented year, laid with numerous challenges and obstacles.
However, I am extremely proud of the AAM team in managing through these speed bumps and instituting protocols to keep our associates safe and healthy, while effectively supporting our customers throughout the year.
As we turn our focus on 2021 and beyond, our core business is solidly intact and well protected for years to come, yielding significant free cash flow generation, which will allow us to strengthen our balance sheet and invest in advanced propulsion technologies to drive profitable growth.
Needless to say, I'm very, very excited about the about the future for AAM.
I will cover the financial details of our fourth quarter and full year 2020 results with you today.
I will also refer to the earnings slide deck as part of my prepared comments.
So, let's go ahead and get started with sales.
In the fourth quarter of 2020, AAM sales were $1.44 billion, compared to $1.43 billion in the fourth quarter of 2019.
Slide 11 shows a walk down of fourth quarter 2019 sales to fourth quarter 2020 sales.
First, we stepped cut down our fourth quarter 2019 sales by $119 million to reflect the sale of the US casting business unit that was completed in December of 2019.
Next, we add back the impact of the GM work stoppage from the fourth quarter of last year.
Then we account for the unfavorable impact of COVID-19 on our fourth quarter of 2020 sales, which we estimate to be approximately $40 million.
At this point, our estimated sales impact from COVID is only for our India and Brazil locations, which have not recovered to pre-COVID levels for us.
On a year-over-year basis, we are also impacted by GM's exit of its Thailand operations by approximately $10 million.
And the transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV impacted sales by about $35 million in the quarter.
We will have one more quarter of the year-over-year impact for this transition in the first quarter of 2021.
Other volume and mix was positive by $38 million, mainly driven by strong light truck mix in North America.
Pricing came in at $19 million on year-over-year impact.
And metal market pass-throughs and foreign currency accounted for increase in sales of about $7 million year-over-year.
For the full year of 2020, AAM sales were $4.71 billion as compared to $6.53 billion in the full year of 2019.
The impact of COVID-19 and the sale of the US casting business was the primary drivers of this year-over-year decrease.
Now, let's move on to profitability.
Gross profit was $236.5 million or 16.4% of sales in the fourth quarter of 2020 compared to $183.4 million or 12.8% of sales in the fourth quarter of 2019.
Adjusted EBITDA was $261.5 million in the fourth quarter of 2020 or 18.2% of sales.
This compares to $193.5 million in the fourth quarter of 2019 or 13.5% of sales.
As David mentioned, this was AAM's best fourth quarter adjusted EBITDA margin in our company's history.
You can see a year-over-year walk down of adjusted EBITDA on Slide 12.
We benefited from higher sales and from our strong cost reduction actions we implemented this year.
For the full year of 2020, AAM's adjusted EBITDA was $720 million and adjusted EBITDA margin was 15.3% of sales.
Let me now cover SG&A.
SG&A expense, including R&D, in the fourth quarter of 2020 was $83 million or 5.8% of sales.
This compares to $90 million in the fourth quarter of 2019 or 6.3% of sales.
AAM's R&D spending in the fourth quarter of 2020 was $31.1 million compared to $39.8 million in the fourth quarter of 2019.
For the year, SG&A expense was down about $50 million, due mainly to our cost reduction actions, both temporary and structural.
As we head into 2021, we will continue to focus on controlling our SG&A costs.
Equally important, we will further our investment in key technologies and innovations with an emphasis on electrification, including shifting resources from traditional product support to new technology development in a cost-effective manner.
Let's move on to interest and taxes.
Net interest expense was $52.3 million in the fourth quarter of 2020 compared to $53.4 million in the fourth quarter of 2019.
We expect this favorable trend to continue in 2021, as we benefit from continued debt reduction.
In the fourth quarter of 2020, we recorded income tax expense of $13.9 million compared to a benefit of $11.5 million in the fourth quarter of 2019.
As we head into 2021, we expect our effective tax rate to be approximately 20%.
Taking all of these sales and cost drivers into account, our GAAP net income was $36 million or $0.30 per share in the fourth quarter of 2020 compared to a loss of $454.4 million or a loss of $4.04 per share in the fourth quarter of 2019.
Adjusted earnings per share for the fourth quarter of 2020 was $0.51 per share versus $0.13 per share in the fourth quarter of 2019.
Let's now move to cash flow and the balance sheet.
Net cash provided by operating activities in the fourth quarter of 2020 was $208 million.
Capital expenditures, net of proceeds from the sale of property, plant and equipment, for the fourth quarter was $69 million.
Cash payments for restructuring and acquisition-related activity in the fourth quarter of 2020 were $33.6 million.
Reflecting the impact of this activity, AAM generated adjusted free cash flow of $172.7 million in the fourth quarter of 2020.
For the full year of 2020, AAM generated adjusted free cash flow of $311.4 million compared to $207.8 million in the full year 2019.
AAM was able to offset the impact of lower EBITDA through lower capital expenditures, lower tax payments and working capital benefits, including leveraging the AAM Operating System to reduce inventory levels.
From a debt leverage perspective, we ended the year with net debt of $2.9 billion and [Indecipherable] adjusted EBITDA of $720 million, calculating a net leverage ratio of 4 times at December 31.
In the fourth quarter of 2020, we prepaid over $100 million of our term loans.
We were pleased to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt and lowering our future interest payments.
We expect to continue this trend in 2021.
AAM ended 2020 with total available liquidity of $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities.
We continue to maintain a strong liquidity position and debt maturity profile.
Before we move to the Q&A, let me close out my comments with some thoughts on our 2021 financial outlook.
In our earnings slide deck, we've included walks from 2020 actual results to our 2021 financial targets.
You can see those starting on Slide 14.
As for sales, we are targeting a range of $5.3 billion to $5.5 billion for 2021.
This sales target is based upon a North American production of 15.5 million to 16 million units, a new business backlog of $200 million and attrition of approximately $100 million.
We have begun to experience some limited downtime in the first quarter due to supply constraints attributable to the semiconductor chip shortage.
We have contemplated what we know today in our guidance, and our target range allows for some variability.
From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $850 million to $925 million.
At the midpoint, this performance would represent EBITDA margin growth of over 100 basis points versus last year.
As you can see on the walk-down on Page 15, we expect volume and mix to positively contribute as well as continued productivity benefits.
As we stated previously, some of our 2020 cost initiatives were temporary in nature, but our focus has been to replace those with more structural savings.
We also expect approximately $40 million in pricing and $15 million in higher R&D spending, as we continue to invest in electric propulsion.
From an adjusted free cash flow perspective, we are targeting approximately $300 million to $400 million in 2021, and the year-over-year walk is very simple.
The main factors driving our cash flow change is higher EBITDA, a return to more normalized income tax payments and a higher working capital associated with revenue growth.
And while on a dollar basis, capex is slightly higher than 2020, we are targeting capex as a percent of sales of approximately 4.5%.
You can clearly see AAM's ability to deliver free cash flow on full display, not only in 2020 actual results but ahead for 2021.
The strong free cash flow number for 2021 is a reflection of the benefits we are realizing from our restructuring and cost reduction actions.
We are experiencing year-over-year margin growth and continued cost optimization, capex as a percent of sales at the lowest levels in AAM's history, and inventory optimization delivering significant cash flow benefits.
We expect to use this free cash flow as well as our enhanced EBITDA to fund our R&D and new product expansion, and at the same time, reduce leverage this year by a full turn or more.
Our resilience in restructuring activities in 2020 is fueling our 2021 performance, and we are very excited to continue to strengthen our financial profile and focus on the growing of the business.
That said, we are well positioned for 2021 and beyond.
We have and will continue to optimize our business to generate meaningful cash flow and invest in our future product development.
This position is driving growth opportunities in electrification and other areas of our business.
You can see this in the third year of our backlog and it is the strongest heading into the mid-decade timeframe.
We are being awarded next generation of key products that will position our businesses to drive cash flow for many years to come.
In the near and mid-term, we see customers adding production facilities for products we support.
This is allowing us to leverage our light truck franchise to contribute to strong cash flow generation capabilities and thus invest and grow our electrification product portfolio.
And lastly, our cost optimization is focused on driving future margin growth opportunities.
So, couple all that with our flexible operations, variable cost structure and ample liquidity and solid debt maturity profile, and you have a good framework for long-term success.
As for now, we expect 2021 to be about operational excellence, margin expansion, free cash flow generation and propulsion innovation.
We are looking forward to a great year for AAM. | q4 adjusted earnings per share $0.51.
q4 diluted earnings per share $0.30.
qtrly sales of $1.44 billion.
q4 sales $1.44 billion versus refinitiv ibes estimate of $1.36 billion.
aam is targeting sales in range of $5.3 - $5.5 billion for full year 2021.
expects launch cadence of 3-year backlog to be about $200 million in 2021, $150 million in 2022 and $250 million in 2023.
aam is targeting adjusted ebitda in range of $850 - $925 million for full year 2021.
aam is targeting adjusted free cash flow in range $300 - $400 million for full year 2021.
sees 2021 north american light vehicle production in range of 15.5 - 16 million units.
sees 2021 european light vehicle production of approximately 19 million units.
gross new, incremental business backlog launching from 2021 - 2023 estimated at about $600 million in future annual sales. | 1 |
These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the third quarter, Hilltop reported net income of $93 million or $1.15 per diluted share.
Return on average assets for the period was 2.1% and return on average equity was 15%.
These favorable operating results again demonstrate the strength of Hilltop's diversified model and our businesses and our people execute on their strategies and capabilities.
PlainsCapital Bank had another strong quarter with pre-tax income of $63 million and a return on average assets of 1.4%.
Income during the period included $4.6 million of PPP loan-related origination fees and a $5.8 million reversal of provision.
We have seen continued improvement in our asset quality, which is a reflection of both the bank's sound lending practices and the healthier economic outlook.
Total average bank loans declined $252 million or 4% versus Q2 2021 as PPP balances ran off.
Excluding PPP loans, average bank loans were stable in the quarter.
Although the lending environment is extremely competitive and many of our clients remain flush with liquidity, we have seen growth in our loan pipeline, which is at its highest level since the pandemic.
The current pipeline is heavily commercial real estate, specifically in residential lot development, industrial and multifamily across the major Texas markets.
Payoffs will remain a challenge though, as our quality real estate clients continue to find attractive opportunities for their projects in the permanent financing markets.
Total average deposits remain stable linked-quarter with average deposits excluding broker deposits increasing by $200 million or 2% from Q2 2021 and $1.9 billion or 16% from prior year.
We continue to see growth in both interest bearing and non-interest-bearing accounts since Q3 2020 we have run off almost $1 billion in broker deposits.
This was another strong quarter for PrimeLending generating $62 million in pre-tax income.
Although a decline from the astonishing levels in 2020 volumes and pricing held on longer than anticipated and as a result we were able to deliver favorable returns during the period.
PrimeLending originated $5.6 billion in volume in the quarter from its continued strength in home purchase volume.
Refinancing volume as a percent of total volume decreased to 29% from 35% during the same period in 2020.
If current mortgage rates remain relatively unchanged through the end of the year, we believe this downward trend of refinancing volumes will continue.
Gain on sale margin of loans sold to third parties declined by 17 basis points linked-quarter to the 359 basis points.
Margins remain pressured as we see competition reacting to the decline in refinancing volume.
And as our product mix has shifted where the relatively higher margin government product is lagging.
Our team at PrimeLending remains acutely focused on monitoring pricing and margins.
PrimeLending continues to recruit productive loan officers and has hired 127 year to date bringing total loan officer headcount to 1,314.
This is a primary focus as we target purchase oriented loan officers to help offset the lower margins we expect in the coming quarters.
We believe our exceptional team purchase orientation, technology investments and focus on customer experience will continue to drive attractive returns from the mortgage business.
During the quarter, HilltopSecurities generated $17.4 million of pre-tax income on net revenues of $127 million or a pre-tax margin of 13.8%.
This was a good quarter for the public finance business in particular with revenues up $12 million from prior year, predominantly from a few larger deals.
We are encouraged by the potential for growth in the municipal finance market with the healthy current pipeline and the anticipation of increased future infrastructure spending.
Revenues within the structured finance business decreased by $26 million from last year as the overall mortgage market has declined from the astonishing levels in 2020.
From a historical average perspective, volumes are still strong and revenues rebounded by $24 million linked quarter.
We continue to build on the structured finance business by solidifying existing relationships and adding new clients.
Within our fixed income business, customer demand weakened given expectations of higher interest rates on the horizon, a trend that has been seen across the industry.
While all product areas were challenged in the quarter HilltopSecurities has made several key additions in the business, including leadership for our middle market sales effort, which has been a strategic priority for several years.
Therefore, we remain focused on growing our market share and profitability in fixed income.
Overall, HilltopSecurities is well-positioned as we have added key infrastructure producers and leadership to broaden our core capabilities and customer penetration as a leading municipal investment bank.
Moving to page 4, as a result of strong and diversified earnings, we continue to grow our tangible book value while returning capital to shareholders.
Our capital levels remain very strong with the common equity Tier 1 capital ratio of 21.3% at quarter end, and we have grown our tangible book value per share by 18% over the last quarter to $27.77.
During the quarter, Hilltop returned $84 million to shareholders through dividends and share repurchases.
The $74 million in shares repurchased are part of the $150 million share authorization the board granted earlier this year.
This week, the Hilltop Board of Directors authorized an additional increase to the stock repurchase program of $50 million, bringing the total authorization to $200 million.
As a result of dividends and share repurchase efforts, Hilltop has returned $153 million in capital to shareholders year-to-date.
Additionally, we paid down $67 million in trust preferred securities during the quarter, which will reduce our annual interest expense by over $2 million going forward.
In conclusion, we are very pleased with the results for the quarter.
All businesses showed solid momentum going into the fourth quarter and are performing well against our strategic objectives.
We feel well-positioned with a team and capital in place to continue growing long-term shareholder value.
I'll start on page 5.
As Jeremy discussed, for the third quarter of 2021, Hilltop recorded consolidated income attributable to common stockholders of $93 million, equating to $1.15 per diluted share.
Included in the third quarter results was a net reversal of provision for credit losses of $5.8 million.
During the third quarter, Hilltop recorded a modest net recovery of charge-offs.
On page 6, we have detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
These were somewhat offset by the increase in specific reserves taken against a small number of credits that experienced deterioration during the quarter.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our third quarter analysis, consistent with our second quarter outlook selection.
This scenario considered lower overall GDP rates, higher inflation and higher ongoing unemployment than other market consensus outlooks.
As said, the S7 scenario did improve from the prior period, and the impact of the improvement resulted in the release of $6 million of credit reserves during the third quarter.
Second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the portfolio experienced positive migration across a number of industries and geographies resulting from improving financial performance and more resilient outlook for future periods.
Further, the portfolio of loans that are currently under active deferral plan build a $17 million from $76 million at the end of the second quarter of '21.
The result of the improvements at the client level equated to a net release of credit reserves of $5 million during the third quarter.
The net impact of these changes resulted in an allowance for credit losses for the period ending September 30 of $109.5 million or 1.45% of total loans.
Further, the coverage ratio of ACL to total loans increases from 1.74% from loans that we believe have lower loss potential, including PPP broker-dealer and mortgage warehouse loans are excluded.
I'm moving to page 7.
Net interest income in the third quarter equated to $105 million, including $8.3 million of PPP-related interest and fee income, as well as purchase accounting accretion.
Net interest margin declined versus the second quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan HFI yields.
Somewhat offsetting these items were higher loans held for sale yield, resulting from higher overall mortgage rates, coupled with lower interest-bearing deposit cost, which have continued to trend lower finishing the quarter down 4 basis points versus the second quarter of '21 at 28 basis points.
We continue to expect that interest-bearing deposit costs will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset to lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on loan yields for new originations, which were 3.8% during the third quarter and is also challenging our ability to maintain current loan flow rates.
Given overall market and competitive conditions, we expect that NIM will remain pressured into the fourth quarter of '21 moving lower to between 240 basis points and 250 basis points by year end.
Turning to page 8, total non-interest income for the third quarter of '21 equated to $368 million.
Third quarter mortgage-related income and fees decreased by $114 million versus the third quarter of 2020 driven by lower origination volumes, declining gain on sale margins, and lower locked volumes.
As it relates to gain on sale margins, we noted in our key driver table in the lower right of the page the gain on sale margins on loans fell 18 basis points versus the prior quarter.
Further, we are providing the impact of gain on sale margin related to those loans that have been retained on the balance sheet, which for the third quarter equated to 13 basis points.
During the third quarter of 2021, the environment in mortgage banking remained resilient and is expected to continue to shift to a more purchase mortgage-centric marketplace with approximately 71% of our origination volumes serving as purchase mortgages.
During the third quarter, purchase mortgage volumes declined modestly to 3.95 billion, while refinance volumes declined 12% or $235 million versus the second quarter origination levels.
We expect this trend to continue for the more purchase-centric mortgage market over the coming quarters, and we continue to expect the gain on sale margins for the third-party sales will fall within a full year average range of 360 basis points to 385 basis points.
In addition, other income declined by $36 million, driven primarily by declines in TBA locked volumes, coupled with lower volumes and market depth in the fixed-income capital markets.
As we've noted in the past, the structured finance and fixed income capital markets businesses can be volatile from period-to-period, as they are impacted by interest rates, market volatility, origination volume trends and overall market liquidity.
Lastly, our public finance and retail brokerage businesses at the broker-dealer drove solid revenue growth as highlighted in the securities-related fee growth of $15 million versus the prior-year period.
This growth highlights the impact of our ongoing investments in enhanced products and service capabilities across HilltopSecurities, which has provided our bankers with additional tools and capabilities to support their clients.
Turning to page 9, non-interest expenses decreased from the same period in the prior year by $44 million to $355 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
The bank continues to deliver improved efficiency, as highlighted in the sub-50% efficiency ratio.
This has been driven by lower overall headcount as well as benefits from strong mortgage production and the acceleration of PPP fees into current period income.
As we've noted in the past, we expect that over the longer term, the efficiency ratio at the bank will fall within a range of 50% to 55%.
Moving to page 10, in the period, HFI loans equated to $7.6 billion, relatively stable with the second quarter levels.
As we've noted previously, we've seen substantial increases in competition for funded loans across the Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheets and consumer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect that full year 2021 average total loan growth excluding PPP loans will be within a range of zero to 3%.
During the third quarter of '21, PrimeLending locked approximately $243 million of loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 2.95% and average FICO and LTV of 776% and 64%, respectively.
Moving to page 11, third quarter credit trends continue to reflect the slow but steady recovery in the Texas economy, which is supporting improved customer cash flows and fewer borrowers on active deferral programs.
As of September 30, we have approximately $17 million of loans on active deferral programs down from $76 million at June 30.
Further, the allowance for credit losses to period end loan ratio for the active deferral loans equates to 22.8% at September 30.
As is show on the graph at the bottom right of the page, the allowance for credit loss coverage including both mortgage warehouse lending as well as PPP loans at the bank ended the third quarter at 1.58%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.74%.
Tuning to page 12, third quarter end-of-period total deposits were approximately $12.1 billion, increasing by $398 million versus the second quarter of 2021.
Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run-off.
At 09/30, Hilltop maintained $243 million of broker deposits that have a blended yield of 33 basis points.
While deposit levels remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and services and focused client acquisition efforts.
Turning to page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we're not providing specific financial guidance, but we are continuing to provide commentary.
This is the most current outlook for the remainder of 2021 with the understanding that the business environment, including the impacts of the pandemic could remain volatile.
That said, we will continue to provide updates during our future quarterly calls. | q3 earnings per share $1.15 from continuing operations. | 1 |
We have Kevin Fletcher, our President and CEO; Scott Lauber, our Chief Operating Officer; Xia Liu, our Chief Financial Officer; and Beth Straka, Senior Vice President of Corporate Communications and Investor Relations.
John will provide you with more detail on our financial metrics in just a few minutes.
But first, I'm pleased to report that we delivered a record year on virtually every meaningful measure of performance, from customer service to network reliability to earnings per share, despite the challenges posed by the Covid19 pandemic.
Our focus on efficiency and financial discipline and an encouraging rebound in energy demand during the second half of the year resulted in the highest net income from operations, and the highest earnings per share in Company history.
And throughout the difficulties of a pandemic year, we also accelerated our support for the communities we serve.
In total, our companies and foundations donated more than $20 million dollars to non-profits across our service area, including more than $2 million to direct Covid19 relief efforts.
We also made significant progress on diversity and inclusion.
We spent a record $303 million with diversifiers during the year, and through our Board refreshment, 46% of our Board members now are women and minorities.
In addition, we set new aggressive goals as we continue to improve our environmental footprint.
In fact, I'm pleased to report that based on preliminary data for 2020, reduced carbon dioxide emissions by 50% or (technical difficulties) 2005 levels.
And we have, as you know, a well-defined plan to achieve a 55% reduction by the end of 2025.
Over the longer term, expect to reduce carbon emissions by 70% by 2030, and as we look out to the year 2050, the target for our generation fleet is net-zero carbon.
Our new five-year capital plan lays out a roadmap for achieving these goals, we call it our ESG progress plan.
The largest five-year plan in our history.
It calls for investment in efficiency, sustainability, and growth, and it drives average annual growth in our asset base of 7% with no need for additional equity.
Highlights of the plan include 1,800 megawatts of wind, solar, and battery storage that would be added to our regulated asset base in Wisconsin.
And we have allocated an additional $1.8 billion to our infrastructure segment, where we see a robust pipeline of high-quality renewable projects, projects that have long-term contracts with strong creditworthy customers.
All in all, our plan positions us to deliver among the very best risk adjusted returns our industry has to offer.
And now, let's take a brief look at the regional economy.
There was, of course, an unusual year for everyone, but many of our commercial and industrial customers proved to be quite resilient, providing essential products and services such as food, plastics, paper, packaging, and electronic controls.
The latest available data show Wisconsin's unemployment rate of 5.5%.
That's more than a full percentage point better than the national average.
And as we look to the year ahead, we see positive signs of continued growth.
For example, Green Bay Packaging is building a major expansion of its mill in northeastern Wisconsin, the $500 million addition, and is expected to be completed later this year.
The Foxconn Komatsu Mining, Haribo, and Milwaukee Tool projects that we've reported to you in the past are all moving forward as well.
So, we remain optimistic about the strength of the regional economy and our long-term sales growth.
Finally, I know many of you are interested in our rate case calendar for the year ahead.
As you know, under normal circumstances, our Wisconsin utilities would be filing rate reviews later this spring for energy rates that would go into effect on January 1, 2022.
Of course, we're in the middle of anything but normal times, and I can tell you that we've begun discussions with the Commission staff and we'll be talking with other major stakeholders to determine whether a one-year delay in the filing would be in everyone's best interest.
I expect the final decision on this around the end of the first quarter.
Turning now to sales.
We continue to see customer growth across our system.
At the end of 2020, our utilities were serving approximately 11,000 more electric and 27,000 more natural gas customers compared to a year ago.
Retail electric and natural gas sales volumes are shown beginning on Page 17 of the earnings packet.
Overall retail deliveries of electricity, excluding the iron ore mine, were down 2.1% compared to 2019, and on a weather normal basis, deliveries were down 2.9%.
Natural gas deliveries in Wisconsin decreased 7.9% versus 2019.
And by 2.4% on a weather normal basis.
This excludes gas used for power generation.
On the electric side, you'll note the positive trend that we've seen in residential sales has continued.
Importantly, it has counterbalanced the weakness in small commercial and industrial sales caused by the pandemic.
Meanwhile, large commercial industrial sales excluding the iron ore mine were down 7.1% for the full year compared to 2019, on a weather normal basis.
However, these sales were only down 4.6% for the fourth quarter.
A notable positive trend reflecting the recovery of Wisconsin's economy.
Now, I'd like to briefly touch on our 2021 sales forecast for our Wisconsin segment.
We are using 2019 as a base for 2021 retail projections.
We're using 2019 because it represents a more typical year.
We are forecasting a decrease of 1.5% in weather normal retail electric deliveries, excluding the iron ore mine compared to 2019.
This would represent a 1.4% increase compared to 2020.
We expect large commercial and industrial sales to continue to improve and anticipate the same positive offsetting relationship between residential sales and small commercial industrial sales.
For our natural gas business, we project weather normalized retail gas deliveries to decrease by 2.4% compared to 2019, this leaves the projected sales outlook compared to 2020, relatively flat.
With this in mind, we remain focused on operating efficiencies and financial discipline across our business.
We lowered operations and maintenance cost by more than 3% in 2020 and we continue to adopt new technology and apply best practices.
We plan to reduce our operations and maintenance expense by an additional 2% to 3% in 2021.
I also have an update on our infrastructure segment.
The blooming Grove and Tatanka Ridge projects are in-service now and came in ahead of time and on budget.
As a reminder, our Thunderhead Wind investment is projected to go in service by the end of the third quarter.
We accept -- expect [Phonetic] this segment to contribute an incremental $0.08 to earnings in 2021.
Throughout 2020, we kept the energy flowing to our customers safely and reliably.
Our largest utility, We Energies, was named the most reliable electric company in the Midwest for the tenth year running, and our Peoples Gas subsidiary was named the most trusted brand and a customer champion for the second year in a row by Escalent, a leading behavior and analytics firm.
Now, I'll review where we stand on current projects in our ESG progress plan.
As you heard in our last call, the Two Creeks Solar Farm is now operating.
As we've mentioned, the very large project, in fact, just days after achieving commercial operation this past November, our share of this project accounted for more than 20% of the solar output in the entire MISO generation market.
Also, in Wisconsin, We Energies is making progress in the approval process for two liquefied natural gas facilities, which would provide enhanced savings and reliability during our cold winters.
If approved, we expect to be in construction in the fall of this year and to invest approximately $370 million in total to bring the facilities in operation in 2023.
And as Gale just mentioned, our ESG progress plan includes 1,800MW of wind, solar, and battery storage.
Filings with the Wisconsin Commission for a number of these projects will begin in the first quarter.
As you may recall, we were in the midst of a rate review for one of our smaller subsidiaries, North Shore Gas, which serves approximately 160,000 customers in the northern suburbs of Chicago.
Rates for North Shore Gas were last set more than five years ago before we acquired the company.
Since then, we have consistently invested capital to serve our customers while reducing operating costs.
The Illinois Commerce Commission has set a schedule for concluding the case.
Meetings are expected to begin in late April, with the final order in September.
We're confident that we can deliver our 2021 earnings guidance in the range of $3.99 a share to $4.03 a share.
This represents earnings growth of between 7% and 8% of our 2020 base of $3.73 a share.
And you may have seen the announcement that our Board of Directors at its January meeting raised our quarterly cash dividend to $0.6775 a share for the first quarter of 2021.
That's an increase, folks, of 7.1%.
The new quarterly dividend is equivalent to an annual rate of $2.71 a share and this marks the 18th consecutive year that our company will reward shareholders with higher dividends.
We continue to target a payout ratio of 65% to 70% of earnings, right smack dab in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share.
Next up, Xia will provide you with more detail on our financials and our first quarter guidance.
Our 2020 earnings of $3.79 per share increased $0.21 per share compared to 2019.
Our favorable 2020 results were driven by a number of factors, these included the execution of our capital plan rate adjustment at our Wisconsin utilities, ROE improvement at American Transmission Company, production tax credit in our infrastructure business, and continued emphasis on operating efficiency.
These factors helped us to overcome the sales impact of Covid19 and mild winter weather, and all of our utilities met their financial goals in 2020.
I'll walk through the significant drivers impacting our earnings per share.
Starting with our utility operations, grew [Phonetic] our earnings by $0.22 compared to 2019.
First O&M expenses were favorable.
This includes $0.08 from lower day-to-day O&M expenses and $0.09 from lower sharing amounts in 2020 at our Wisconsin utilities.
Second, despite the impact of Covid19 and reduced wholesale and other margins, rate adjustments at our Wisconsin utilities continue -- continued capital investment, and fuel drove a net 21% increase in earnings.
Third, we had $0.12 of higher depreciation and amortization expense and an estimated $0.05 decrease in margins related to mild winter weather year-over-year.
These factors partially offset the favorable items we discussed.
Overall, we added $0.22 year-over-year from utility operations.
Earnings from our investment in American Transmission Company increased $0.08 per share compared to 2019.
Recall that $0.07 of the $0.08 were driven -- were due to ROE changes from FERC orders issued in November, 2019, and May, 2020.
$0.04 resulted from the November 2019, order and $0.03 from the May 2020, order.
The penny came mainly from continued capital investment.
Earnings at our energy infrastructure segment improved $0.05 in 2020 compared to 2019, primarily from production tax credits related to wind farm acquisitions.
These include the Coyote Ridge Wind Farm placed in service at the end of 2019.
Additional 10% ownership of the Upstream Wind Energy Center and the Blooming Grove Wind Farm came online in early December.
Finally, you'll observe that we recorded a $0.09 charge in Corporate and Other to account for the make-whole premiums we incurred in the fourth quarter as we refinanced certain holding company debt to take advantage of lower interest rates.
The remaining $0.05 decrease is related to some tax and other items, partially offset by lower interest expense.
In summary, WEC improved on our 2019 performance by $0.21 per share.
Now I'd like to update you on some other financial items.
Our effective income tax rate was 15.9% for 2020, excluding the benefit of unprotected taxes flowing to customers, our rate was 20.2%.
Looking to 2021, we expect our effective income tax rate to be between 13% and 14%.
Excluding the benefit of unprotected taxes flowing to customers, we project our 2021 effective tax rate to be between 19% and 20%.
Adding past years, we expect to be a modest taxpayer in 2021.
Our projections show that we will be able to efficiently utilize our tax position with our current capital plan.
Looking now at the cash flow statement on page 6 of the earnings packet.
Net cash provided by operating activities decreased $149.5 million.
Our increase in cash earnings in 2020 more than offset by higher working capital requirements, primarily related to Covid19 and by higher pension contributions.
Total capital expenditures and asset acquisitions were $2.9 billion in 2020, a $345 million increase from 2019.
This reflects our investment focus in our regulated utility and contracted renewable businesses at our energy infrastructure segment.
In terms of financing activities, in the fourth quarter of 2020, we opportunistically refinanced over $1 billion of holding company debt, reducing the average interest rate of these notes from 3.3% to 1.5%.
We continued to demonstrate our commitment to strong credit quality.
As expected, our FFO to debt ratio was 15.4% in 2020.
Adjusting for the impacts of voluntary pension contributions and customer arrears related to Covid19, our FFO to debt was 16.9% in 2020.
At the end of 2020, our ratio of holding company debt to total debt was 28%, below our 30% target.
In addition, as Gale mentioned, we have no need for additional equity over the five-year forecast period.
Finally, let's look at our guidance for the first quarter of 2021.
Last year we earned a $1.43 per share in the first quarter.
We project first quarter 2021 earnings to be in the range of $1.45 per share to $1.47 per share.
We have taken into account mild went -- weather to-date and this forecast assumes normal weather for the rest of the footer.
For full year 2021, we are reaffirming our annual guidance of $3.99 to $4.03 per share.
All, we're on track and focused on delivering value for our customers and our stockholders.
Operator, we're ready to open it up for a little trash-talking and the Q&A portion of our conference call today. | reaffirming company's 2021 earnings guidance. | 1 |
I am Quynh McGuire, Vice President of Investor Relations.
You may access it 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 will now turn the discussion over to Leroy.
Now for those of you who joined us in mid-September for our Koppers Investor Day, we hope you enjoyed the event.
Our team was very encouraged by the interest shown and to have the opportunity to provide some additional context on our long-term business strategy.
And while I am disappointed to post lower-than-expected results in our first quarter following that day, I'd also like to emphasize that we are playing a long game, which as we all know, can be difficult to do as a public company.
That's where our focus has been, and that's where it remains, and that's why we were excited to take the opportunity to unveil our 5-year plan.
Our interest is in attracting an investor base that's also in it for the long game.
And those investors that are interested in owning an essential and underappreciated business model, which has a lot of upside, should have a lot to like with the future we have laid out for Koppers.
So now let us get started with a review of our Zero Harm safety performance for the third quarter with special attention on COVID-19, as seen on slide four.
Following guidelines set by the Center for Disease Control and the Occupational Safety and Health Administration, Koppers continues to require masks for those working indoors with some flexibility as case numbers dictate in each region.
The vaccination rates for the company as a whole currently track at 64% globally with 61% in North America and 81% across our international locations.
Overseas, Denmark lifted its COVID restrictions throughout the country now that more than 75% of its population is fully vaccinated.
And as a result, we have relaxed protocols at our new Board facility.
In Australia, lockdowns are being lifted as vaccination rates there have exceeded 60%.
However, we have elected to keep our COVID protocols in place at our sites there for the time being.
And over the coming days, we will be reviewing it to determine exactly how it must be deployed, and we will put the necessary plans and protocols in place.
As described on slide five, we are going through our annual open enrollment process in the U.S. for employees to select their health insurance for 2022.
And after careful consideration, we have decided to institute a monthly healthcare surcharge to employees that remain unvaccinated.
That decision was made to help mitigate the additional cost of care for those that end up hospitalized as a result of contracting COVID.
The data supports that for those who do contract COVID, the health results and cost of care for unvaccinated individuals far exceeds that for the vaccinated.
And I cannot, in good conscious ask our vaccinated employees to bear the additional cost that is brought on by others that are consciously choosing to not vaccinate for their own personal reasons.
And also, we have adjusted our Zero Harm life-saving rules to reflect current COVID safety requirements, and we are maintaining all safety and health protocols regarding masks and social distancing.
All Koppers office locations have been made available to employees and those who have been vaccinated must wear masks in common areas, while unvaccinated employees are encouraged to work remotely.
Unvaccinated individuals who come into the office must wear mask and maintain social distance at all times.
We are now planning a return to the office beginning on January 3, 2022, and a hybrid work arrangement between office and home will remain in effect and available to employees as appropriate.
At this time, as shown on slide six and as announced back in August, Mike Zugay, our Chief Financial Officer and a critical member of the Koppers leadership team in the past seven years, has announced his retirement effective at the end of this year.
And that means that this will be Mike's last earnings call.
We will miss him.
Next week, Mike will be recognized here in Pittsburgh with a career achievement award as the CFO of the year for his tremendous contribution he has made to the several organizations he has worked at during his career.
Without any further ado, I will hand over the podium to Mike for the final time.
On slide eight, consolidated sales for the quarter were $425 million, which was a decrease from sales of $438 million in the prior year quarter.
Sales for RUPS were $187 million, down from $191 million.
PC sales fell to $115 million from $148 million, and CM&C sales rose to $123 million, up from $99 million.
Moving on to slide nine.
Adjusted EBITDA for the quarter was $54 million or 12.7%, down from $67 million or 15.2% in the prior year.
Also compared to the prior year, adjusted EBITDA for RUPS was $11 million, down from $19 million.
PC EBITDA decreased to $20 million, down from $32 million, and CM&C EBITDA improved to $23 million, up from $17 million.
On slide 10, sales for RUPS were $187 million, a slight decrease from the prior year's results.
We attribute this mostly to declining Class I crosstie treating volumes and the impact of exiting our contract with Texas Electric Cooperatives.
We are now serving the Texas market by treating poles at our own facility in Summerville, Texas, and this creates opportunities for longer-term sales growth for the company.
These declines were partially offset by increased activity in commercial crossties and rail joints.
Hardwoods for crossties remain a procurement challenge as there is continuing strong demand in the construction industry for other uses for that wood.
In fact, crosstie procurement is down 38% in the quarter over last year, while crosstie treatment has increased slightly by 3%.
On slide 11, adjusted EBITDA for RUPS was $11 million compared with $19 million in the prior year.
This was driven by lower green crosstie purchases, which led to reduced capacity utilization and absorption at the plant level.
We saw reduced track time due to increased levels of rail traffic, along with inefficiencies caused by employee turnover, which led to an approximately $2 million decrease in EBITDA for our Maintenance-of-Way business.
Additionally, the costs incurred by converting from Penta to our CCA preservatives had a negative $2 million unfavorable impact.
Moving on to slide 12.
PC achieved sales of $115 million compared to $148 million in the prior year.
Volumes of preservatives in North America were down, while wood treaters continue to closely manage inventory due to higher lumber prices.
As the economy has reopened in various areas, travel and other in-person goods and services have been taking a higher share of discretionary consumer spending.
However, we have implemented price increases for our copper-based preservatives, which has somewhat offset these headwinds.
On slide 13, adjusted EBITDA for PC was $20 million compared with $32 million in the prior year.
This change can be attributed to lower sales volumes compared with pandemic fueled demand in the prior year and higher raw material and logistics costs, partially offset by price increases.
EBITDA from Europe and Australia was about $3 million lower due to European regulatory impacts on our product portfolio and rolling lockdowns in Australia and New Zealand.
Slide 14 shows CM&C sales at $200 -- $123 million compared to sales of $99 million in the prior year.
The increase can be attributed to higher pricing for carbon Pitch, carbon black feedstock and phthalic anhydride, partially offset by lower volumes of carbon pitch.
Moving on to slide 15.
Adjusted EBITDA for CM&C was $23 million compared to $17 million in the prior year.
This increased profitability was driven by favorable pricing and strong operational efficiencies, partially offset somewhat by higher raw material costs.
Compared with the second quarter, prices of major products this quarter increased 11%, while average coal tar cost increased 8%.
Compared with the prior year quarter, average pricing of major products rose 24%, while average coal tar costs went up by 39% in that particular quarter.
Now let us review our debt and liquidity.
As seen on slide 17, at the end of September, we had $762 million of net debt with $326 million in available liquidity, and we also remain in compliance with all of our debt covenants.
Our net leverage ratio was 3.4 times at the end of September, down from 3.5 times at the end of December 2020 and 3.8 times in the prior year quarter.
Longer term, our net leverage goal continues to be between two times and three times.
In connection with our ongoing efforts to evaluate potential financing options, we are reviewing various refinancing alternatives for both our $500 million senior notes, which are due in 2025, as well as our existing bank credit facility.
With that said, we have not yet determined to move forward with any particular refinancing transaction at this time.
Now before getting into a review of business sentiments and our outlook for the remainder of this year, I would like to share some notable accomplishments of Koppers and our people in the third quarter.
On slide 19, you can see the remarkable accomplishment achieved by our entire Koppers Wood Products team at Longford, Australia, who have reached a 100% vaccination rate, our first location of 20 or more employees to reach that milestone, which is an incredible feat, and we are extremely appreciative of this achievement.
Our new Nyborg Denmark team is dealing with the pandemic in an outstanding fashion as well.
The 93 employees there have achieved a 95% vaccination rates which are passing even the national rate of 75%.
It's due to their willingness to take the COVID-19 virus so seriously that we have had no infections at Nyborg.
And finally, in our corporate headquarters in Pittsburgh, where we have 177 employees, we have crossed the 90% vaccination threshold.
I believe it's important for our headquarters personnel to set the right example of what we expect to see throughout the organization.
So I am especially happy to see us get to that level.
Kudos all around to our teams at Longford, Nyborg and Pittsburgh for truly making Koppers Zero Harm culture to heart.
On slide 20, we wanted to congratulate our truck drivers, the unsung heroes of Koppers who load transport and deliver our products all over the world safely and with special attention paid to limiting and eliminating negative environmental impacts.
At our annual Zero Harm Truck Driving Championship 10 drivers were identified as finals for their overall performance and were appropriately recognized.
As seen on slide 21, the Pittsburgh Post-Gazette named Koppers headquarters location in Pittsburgh as one of the top workplaces for 2021 with a special recognition of our attention to Health and Wellness.
This honor determined by a third-party and using survey results of employees across the Greater Pittsburgh region noted our company for its alignment, coaching, engagement, leadership, work-life balance and more.
Now as the competition for talent intensifies, it will be the flexible adaptive culture we have created that focuses on the whole person that we expect to bring as a competitive advantage for Koppers.
And we have seen some significant shifts impacting our businesses during the third quarter, many attributable to the aftereffects of the global pandemic, including various supply chain issues and rising costs.
I want to stress the headwinds we are facing are short-term and surmountable.
They are not indicative of any underlying negative systemic changes to the foundations of our business model, which is important.
The first-up is a review of what we see in the fourth quarter for Performance Chemicals, as outlined on slide 23.
Now while we had a respectable third quarter, it fell a little bit short of our internal expectations.
Residential preservative volumes took a little longer to recover from the deep trough that began in the last couple of weeks of June as lumber prices were in a steep and rapid free fall.
The fourth quarter looks to generate a sales volume improvement of about 8% over third quarter results, building on North American residential demand that began in the back half of October.
Year-over-year sales volumes are expected to finish about 14% lower than the record volumes in the prior year, which were driven by the strong demand during the pandemic in 2020.
Now the trend of our largest customers leading the way and consolidating the residential treaty market continues to work to our advantage.
And as a result of consolidation that's occurred this past year, Koppers will now be the largest wood preservative supplier to the top three U.S. big-box retailers, which is a tremendous achievement and shows what can be achieved with strong proprietary technology and strong partners.
Industrial demand in the U.S. should remain strong at a 5% year-over-year increase through September as the pent-up preservative is phased out for utility pole treatment.
And this is one of the areas that we have dealt with some supply chain disruption, and therefore, haven't been able to fully keep up with demand.
However, that situation has recently improved, and we appear to be on a path of restocking the inventory channel.
The book of demand remains strong, and we have been challenged to keep up.
So the full potential of industrial sales will still be a little bit limited somewhat by short-term supply chain challenges in Q4.
We are seeing the cost of labor, energy shipping and materials are all trending higher.
And as such, we will need to continue pushing further price increases that started at the beginning of the year.
Despite what some are saying, these inflationary cost pressures are not transitory.
So we will need to continue the acceleration of global price increases that began in early 2021 and that have totaled $15 million thus far through September.
In foreign markets, strong demand and a weaker dollar have South America on track for a record year, while regulatory pressures on European products have led to a forecast of record low results there.
Rising copper prices and a revalued inventory have helped our PC results despite the recent volume drop off, it does create some short-term risk of earnings volatility for this segment if the price of copper were to fall rapidly before our price increases step in to fill the gap.
Looking at the external data, some encouraging news came from a 7% rise in the sale of Existing-home with all four U.S. regions experiencing increases in sales and housing demand, according to the National Association of Realtors.
The NAR also noted that it expects homebuyers to continue fueling a strong market, securing mortgages before potential interest rate increases.
In October, the consumer confidence index was 114%, an increased from September and reversing a three month decline as concerns began to lessen regarding the spread of the Delta variant of the coronavirus.
Spending intentions have risen for homes, cars, major appliances and travel, all of which are projected to drive economic growth for the rest of this year.
Slide 24 provides a look at the longer-term PC picture from 2022 through '25.
Currently, our early take on MicroPro volumes in North America next year are that we expect them to be between 2020 and 2021 volumes.
This is based upon an industry consensus view that volumes return to normal after the pandemic, and we see market share growth through the friendly treating consolidation mentioned earlier.
And we also expect North American industrial volumes will rise as the Penta preserver continues to get phased out of the utility pole market and customers move to other preservatives, including our CCA and DuraClimb products.
I mentioned earlier that we are on track for our best year ever in South America, which is a rapidly growing market for wood preservation.
And to support that growth, we will be looking to expand our footprint in that geography.
Earlier this year, we purchased property for a greenfield manufacturing operation in Brazil and are currently going through the detailed design engineering phase of that project.
This is capital that's already in our strategic plan and supports our preservative growth strategy.
The expansion of production capacity for Basic Copper Carbonate at our Hubbell, Michigan facility was completed this past quarter.
That development, along with regulatory approval of a new domestic BCC supplier promises to significantly reduce our dependence on overseas suppliers for that critical material, thereby strengthening our MicroPro supply chain.
Now to keep up with rising costs, we are continuing to implement price increases that should add more than $20 million in 2022 and more than $60 million in 2023 based on current copper prices.
We also anticipate higher working capital values moving forward due to the higher cost of raw materials and increased inventory levels that we will likely carry for some period until we are comfortable that our concerns around supply chain have been alleviated.
From an R&D standpoint, we are pleased to report that we have been issued a patent for our next-generation MicroPro product, which will remain in force through early 2038, and we will begin commercializing it in 2023.
This is a big deal as it improves upon our current product line while extending the protection of our technology.
As support for next year's volumes projection, is a leading indicator of Remodeling Activity estimates that spending on home renovation and repairs will reach 9% annual growth and surpassed $400 billion by the third quarter of 2022.
Also, the expansion in homeowners' equity opens the door to increased numbers and scope of home improvement projects in the coming year, even as labor and material costs are projected to rise.
All in all, the future continues to look very bright for our Performance Chemicals business.
Now slide 25 offers some insight into our UIP business for the fourth quarter.
Near-term sales have been affected by the downstream effect of PC related supply chain issues, but that situation is already improving and should be much improved by the time we get to the end of the year.
Now similar to our PC business, inflationary cost pressures will mean continued U.S. price increases that began in the second quarter and have continued through the third quarter on an accelerated pace.
Year-to-date through September, those increases have totaled $8 million, and we will need to continue to cover the rising cost of labor, chemical, fuel and transportation.
As mentioned previously, market production of Penta will cease at the end of this year, and most of our customers are choosing to transition to our PC produced CCA and DuraClimb treatment solutions for the Southern Yellow Pine utility poles.
Our Vidalia, Georgia plant completed its conversion from Penta to CCA in the third quarter, which did have a negative impact on Q3 results, as Mike had earlier indicated.
At our Vance, Alabama facility, a similar conversion will occur in the fourth quarter, which will similarly impact Q4 results.
A new dry kiln also located in our Vance plant came online in the third quarter, while a similar kiln at Newsoms, Virginia will be completed in the fourth quarter.
And although all these projects are disruptive in the short term, they are part of our network optimization strategy to reduce costs by becoming more efficient and taking closer control of our supply chain.
Wood supplies seem relatively stable, although we are seeing pricing pressure stemming from increased demand for small logs and pulp and export.
Trucking and logistics costs are remaining high due to increased diesel costs, availability of third-party trucking assets and labor costs.
And all this goes back to our need to pass-through our increased costs.
Sales of poles in Australia have been affected by pandemic related shutdowns, although a vaccine rollout in New South Wales is expected to ease restrictions over the next few months.
Turning to slide 26.
We offer a peak ahead to next year and beyond for our UIP business.
Now as mentioned earlier, sales of CCA treated poles will increase as 65% of our UIP customers have selected CCA as their preservative of choice with 10% still undecided.
In 2022, we will continue to build on our Texas creosote pole business as we leverage our pole recovery business to add new customers and improve our cost structure.
Sticking with the network optimization theme, we expect a much improved cost footprint to add meaningfully to EBITDA in 2022 through the capital spent this year for plant conversions and drying capacity.
Furthermore, we continue to evaluate our treating footprint and could pull the trigger on the consolidation of another treating plant in 2022, pulling that volume into the remaining plants in our network and saving even further on fixed costs.
Basic demand for poles should remain high at least over the first half of 2022 due to project work and upgrades that were deferred during the pandemic, the longer-term demand profile should also remain positive as utilities need to continue to maintain their infrastructure, to avoid service interruptions as remote work continues and extreme weather events continue to increase.
Now an ample supply of softwood to keep whitewood prices stable for the foreseeable future.
On the preservative side, we have been granted a registration to produce copper naphthenate, which would add another oil born preservative to our portfolio.
At this point, we are in the process of assessing the most effective path forward and whether it is to externally procure or independently produce.
In 2022, we expect to implement $15 million to $20 million in annualized price increases to cover the increased costs we are experiencing and that I had outlined earlier.
Now for next year, in Australia, we see strong underlying pole demand to replace poles damage from recent natural disasters.
While a new dry kiln has been installed at our Takura location to meet the growing demand for softwood due to hardwood supply constraints.
Moving on to our Railroad products and services business on slide 27.
The year-over-year trend of green tie purchases looks to have bottomed out and should comparatively improve beginning in the fourth quarter.
At our current pace of 4.4 million ties purchased, this would represent a new low driven by customer reluctance to pay higher prices to meet their demand levels.
Treated and sold ties are flat year-over-year, suggesting that crosstie insertions are not an issue.
Railroad customers are using high green tie prices to defer purchases with demand being pushed out to mid-2022 in hopes that cost will abate.
Trucking problems persist from a lack of drivers and pent-up demand limiting access, all of which are driving transportation rates higher.
In commercial crosstie profit should improve as comps get easier, but the market overall is still very competitive.
As announced in early October, we closed on the sale of the property where our former Denver facility was located, providing net proceeds of $24 million in the fourth quarter.
The American Association Railroads reports total year-over-year U.S. carload traffic increased 8%.
Intermodal units increased 10% and combined carloads and intermodal units increased by 9% as of September 30.
The AAR added that limited availability of downstream truck and warehouse capacity because of supply chain logistics are impacting intermodal volumes for the time being.
Now, the association added that significant network investments have made the rail industry more adaptable and enable to adjust ongoing changes in operational and market conditions, which bodes well for rail traffic long term.
The fourth quarter view of our maintenance-of-way business calls for it to sequentially improve and come in slightly better than last year's fourth quarter.
Full year EBITDA, however, is on pace for an all-time low due to a collection of direct and indirect COVID related factors, such as labor shortages, lockdowns and reduced track time due to increased rail traffic mentioned previously.
slide 28 discusses our view for our RUPS business in 2022 and beyond.
Our current projections have supply issues around green ties beginning to subside with a rebound beginning in the second half of 2022.
In the meantime, we have been working on the development of a long-term strategy to smooth out the peaks and valleys of the procurement side of the business, and we are planning to use the experience we have had addressing the factors that created volatility in both our CM&C and PC businesses and applying those same factors to address this challenge.
We expect a minimum of $20 million in price increases to flow through our top-line next year to account for higher material costs that we have been experiencing thus far this year.
We are close to finalizing the last of our contract extensions on the Class one contracts that were set to expire this year.
And when complete, most of our Class I volume will be secured beyond 2025.
While overall volumes are set to increase 3% to 4% in 2022, with share remaining flat, volumes are expected to grow by more than 10% in 2023.
The planned completion of expansion at our North Little Rock facility will support a large portion of that projected volume growth.
As a result, working capital will increase due to higher green tie purchases and volume growth.
And while I mentioned the disappointing results for our maintenance-of-way business this year, on a bright note, we are carrying the highest backlog we have had in that business in years into 2022.
Our results should improve meaningfully as we gain cooperation from the railroad for track time and see better crew continuity.
We are addressing our turnover issue through a new redesigned compensation model for portions of our maintenance-of-way group that focuses on what that workforce values.
Finally, we are actively working to expand our crosstie recovery business and add more Class one customers to our portfolio.
While there's no getting around the fact that 2021 has been a disappointment for our RUPS business, the investments we are making now will set us up to make a major jump in profitability over the next two years.
Looking at the fourth quarter for our CM&C business on slide 29, we see strong demand continuing in key markets like steel and aluminum, with production increasing in auto and other manufacturing industries.
The energy crisis in China, along with global supply chain issues have caused raw material shortages and longer lead times for finished goods, which has supported our business model outside of China.
And one example is the high pitch export pricing out of China that's partially caused by the previous factors that supports stronger pricing of our Australian produced products that are tied to that benchmark.
Our European business continues to experience end market pressure as a result of aluminum production cutbacks cutting into our customers -- cutting into our competitors' demand, which has caused them to compete for business to replace what was lost.
In North America, tar production is even with or maybe even surpassed what it was pre-COVID, meaning we can reduce our higher cost tar imports from Europe and shorten our supply chain.
Price increases on coal tar are expected to continue globally, which will begin to compress margins somewhat in the fourth quarter.
Pricing of products tied to oil, like carbon black feedstock, phthalic anhydride should remain high and boost profitability.
On the downside, we are expecting volumes in our phthalic business to be lower due to customer supply chain issues impacting their demand.
We are considering dissolving the previously closed KCCC facility in China during the fourth quarter or early next year to substantially complete our China exit plan.
Slide 30 offers a look forward for CM&C.
Strong demand in aluminum and steel markets should continue into 2022 or longer with passage of an infrastructure bill in the U.S. and as reliance on Chinese exports goes down and global logistics challenges continue, our CM&C business is poised to benefit.
A global review by IHS Markit says that after making adjustments for production trends during the pandemic, production of light vehicles worldwide is expected to see double-digit growth in 2022.
Now also, it reports that the semiconductor supply chain is stabilizing, which represents another positive step in the recovery of the automobile and other manufacturing segments.
More decarbonization projects to eliminate coke from the steelmaking process are occurring and will further impact future coal tar availability.
But despite external pressures, our focused footprint puts us in a solid competitive position to maintain our low to mid-teens EBITDA margins in this business.
Ongoing improvements we are making at our Stickney facility will improve safety, boost reliability and generate additional profitability.
Higher future crosstie volumes and creosote treated utility poles will also have a positive effect on the CM&C business in the form of more distillate being upgraded from carbon black feedstock to creosote.
Our yield optimization project would further improve pitch yields that we get from tar from 50% of production to up to 70%, meaning higher sales and profitability.
In a similar vein, work on enhanced carbon products for use in battery anode materials continues in North America, Europe and Australia.
And those projects are not yet included in our 2025 projections but could provide significant potential upside.
On slide 32, our sales forecast for 2021 has been revised to be approximately $1.7 billion compared with $1.67 billion in the prior year to reflect the lower than previously expected PC volumes on our third and fourth quarter.
On slide 33, we are adjusting our 2021 EBITDA projections to now be approximately $220 million, which is at the low end of our previously communicated range.
That compares favorably with the $211 million generated in the prior year and will be our seventh consecutive year of EBITDA growth looking at the company in its current formation.
On slide 34, our adjusted earnings per share guidance is now expected to be approximately $4.12, which is comparable to our all-time high 2020 adjusted earnings per share despite the negative impact of $0.40 per share from our higher estimated effective tax rate.
Our $4.12 estimate for 2021 is lower than our prior estimate range, primarily due to our effective tax rate increasing from prior projections.
Finally, on slide 35, our capital expenditures were $87.6 million year-to-date through September 30 or $78.7 million, net of the $8.9 million in cash proceeds.
We are on track to spend a net amount of $80 million to $85 million on capital expenditures with approximately $45 million dedicated to growth and productivity projects.
So in summary, while we always strive to do better, I actually think it's pretty remarkable that we are on track to be in our most recently communicated range of guidance and actually right in the middle of the original guidance we gave for the year back in February.
Of course, how we are getting there is quite a bit different than what we thought.
But once again, I believe that just highlights the strength and the diversity of our business segments, which tend to operate opposite of each other.
In the dynamic environment, we find ourselves in, it's tremendously helpful to not be reliant upon a single business or market to carry the day, year in and year out.
It's been a difficult and draining couple of years, but I am proud of how our team has weathered the storm and put us in a position to capitalize on the many opportunities in front of us.
And through a combination of significant price actions and continued execution on our high-return internal projects, I am confident that we will take the next important step forward in 2022 toward meeting our 2025 goal of reaching $300 million in EBITDA.
With that, I would like to open it up to any questions. | sees 2021 sales will be approximately $1.7 billion.
expects adjusted ebitda will be approximately $220 million for 2021.
sees 2021 adjusted earnings per share to be approximately $4.12.
expects to invest $115 million to $120 million in capital expenditures in 2021. | 1 |
Actual results may differ materially from those indicated.
The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP.
In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website.
The strength of our leading non-clinical portfolio was clearly demonstrated in our second quarter financial performance.
Robust industry fundamentals are leading to unprecedented client demand across most of our businesses, and we're extremely well-positioned to succeed in this environment.
Second quarter organic growth-revenue growth was in the mid-teens, even after normalizing for last year's COVID-19 impact and exceeded the long-term low double-digit target that we recently provided at our Investor Day in May.
Clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio, and our unwavering focus on flawlessly serving the diverse needs.
Utilizing our capabilities enables them to drive greater efficiency and accelerate the speed of their research, non-clinical development and manufacturing programs.
We believe that the efforts we have made and continue to make to differentiate ourselves from the competition now critical as clients choose to work with a smaller number of CROs who offer broader scientific capabilities.
Due to the sustained demand, we are keenly focused on the execution of our strategy.
We are strengthening our portfolio as we did through the acquisition of gene therapy CDMO, Vigene Biosciences in late June, strategically adding staff and capacity to accommodate the robust demand and support our clients and enhancing our digital enterprise to provide greater connectivity and exceptional service to them.
We believe we will make these investments and remain well-positioned to achieve our operating margin target of 22.5% in 2024.
We believe the success of our strategy is reflected in our second quarter performance.
So let me provide some of the highlights.
Quarterly revenue surpassed $900 million for the first time and a $914.6 million in the second quarter of 2021, represented a 34% increase over last year.
Organic revenue growth of 24.1% was increased by approximately 8%, when compared to last year's COVID-19 impact in the second quarter of 2020, with the greatest impact in the Research Models and Services segment.
Even after normalizing for the COVID impact, we reported mid-teens organic growth, with double-digit increases across all three business segments.
The operating margin was 20.8%, an increase of 350 basis points year-over-year.
The improvement was principally driven by the RMS segment, reflecting operating leverage from significantly higher sales volume for Research Models, due in part to the comparison to last year's COVID-19 impact.
Notwithstanding this favorable year-over-year comparison, we were pleased with the margin progression in the first half of the year and are on track to achieve a full year operating margin of approximately 21% or 100 basis points higher than last year.
Earnings per share were $2.61 in the second quarter, an increase of 65.2% from $1.58 in the second quarter of last year.
This result widely exceeded our prior outlook of more than 50% earnings growth for the quarter, primarily as a result of the exceptional demand environment.
Based on the second quarter performance and our expectation for sustained demand through the remainder of the year, we are increasing our revenue growth and non-GAAP earnings per share guidance for 2021.
We now expect organic revenue growth in a range of 13% to 15%, 100 basis point increase from our prior range.
Non-GAAP earnings per share are expected to be in the range from $10.10 to $10.35, which represents 24% to 27% year-over-year growth and an increase of $0.35 at midpoint from our prior outlook.
We attribute this exceptional performance and outlook to the success of our ongoing efforts to enhance our position as the leading non-clinical contract research and manufacturing organization, as well as the pace of scientific innovation that's fueling a significant increase in biotech funding and FDA approvals, both of which are tracking to near record levels through the first half of the year.
I'd like to provide you with details on the second quarter segment performance, beginning with the DSA segment.
Revenue was $540.1 million in the second quarter, an 18.1% increase on an organic basis over the second quarter of 2020, driven by broad-based demand for both Discovery and Safety Assessment Services.
COVID only had a small impact on the DSA segment last year, so it wasn't a meaningful driver of the year-over-year growth.
Safety Assessment business continued to perform exceptionally well, reflecting robust demand from both biotech and global biopharma, clients and price increases.
Bookings and proposal volume continued to achieve record highs in the second quarter, with strength across all regions and major service areas.
The strength of biotech funding is enabling clients to meaningfully invest in early stage programs.
And due to the unprecedented demand, we are now booking work into next year.
As I mentioned last quarter, clients are expanding their preclinical pipelines and intensifying their focus on complex biologics to ensure they do not delay their research, we believe clients are securing space with us further in advance, which, in turn, provides us with greater visibility.
To support our clients, we are continuing to add staff, capacity and the resources necessary to effectively manage the current demand environment and provide our clients with a timely, efficient and high-quality service that they have come to expect from Charles River.
We believe these investments position Safety Assessment business well and will support low double-digit organic revenue growth in the DSA segment this year.
We believe the combination of the robust funding environment as well as our deep scientific expertise and willingness to forge flexible relationships with our clients led to another exceptional quarter for the Discovery business.
Our comprehensive portfolio of oncology, CNS, early discovery and antibody discovery capabilities, which we recently enhanced through the Distributed Bio and Retrogenix acquisitions, is resonating with clients, and clients are increasingly choosing to outsource -- to integrated Discovery partners like Charles River.
Despite the robust funding, biotech clients continue to maintain limited or no internal infrastructure, opting instead to invest in their pipelines and utilize our services to move their programs forward.
To support the robust demand from biotech and global biopharmaceutical clients, we will continue to strengthen our portfolio by expanding our scale, our science and our innovative technologies through a combination of internal investment, M&A and our strategic partnership strategy.
By doing so, we are enabling our clients to remain with one scientific partner from Target ID through IND filing and beyond and solidifying our position as the leading nonclinical CRO.
The DSA operating margin increased by 30 basis points to 23.5% in the second quarter.
Leverage from the robust DSA revenue growth was the primary driver of the margin improvement.
Foreign exchange reduced the DSA operating margin by 150 basis points in the quarter as revenue and costs are not naturally hedged at certain DSA sites, including our Safety Assessment operations in Canada.
We continue to expect the DSA margin will be in the mid-20% range for the year.
RMS revenue was $176.7 million, an increase of 44.5% on an organic basis over the second quarter of 2020.
Approximately 33.4% of this growth was attributable to the comparison to last year's COVID-related revenue impact from client site closures and disruptions, which reduced research model order activity.
Adjusted for the COVID impact, the RMS growth rate was above 10% as strong research activity across biopharmaceutical academic and government clients led most RMS businesses to grow above their targeted growth rates.
Robust demand for research models in China continued to be the primary driver of RMS revenue growth.
There has been a resurgence of research activity this year, and model volumes far exceed pre-COVID levels.
Several other western markets, the client base in China has transitioned from one dominated by academic and government accounts to a vibrant mid-tier biotech and CRO client base, which now represents the majority of our clients in China.
We believe the expansion of our client base is fueling increased demand.
And to accommodate the growth, we are continuing to expand our model and services offering and our geographic and our geographic footprint in Western and Southern China.
We are currently experiencing strong double-digit revenue growth in China.
Demand for Research Models outside of China was also quite strong.
We believe this correlates with the increased level of non-clinical research that's being conducted by biopharmaceutical and academic clients in Western markets.
Research investments have led to biomedical breakthroughs and new drug modalities, and we believe the global focus on scientific innovation is sustainable.
We also continue to win new academic clients in the second quarter, resulting from the COVID-19-related client shutdowns last year and more recently from digital engagements targeting the academic client base.
Research Model Services also performed very well.
GEMS is benefiting from strong outsourcing demand as our clients seek the greater flexibility and efficiency they gain when we manage their proprietary model colonies.
The greater complexity of scientific research and the proprietary models that our clients are creating further reinforce the value proposition for the GEMS business.
Clients need for greater flexibility and efficiency is also driving demand for our Insourcing Solutions, or IS business, particularly for our CRADL initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity at Charles River sites.
In addition to expanding our existing CRADL presence and adding clients in the Boston, Cambridge and South San Francisco biohubs, we're also looking to expand into other regions to provide a flexible capacity solution for our clients in emerging biohubs.
Utilizing CRADL also provides clients with collaborative opportunities to seamlessly access other Charles River services, which further enhances the speed and efficiency of their research programs.
The revenue growth rate for our self-supply businesses, HemaCare and Cellero, improved in the second quarter, but remain below the targeted level due to continued limitations on donor access.
We believe cell supply revenue will increase during the second half of the year as donor availability and capacity improved.
We have expanded capabilities, including donor capacity at our cell supply sites in Massachusetts and Washington State, which we believe will enable us to further expand our donor base in the US and accommodate the robust demand in the broader cell therapy market.
We expect HemaCare and Cellero will provide the critical tools for our new cell and gene therapy CDMO business, Cognate and Vigene.
We believe this will be highly synergistic for both Charles River and our clients because it will enable us to move client cell therapy programs forward using the same cellular products from research to CGMP production.
The RMS operating margin increased to 27.4% from 9.1% in the second quarter of last year.
The significant improvement was primarily due to the comparison to last year's depressed margin associated with COVID-related client disruptions and the corresponding reduction in Research Model order activity.
Revenue for the Manufacturing segment was $197.8 million, a 26.6% increase on an organic basis over the second quarter of last year.
The increase was driven by strong double-digit revenue growth in both the Biologics Testing Solutions and Microbial Solutions businesses.
COVID-19 did not have a meaningful impact on the segment's revenue last year, but testing on COVID vaccine -- COVID-19 vaccines has helped accelerate Biologics revenue growth rate this year.
Consistent with the first quarter, Microbial Solutions growth rate in the second quarter was well above the 10% level, reflecting strong demand for our Endosafe Endotoxin testing systems, cartridges, and core reagents in all geographic regions, as well as Accugenix microbial identification services.
With COVID related client access restrictions effectively behind us, we were pleased with the strength of the underlying demand for our endotoxin testing platform, which reforms FDA mandated lot release testing for our clients' critical quality control testing needs.
The advantages of our comprehensive portfolio continue to resonate with clients, and we believe that our ability to provide a total microbial testing solution will enable Microbial Solutions to deliver at least low double-digit organic revenue growth this year and beyond, which is consistent with the historical trend pre-COVID.
The Biologics Testing business reported another exceptional quarter of strong revenue growth that was well above the 20% growth target for this business.
Robust demand for cell and gene therapy testing services continue to be the primary growth driver.
There has been a rapid increase in the number of cell and gene therapy programs in development to approximately 3,000 programs now in the pipeline, with approximately two-thirds in the preclinical phase, which is expected to continue to fuel the strong growth.
COVID-19 vaccine work was also a meaningful driver of Biologics second quarter growth, but the underlying Biologics growth trends remained above the 20% level, even without the incremental COVID-19 testing revenue.
We believe cell and gene therapies will continue to be significant growth drivers over the long-term, and demand for COVID-19 vaccine testing is showing no signs of abating.
We believe the commercial production of COVID vaccines will continue for many years to come, supporting the demand for our services.
These factors are contributing to the strength of the demand environment, and we continue to build our extensive portfolio of manufacturing services to ensure we have available capacity to accommodate client demand.
The Manufacturing segment second quarter operating margin declined by 420 basis points to 33.2%.
The primary driver of the decline primary driver of the decline was the addition of Cognate's CDMO business as well as higher production costs in the Microbial business.
Cognate is a profitable business with a solid operating margin, but its margin is below the Manufacturing segment.
Coupled with the addition of Vigene in the third quarter, we expect a full year Manufacturing margin slightly below the mid-30% range.
However, beyond 2021, we expect this headwind to gradually dissipate as we drive efficiency and as the significant growth we anticipate generates greater economies of scale and optimizes throughout our CDMO sites.
Early in the second quarter, Cognate BioServices officially joined Charles River, followed by Vigene Biosciences in late June.
Aligned with HemaCare and Cellero, these businesses form the core of our cell and gene therapy offering, and we believe they will be highly complementary to our Biologics business and our portfolio as a whole.
We are pleased with the initial progress on the integrations and the addition of the cell and gene therapy CDMO services to a comprehensive portfolio, which is resonating with clients.
Our clients are beginning to explore opportunities to streamline their biologics development workflows by using Cognate's and Vigene's services, and their legacy clients are already looking to utilize other products and services within the Charles River portfolio to drive greater efficiency in their development and manufacturing activities.
We believe the acquisition of Vigene Biosciences with its viral vector-based gene delivery solutions, fulfills our objective to create a comprehensive cell and gene therapy portfolio, which spans each of the major CDMO platforms.
Gene-modified cell therapy, viral vector and plasmid DNA production.
In combination with Cognate's Memphis-based operations, we have established an end-to-end gene-modified cell therapy solution in the US, which we believe is critical to support our clients more seamlessly.
Our goal is to enable clients to conduct analytical testing, process development and manufacturing for these advanced modalities, with the same scientific partner, enabling them to achieve their goal of driving greater efficiency and accelerating the speed to market.
As a result of the successful execution of our strategy to date, we believe that our portfolio is the strongest it has ever been.
Our efforts to enhance our scientific capabilities, deliver flexible outsourcing solutions and provide greater value to our clients have made Charles River an important partner for our clients.
With the biopharmaceutical industry benefiting from record funding levels, we are experiencing robust demand for our essential products and services.
To support this demand and to continue to enhance the value we provide to clients, we will continue to move our growth strategy forward.
Acquisitions and strategic partnerships remain vital components of our strategy, as we endeavor to expand the scientific expertise, global reach and innovative technologies that we can offer clients across all three of our business segments.
Investing in our scientific capabilities as well as internally on the necessary staff resources in our digital enterprise will help us ensure that we can meet the needs of our clients.
The successful execution of our strategy will not only enable us to enhance our position as our clients' partner of choice from concept to nonclinical development to the safe manufacture of their life-saving therapeutics.
It will also allow us to achieve our longer-term financial targets of low double-digit organic revenue growth and an average of approximately 50 basis points of operating margin improvement beyond 2021.
And now, I'll ask David to give you additional details on our second quarter results and updated 2021 guidance.
Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiative, our venture capital and other strategic investment performance and certain advances.
Many of our comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
Once again, we are very pleased with another strong performance in the second quarter.
Robust revenue and earnings-per-share growth outperformed our prior outlook.
Organic revenue growth of 24.1%, including 8% related to last year's COVID-19 impact and operating margin expansion of 350 basis points, were the primary drivers behind earnings-per-share growth share growth of 65.2% to $2.61.
These results also reflect a favorable comparison to the second quarter of last year in which we experienced the peak of the COVID-related impact and client disruptions.
Based on our strong second quarter results and expectations for the underlying strength of demand to continue, we have increased our full year financial guidance and now expect to deliver organic revenue growth in a range of 13% to 15% for the full year.
Primarily as a result of the enhanced growth prospects this year, and to a lesser extent, a favorable tax rate, we raised our earnings per share guidance by $0.35 to a range of $10.10 to $10.35, which represents year-over-year growth of 24% to 27%.
By segment, our updated outlook for 2021 reflects the strong business environment.
For RMS, we continue to expect organic revenue growth in the high teens, driven by the Recovery in Research Model order activity from the impact of the COVID-19 pandemic last year, as well as exceptional growth in China.
Our outlook for DSA is unchanged, with low double-digit organic revenue growth for the full year, reflecting continued strength in early stage research activity.
For the Manufacturing segment, we now expect to achieve high-teens organic revenue growth.
Our revised outlook is based on exceptionally strong demand in Biologics, driven primarily by cell and gene therapy programs and an increase in contribution from the Microbial Solutions business, which is expected to return to at least low double-digit growth for the full year.
Including the acquisitions of Cognate and, more recently, Vigene Biosciences, Manufacturing's reported revenue growth rate is expected to be in the low to mid-40% range.
With regard to operating margin, our expectations for segment contributions remain mostly unchanged from our prior outlook, with the RMS operating margin meaningfully above 25% for the full year, DSA in the mid-20% range and Manufacturing slightly below the prior mid-30% outlook, principally reflecting the addition of Vigene in late June.
Lower unallocated corporate costs contributed to the second quarter margin expansion, totaling 5.6% of revenue or $51.2 million in the second quarter, compared to 6.1% of revenue last year.
Our scalable infrastructure enables us to drive greater efficiencies even as we continue to make investments to support the growth of our businesses and meet the needs of our clients.
We continue to expect unallocated corporate costs to be in the mid-5% range as a percentage of revenue for the full year.
The second quarter non-GAAP tax rate was 20.4%, representing a 60 basis point decline from 21% in the second quarter of last year.
The decrease was due to a favorable excess tax benefit associated with stock-based compensation, which resulted from increased equity exercise and award activity at higher stock price levels during the quarter.
This benefit was partially offset by higher tax expense associated with the UK tax law change.
or the full year, we are reducing our tax rate outlook to a range of 19.5% to 20.5% from our prior outlook of a tax rate in the low 20% range, principally driven by a higher benefit from stock-based compensation.
Total adjusted net interest expense for the second quarter was $20.8 million, an increase of $3.7 million sequentially and $1.7 million year-over-year, due to higher debt balances primarily to fund the Cognate acquisition.
At the end of the second quarter, we had an outstanding debt balance of $2.7 billion, representing gross and net leverage ratios of about 2.5 times.
Subsequent to the end of the second quarter, we completed the acquisition of Vigene on June 28.
On a pro forma basis, including Vigene, our gross leverage ratio remained below three times, which we attribute to our robust free cash flow generation that has enabled us to repay debt ahead of our expectations.
For the full year, we now expect total adjusted net interest expense to be slightly below our prior outlook in a range of $82 million to $85 million, primarily reflecting the accelerated debt repayment.
Free cash flow was $140.2 million in the second quarter, an increase of 3.5% over the $135.5 million for the same period last year.
The primary drivers of the increase were our strong second quarter operating performance and distributions from our VC investments, partially offset by higher capital expenditures.
In view of our robust results in the first half of the year, we have increased our free cash flow outlook by $65 million and now expect free cash flow of approximately $500 million for the full year.
capex was $46.4 million in the second quarter last year, compared to $26.8 million last year.
The increase was due primarily to the timing of projects.
Some investments, which were slowed or deferred during the COVID-19 disruptions last year are now back on track.
We continue to expect capex to be approximately $220 million for the full year.
A summary of our revised financial guidance for the full year, including all recent acquisitions, can be found on slide 39.
For the third quarter, our outlook reflects a continuation of the strong demand environment.
We do expect that growth rates will normalize from the second quarter levels, because we have anniversarized the peak of the COVID-19-related revenue loss last year.
Accordingly, we expect organic revenue growth in the low to mid-teens range and reported revenue growth in the low 20% range.
You should note that we are not forecasting a meaningful difference between the first half and second half organic growth rate after normalizing last year's COVID impact, which is not surprising as we believe the robust demand environment is showing no signs of abating.
We expect low double-digit earnings-per-share growth when compared to last year's third quarter level of $2.33.
I will remind you that the DSA operating margin in the third quarter of last year included a 50 basis point benefit from a discovery milestone payment, which will impact the year-over-year comparison.
In closing, we are very pleased with our second quarter results, which included another quarter of robust revenue, earnings and free cash flow growth.
We continue to be focused on the continued execution of our strategy and achieving our financial and operational targets, which will move us forward toward our longer-term targets for 2024. | compname reports q1 non gaap earnings per share of $2.53.
q1 non-gaap earnings per share $2.53.
q1 revenue rose 16.6 percent to $824.6 million.
updates 2021 guidance.
sees 2021 reported revenue growth of 19% - 21%.
sees 2021 organic revenue growth of 12% - 14%.
2021 gaap earnings per share estimate of $5.95 - $6.20.2021 non-gaap earnings per share estimate of $9.75 - $10.00. | 0 |
They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations.
For a discussion of these risks and uncertainties, please see the risks described in our most recent annual report on Form 10-K and subsequent filings with the SEC.
We may also discuss non-GAAP financial measures during today's call.
I'll give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss the current portfolio in more detail.
Also joining us on the call to participate in the Q&A are our President, Kevin Collins, our CFO, Lee Fegley; and our COO, Dave Lyle.
I am pleased to announce earnings available for distribution for the third quarter came in at $0.10 per share.
Book value ended the quarter at $3.25 per share, which represents an increase of 1.2%.
This increase in book value combined with our $0.09 dividend produced an economic return of 4% for the quarter.
The portfolio remains predominantly agency focused with substantially all of our entire $8.8 billion portfolio plus $1.5 billion notional in TBA invested in agency mortgages.
Our liquidity position remains strong as we held $788 million of unrestricted cash and unencumbered investments at quarter end.
After underperforming sharply during second quarter, agency mortgage performance stabilized during the quarter as positive performance from higher coupons generally offset underperformance from the bottom of the coupon stack.
Higher coupons benefited from slowing speeds as signs of prepayment burnout spurred investor demand.
Lower coupon struggled as the market ready for the onset of asset purchase tapering by the Federal Reserve.
Looking ahead, we believe that earnings available for distribution will continue to be supported by attractive dollar rolls and slow speeds on our specified pool collateral as well as by an attractive reinvestment environment characterized by wider spreads and continued strong funding markets.
While the near-term technical picture for mortgage remains supportive of valuations, we are cautious over the next several quarters as the decrease in purchases by the Federal Reserve and the likely increase in seasonally driven supply remains headwinds.
I'll stop here and let Brian go through the portfolio in more detail.
I'll begin on slide four in the upper left-hand chart, which details the changes in the U.S. treasury yield curve since year-end.
As indicated by the light blue line, the third quarter ended with interest rates largely unchanged with a modest flattening twist at the 10-year portion of the curve resulting in the difference between the yield on the 30-year and five-year U.S. treasuries falling by 12 basis points.
Treasury note in the first five weeks of the quarter.
Improving economic data, increased inflation expectations, indications of a peak in COVID cases, and clear signals from the Federal Reserve on the time line for tapering asset purchases at the September FOMC meeting led to a reversal in rates during the last couple of weeks of the quarter with a 10-year largely unchanged at 1.49% at quarter end.
Conversely, swap spreads reversed the tightening in the first half of the year and widened back to year-end levels, as displayed in the lower left-hand chart, resulting in higher swap rates across the curve during the quarter and benefiting those with a higher percentage of their hedges and interest rate swaps.
Despite short-term funding rates remaining attractive, the decline in interest rates in the first half of the quarter and increase in interest rate volatility led to a reduction in commercial bank demand for agency mortgages with monthly purchases of approximately $28 billion per month compared to the $46 billion per month average in the first half of the year.
Moving on to slide five, where we provide more detail on the agency mortgage market.
In the upper left-hand chart, we show year-to-date agency mortgage performance versus swap hedges in generic 30-year 2%, 2.5% and 3% coupons, highlighting the third quarter in gray.
As you can see, lower coupon 30-year 2% and 2.5% coupons modestly underperformed during the quarter, while 30-year coupons 3% and higher outperformed.
Lower coupons underperformed largely due to the increased expectations for asset purchase tapering in the fourth quarter as well as the previously mentioned decline in commercial bank demand and increase in interest rate volatility.
Higher coupons benefited from the perceived peak and prepayment speeds as indications of modest prepayment burnout for higher coupon borrowers continued.
Specified pool payups, as indicated in the chart on the top right, improved as interest rates fell during July and remained elevated relative to the second quarter through the end of September.
We have seen a reversal of this move so far in the fourth quarter as the recent modest increase in mortgage rates and decline in refinancing activity has dampened demand for prepayment protection.
Implied financing in the TBA market, shown in the lower right-hand chart remains attractive in lower coupons with financing rates drifting modestly lower, while still volatile, higher up the coupon stack, as indicated by the purple line representing the 30-year 3% TBA.
We believe the pine demand technicals should remain supportive of the dollar roll market in the near term despite reduced demand from the Federal Reserve, and we are likely to maintain a significant allocation in TBAs as a result.
slide six provides detail on our Agency RMBS investments and our activity during the third quarter.
While our overall allocation to the sector was largely unchanged, we modestly reduced exposure to lower coupons through paydowns and invested the proceeds in 30-year 3.5% specified pools, increasing our coupon diversification and higher coupon allocation by approximately $300 million.
We continue to actively manage our specified pool holdings, rotating $2.1 billion into more attractive alternatives within the sector while mitigating our exposure to elevated pay-ups.
Our specified pool holdings had a weighted average payout of 0.9 points as of September 30, an increase from 0.6 points as of June 30.
Despite our rotation away from higher pay-up loan balance stories into new production, which is reflective of the market's increased demand for specified pools during the quarter.
As noted on the previous slide, we have seen a reduction in demand for prepayment protection so far in the fourth quarter as our weighted average pay up has declined back to the June 30 average of 0.6 points.
The weighted average yield on our Agency RMBS holdings improved seven basis points to 2.11% as of quarter end, while prepayments on our holdings remained low at 7.3% CPR for the quarter.
We believe the strength of the dollar roll market and wider spreads represent attractive investment opportunities with ROEs on lower coupon dollar rolls in the mid-teens and 9% to 11% on specified pools.
Our remaining credit investments are detailed on slide seven with non-Agency CMBS representing nearly 60% of the $108 million portfolio.
Our allocation to credit remained stable during the quarter with no asset sales and limited price movements overall.
Our $73 million of remaining credit securities are high quality with 90% rated single A or higher and we remain comfortable with the credit profile of our remaining holdings.
Although we anticipate limited near-term price appreciation, we believe these assets are attractive holdings at 100% are held on an unlevered basis and provide attractive unlevered yields.
Lastly, slide eight details our funding book at quarter end, as shown in the chart on the upper left.
Repurchase agreements collateralized by Agency RMBS remain unchanged at $7.9 billion as of September 30.
Given the modest decline in our holdings and hedges associated with those borrowings also remain unchanged at $5.3 billion notional of pay fixed received floating interest rate swaps.
The weighted average interest rate on our hedge book remained unchanged at 41 basis points, while a modest extension in the maturities of our repurchase agreements led to a two basis point increase and the average funding rate to 12 basis points.
In order to hedge additional exposures further out the yield curve, we continue to hold $1.3 billion notional of forward starting interest rate swaps with starting dates in 2023.
Our economic leverage when including TBA exposure ticked modestly lower during the quarter to 6.5 times debt to equity as we remain conservatively positioned.
Spread widening of nearly 30 basis points since May supports an attractive investment environment in the Agency RMBS sector with ROEs ranging from high single digit on specified pools to mid-teens on TBA.
And we believe valuation should be relatively well supported in the near term despite the reduction in Fed purchases as commercial bank demand remains robust and supply declines. | invesco mortgage capital inc - qtrly earnings available for distribution per common share of $0.10.
invesco mortgage capital inc - qtrly book value per common share of $3.25 compared to $3.21 at q2 2021. | 1 |
With me on the call today are Vic Grizzle our CEO; and Brian MacNeal, our CFO.
Actual outcomes may differ materially from those expected or implied.
Both are available on our website.
I'm pleased to be with you today from our corporate campus in Lancaster, Pennsylvania.
Armstrong, like many companies, is adapting to a new normal of hybrid work activity.
Here at Armstrong, safety protocols are in place and our physical spaces have undergone a first phase of modifications to allow our organization to return to the office safely.
We're actively working on more permanent changes to our facilities, including the use of new ceiling and grid solutions to create healthier spaces for our staff and visitors.
Our manufacturing and distribution facilities continue to operate well and safely.
Quality and service levels are high and our connectivity to customers, enabled by our digital tools, remains excellent.
Overall, demand in the quarter improved sequentially much as we had expected.
On a seasonally adjusted basis, Q3 was 14% better than Q2, down 11% versus 25%.
In addition, we saw sequential improvement within the quarter, as daily Mineral Fiber sales improved from down 15% in July to down 11% in September.
And October has continued this trend and is progressing better than September.
Our top seven territories, which had lagged significantly in the second quarter, returned to the overall national average during the quarter.
But the New York Metro area, our highest AUV territory, continues to lag.
Overall, sales of $247 million were down 11% a quarter versus prior year.
Volume was down 10% and Mineral Fiber AUV was slightly negative.
Positive like-for-like pricing improvement and favorable product mix were offset by negative channel mix and negative territory mix, primarily driven by the lag in New York metro area.
In addition, sales to big box customers were up in the quarter versus 2019, which is good from a volume perspective, but given the lower sales price in this channel, it was also a headwind to mix.
While the overall demand trends in the quarter progressed largely as expected, there were some developments that we observed that I want to share with you to provide context on the market conditions.
As expected, construction activity picked up in the territories most impacted by COVID-related restrictions in the second quarter, namely the seven largest territories we referenced on our last call.
The easing of state and local regulations on job sites and the increasing ability of contractors to work with the newly imposed restrictions both helped this situation.
However, as the quarter progressed we saw delays emerge in previously less impacted territories, namely the South and the Midwest following the migration of the virus.
This shift in regional activity reflects the impact of increasing COVID cases on construction activity and the overall uneven nature of the market reopening.
New construction activity has fared pretty well overall, as existing projects continue toward completion, while smaller and midsized renovation projects experienced greater headwinds.
In our conversations with our customers, it is clear that there remains a lot of near-term uncertainty as building owners work to determine the best path forward to adapt their facilities to enable the safe return of occupants.
This is also true with schools, with some remodel activity remaining on hold, as many students learn from home.
Also in the quarter we continued to experience softness in our low visibility flow business.
These are the small discretionary repair/remodel type projects that flow through our distribution partners and often without a specification.
In addition to the uneven opening of the markets, we also experienced minor business interruptions in the quarter due to protest activity in certain cities and Hurricane Sally which closed our Pensacola, Florida plant for a few days.
The Armstrong team and our partners continue to earn my admiration as they overcome obstacles and continue to deliver for our customers.
Adjusted EBITDA in the quarter of $92 million was down 19% from 2019.
The pandemic-driven volume decline is really the entire story as the business continues to operate well and as expected otherwise.
Brian will provide more details on our financial results in a moment.
But it has been an impressive performance by our operations team in an extraordinary environment.
I could not be more proud of the work that they have done thus far.
Despite the challenges in the market, our strong cash flow performance continues, and we remain on track to deliver over $200 million in adjusted free cash flow.
Based on this continued strong cash flow generation and our confidence to continue to do so, our Board has approved a 5% increase in our regular quarterly dividend to $0.21 per share and we are restarting our share repurchase program.
The third quarter was also notable, in that we completed two M&A transactions.
The previously discussed, acquisition of Chicago-based Turf Design, the leading provider of custom felt-based ceilings and walls and then on August 24, we acquired Moz Designs.
Moz is a Northern California-based designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers.
Moz brings unique capabilities that can be utilized to improve the product offerings of our three existing metal ceiling facilities, and further strengthens our already leading position in the growing category of metal ceilings and walls.
This transaction marks our seventh acquisition since 2017.
We are truly building an unmatched platform of specialty ceilings and walls and we are not done.
Our M&A pipeline continues to grow as we see more and more opportunities to build out the most unique set of capabilities in the industry, and our financial strength allows us to do so.
Today, I'll be reviewing our third quarter results.
Beginning on slide 4, for our overall third quarter results, sales of $246 million were down 11% versus prior year, a significant sequential improvement from the second quarter when year-over-year sales were down 25%.
Adjusted EBITDA fell 19% and margins contracted 370 basis points, again a substantial sequential improvement from the second quarter when year-over-year EBITDA was down 36% and margins contracted 590 basis points.
Adjusted diluted earnings per share of $1.07, fell 22% and adjusted free cash flow declined by $53 million versus the prior year.
I'll address the reasons for this decline in a moment.
Our cash balance at quarter-end was $139 million, and coupled with $315 million of availability on our revolver, positions us with $454 million of available liquidity, down $33 million from last quarter as we completed the Turf and Moz acquisitions during this past quarter, and down $24 million from the third quarter of 2019.
Net debt of $542 million is $4 million higher than last year as a result of our acquisitions, partially offset by cash earnings and the receipt of $19 million from the sale of our Qingpu plant in China, which was idled.
As of the quarter-end, our net debt to EBITDA ratio was 1.5 times versus 1.6 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times, so we have considerable headroom in this measure.
Our balance sheet is in solid shape.
In the quarter, we did not repurchase any shares as our repurchase program remains suspended to preserve liquidity in light of the COVID-19 impact on the market.
Last week, our Board of Directors approved the restart of the program.
Going forward, we will look to return to our customary approach of repurchasing shares subject to our normal processing protocols.
Since the inception of the repurchase program, we've bought back 9.6 million shares at a cost of $596 million for an average price of $62.13.
We currently have $604 million remaining under our share repurchase program, which now expires in December of 2023.
Slide 5, illustrates our Mineral Fiber segment results.
In the quarter, sales were down 14% versus prior year, but sequentially improved from the prior quarter when year-over-year sales declined 26%.
COVID-19 driven volume declines were the key driver.
AUV was a headwind, as positive like-for-like pricing and favorable product mix, were offset by the channel and geographic mix issues that Vic mentioned.
While sales in our key seven territories improved sequentially and converged with the performance in other territories, performance within these key seven territories was inconsistent and was a headwind to overall price and mix for the Mineral Fiber segment.
AUV in the remaining territories was positive.
Adjusted EBITDA was down $20 million or 21% as the volume decline fell through to the bottom line and AUV was a drag.
Continued manufacturing productivity and cost reduction initiatives, lower raw material and energy costs, and SG&A cost management were all positive in the quarter.
WAVE equity earnings were down due to lower sales and also as a result of a year-to-date true-up of allocated costs from Armstrong and Worthington.
Moving to Architectural Specialties segment on slide 6, sales were up 1% as the acquisitions of Turf and Moz contributed almost $8 million in the quarter and offset COVID-driven organic sales decline of 12% which were sequentially better than the 22% decline we experienced in the second quarter.
While current period sales activity was challenged given state and local restrictions, we continue to have exciting wins and have been awarded the Kansas City International Airport and the Princeton University Residential College projects.
These jobs will ship in 2021 and 2022 and demonstrate our continued ability to win complex and iconic projects.
Despite flat sales direct margins expanded significantly driven by the higher margins of the Turf and Moz acquisitions relative to our base business and ongoing productivity in the network particularly at acquired facilities.
Fixed manufacturing costs and SG&A were up driven by the costs of Turf and Moz.
Slide seven shows our consolidated results for the quarter and clearly illustrate the impact of COVID-related volume declines.
Slide eight shows adjusted free cash flow performance in the quarter versus the third quarter of 2019.
Cash flow from operations was down $48 million, largely driven by volume due to COVID-19.
Also in the quarter despite lower income in Q3 2020, we actually paid $14 million more in cash taxes than in the third quarter of 2019.
This is largely driven by timing in certain discrete items in the base period.
Not included in this cash flow bridge are two significantly positive non-recurring cash items.
In the quarter, we applied a $27 million tax refund related to the sale of our international operations.
And we received $19 million from the sale of our closed Qingpu facility in China.
We have received an additional $2 million from the sale in October and this transaction is now complete.
Slide nine shows our year-to-date results.
As you can see sales were down 12%, adjusted EBITDA is down 18%, and adjusted free cash flow is down 16%.
Slide 10 is our year-to-date bridge.
Again, COVID-related volume declines are the main driver followed by the geographic and customer AUV issues we've called out.
For the year product mix and like-for-like pricing are both positive contributors to sales, but mix is a headwind to EBITDA due to geographic and channel mix.
Input costs, deflation and the savings we are driving in manufacturing and SG&A despite our acquisitions helped mitigate the sales fall through the EBITDA.
Slide 11 reflects our year-to-date free cash flow.
As with the quarter, operating cash flow was impacted by volume declines due to COVID-19, the tax refund in Qingpu sales proceeds mentioned earlier are excluded.
Capital expenditures reflects the delaying actions we are taking to finalize or to prioritize cash in the near-term.
Interest expense is lower as a result of our refinancing in September of 2019.
WAVE earnings were impacted by volume declines.
Slide 12 is our guidance for the year.
We now anticipate full year revenues in the range of $920 million to $935 million or down 10% to 11%.
Overall the decline will be entirely volume as we anticipate AUV to be essentially flat for the full year.
EBITDA will be in the range of $320 million to $330 million as the sales decline drops down and is partially offset by productivity and the impact of our cost containment actions.
Actions are in place to drive $40 million to $45 million of savings in manufacturing and SG&A down slightly by $5 million from our previous outlook as we invest for future growth.
Our cash flow guidance is adjusted from our prior outlook as we have taken capital expenditures up, acquired the working capital of Turf and Moz and adjusted the seasonal trajectory of our fourth quarter to account for continued sequential improvement.
These are challenging times but Armstrong is laser-focused on controlling what we can control investing to drive growth and building on an already best-in-class platform.
Our ability to execute two meaningful acquisitions during a global pandemic is testament to our focus and confidence.
I have no doubt that we will emerge on the other side of this crisis in an even stronger position to grow and create value.
Healthy spaces is the dominant topic in commercial construction conversations today.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
And it's a universally known fact that we spend 90% of our lives indoors.
And even though healthy spaces have always been important this pandemic has made it an even greater priority, possibly the highest priority and the standards for which health and safe are measured are being raised to a whole new level.
At Armstrong, we have been the leading supplier of ceilings and spaces where healthy has mattered the most in operating rooms, in ICU wards and other isolation room applications.
Now, we are bringing that experience to today's conversation about creating healthy spaces and how to create one.
We believe a healthy space and safe space is a space that protects us and fosters a feeling of well-being and comfort that allows people to be at their best.
So where do ceilings come in?
You're already familiar with how ceilings play a role in acoustics and aesthetics and in making the most of natural and supplemental light in interior environments, all of which are part of the healthy spaces equation.
As the structural capstone of any space, the right ceiling system can make a meaningful difference by bringing the additional elements of healthy spaces together.
Our ceiling grid and partition solutions contribute to maximizing ventilation and minimizing the transmission of harmful pathogens.
In most buildings, the ceiling system is part of the supply and return air ducting.
We're already very in tuned with that with our current solutions for healthcare spaces.
We are now adapting this technology to be more affordable and effective in the office, the classroom and other settings to meet the new definition and the new standards for a healthy space.
I'm very pleased to introduce a new family of products called 24/7 Defend.
These products represent innovative new solutions against harmful pathogens and other particles in indoor environments.
Our 24/7 Defend product family already includes infusion partitions and CleanAssure disinfectable products, which are proven cleanable products.
What's new is the AirAssure family of gasketed ceiling tile products that self-seal to the grid system and a new integrated VidaShield ultraviolet air purification and ceiling tile system.
When placed in our standard grid system, AirAssure gasketed ceiling panels form a tight seal and reduce air flow leakage into the plenum by 300% over standard ceiling panels.
Reducing air leaks significantly increases the effectiveness of air ventilation and filtration systems allowing more air to flow through the return air vents where it can be filtered and purified and ensuring greater air quality.
In addition to allowing more filtering and cleaning of air vent spaces, AirAssure can also reduce the risk of pathogens traveling between spaces in a building, further protecting a greater number of people.
In addition to offices and healthcare facilities, this is vital for schools and senior living facilities as they are being asked to create more isolation rooms to prevent the spread of infections.
Reducing air leakage with AirAssure is an easy way to retrofit existing rooms and is available with our popular Sustain and Total Acoustics solutions.
Now in a complementary way, the new patented scientifically proven VidaShield system pairs an active ultraviolet air purification system with Armstrong ceiling panels to provide cleaner, safer air in any commercial space.
An unobtrusive drop in ceiling system that draws air into a chamber above the ceiling exposes the air to UV light, neutralizing harmful pathogens and then returning clean air to the room.
VidaShield can be used as a stand-alone solution or for even better results it can be integrated with AirAssure panels.
Together these two new solutions reduce the risk of indoor air transmission of harmful pathogens.
This pandemic is serving as a catalyst to renovating commercial spaces to create healthy and safer spaces unlike anything we've seen before.
And we believe it will continue to evolve for many years to come because healthy spaces are now essential.
These new products are just the beginning of 24/7 Defend family as we have solutions in our innovation pipeline that we will add to this family in the coming quarters.
Armstrong is a clear leader in the commercial construction market and we have been for many, many years.
As the need for healthier buildings evolves, we will be at the forefront driving positive change in our industry.
We believe these changes in the short and long-term will allow market leader like Armstrong to further grow our business and bolster our competitive advantage.
Together with our industry-leading position, our digitalization investments and now with our expanding health spaces platform Armstrong is well positioned for profitable top line growth.
With appending renovation renaissance in the medium-term and a whole new way of thinking about commercial interior spaces longer-term, we are both ready for and excited about the possibilities ahead.
And this is all aligned with our commitment to continue to deliver strong returns for our shareholders and to making a positive difference by creating healthier spaces where people live, work, learn, heal and play. | sees fy 2020 sales $920 million to $935 million.
sees 2020 ebitda of $320 million-$330 million.
quarterly adjusted earnings per share $1.07. | 1 |
I'm joined on the call today by Michael Happe, president and chief executive officer; and Bryan Hughes, vice president and chief financial officer.
These factors are identified in our SEC filings, which I encourage you to read.
We express our hope that each of you and your families are safe and healthy, currently and into the future.
I would like to begin with an overview of the progress made by our team in continuing to transform our company during this unprecedented fiscal year 2020.
We will specifically highlight the macro results of our strong fiscal 2020 fourth quarter and review the strategic drivers critical to that success.
Our final segment will offer some closing thoughts on the state of the outdoor industry, early trends we are seeing in our fiscal 2021 first quarter, which we are already more than halfway through, and our core enterprise strategies for the future.
We will conclude the call, as always, with a question-and-answer session.
Now it is difficult to overstate just how unique the back half of our fiscal 2020 year was from the March through August.
We witnessed the incredible health, societal and economic consequences of the worst global pandemic in more than 100 years.
Critical matters of social injustice rose to the forefront during the summer of 2020, and the depth of our country's political discord seems as magnified as ever.
2020 also witnessed and continues to experience an engagement by Americans in the great outdoors at recently unseen levels.
Our consumers combined the imperative of the safety of their families with our strong desire to be immersed in the experiences they could control and consequently flocked to the outdoor recreation lifestyle like never before.
The outdoor industry, the recreational vehicles industry, the marine industry and Winnebago Industries continues to see record interest in outdoor participation as calendar year 2020 progresses.
I strongly believe that the prevailing theme of fiscal 2020 was that despite all of the chaos we experienced, our 5,500-plus strong Winnebago Industries employees were steadfast in their commitment to safely achieving our strategic goals and also delivering on our golden threads of quality, innovation and service in all that we do.
This team experienced some difficult days in -- as we navigated the worst of the pandemic's impact on our business, and they continue to adhere to the stringent safety protocols we utilize every day.
It is our employees' ongoing commitment to working collaboratively, safely and efficiently that drives our business forward.
They, too, are true heroes as the pandemic drags on, and their efforts remain a constant force against this unfortunate virus.
In fiscal 2020 and especially in our fourth quarter, we made meaningful progress on delivering on our strategic growth initiatives and creating increased value for key stakeholders of our business.
While the acute impact of this year's third quarter impeded our ability to deliver the full-year financial performance, reflective of the momentum we had generated in the first half of the year, the underlying fundamentals of the business remain strong, driven by ongoing and tremendous consumer and dealer demand, which has returned in full force, evidenced by our significant fourth-quarter results.
Throughout the fiscal year, we continued to expand our portfolio, organically and now inorganically, and gain market share behind our four premium outdoor brands.
We successfully completed the acquisition of the Newmar luxury RV business in November of 2019, which added yet another outstanding brand to our Winnebago Industries family and furthered our progress to restore leadership in the Motorhome RV segment through their ever-increasing market share in the Class A Motorized category.
Winnebago Industries also drove organic market share in fiscal year 2020, led once again by the surging Grand Design RV brand and its expanding and highly desired travel trailer and fifth wheel lineups.
Our leading offering of Winnebago-branded Class B vans added almost nine points of market share in fiscal 2020, and heralded some new product launches by our Winnebago Towables team also enabled a significant increase in future orders in that business.
As the pandemic hit our company with unforeseen speed in the middle of March, we, ourselves, took swift and appropriate actions to protect our employees and key stakeholders, while strengthening our solid financial position and ensuring liquidity and flexibility in the face of uncertainty.
While much of our operations were suspended for six weeks in the spring of 2020, we wasted no time reimagining some daily operating processes to ensure a safe return to full operating status in May, which allowed us to react appropriately to begin meeting increased and soon to be record levels of consumer demand in the summer of 2020.
We kept our foot on the accelerator in terms of new product development, worked to create strategic and mutually beneficial relationships with key suppliers and pivoted our portfolio to a committed and confirmed order production system.
These actions and many more set us up to safely and profitably deliver for our end consumers and dealers in the fourth quarter even as a record backlog of new orders accumulated across both our RV and Marine businesses.
Throughout our fiscal year, Winnebago Industries continued to make progress in realizing our vision to be a leading provider of outdoor lifestyle solutions and in creating value for our shareholders and communities.
In fiscal 2020, Winnebago Industries returned $15 million to shareholders through our increase in sustained dividends.
As Bryan Hughes will touch on further, our capital allocation priorities are focused on managing our flexibility and maintaining our solid financial position as we continue to really invest in a disciplined manner in the face of an uncertain economic environment.
We feel confident but remain constantly diligent in the strength of our balance sheet and are pleased with our ability of having delivered positive operating cash flow throughout the fiscal year.
We also maintained our commitment to publishing our first annual corporate social responsibility report for the 2019 calendar year, with the 2020 edition just around the corner later this fall.
These reports highlight our every effort to address the environmental, social and governance issues that impact our employees, our customers and our world and most directly affect the long-term success and sustainability of our business.
It is also indicative of our commitment to developing goals and tracking our progress toward enhanced sustainability.
Additionally, in light of the pandemic and the financial hardship it has put on so many in our communities, Winnebago Industries made a record 7-figure donation to the Winnebago Industries Foundation in fiscal 2020, supporting national partners in its three impact areas: outdoors, access and community as well as some local organizations in our Winnebago Industries hometowns, like those supporting the pandemic first responders and healthcare providers in the communities in which our employees live, work and play.
Turning now to our consolidated financial results.
Our fiscal fourth quarter was a strong finish to the year, reflecting the appeal and the market position of our portfolio of leading outdoor lifestyle brands.
The strides we have made in safety and operational excellence and the value of our collaborative relationships with our supplier partners and our dealer network.
Consolidated revenues for Winnebago Industries were the $737.8 million for the fourth quarter of fiscal 2020, an increase of approximately 39% year over year and a robust 15.3% organic increase, excluding the impact of Newmar.
We saw exceptional demand across our product portfolio as consumers invested in safe outdoor lifestyle solutions once the stay-at-home restrictions began to lift, with standout performance by Grand Design in our Towables segment and Class B sales in our Motorhome segment.
Behind the strength of our Winnebago Grand Design and Newmar brands, and we saw our RV market share gains continue, achieving 11.3% market share on a trailing 12-month basis, which is a full 1.3 percentage points above last year, of which 0.8 percentage points or almost 2/3 is organic.
Remember, this company had less than 3% total market share at the end of 2015.
This continuation of market share gains is especially encouraging since first-time RV buyers make up a larger portion of our purchases these days.
First-time buyers generally gravitate toward more entry-level models where Winnebago Industries portfolio skews toward more premium offerings.
Yet, our market share gains would now reflect that we appear to be competing just fine for these new consumers.
Full-year operating cash flow was $270.4 million, an increase of approximately 102%, reflecting disciplined working capital management and our strong sales momentum throughout the year, despite the acute COVID impact in our fiscal third quarter.
We have continued to be very measured with our cash and have maintained our focus on curtailing expenses and enhancing our liquidity.
Our cash balance rose to $293 million at quarter end.
While really our outlook for continued strong consumer and dealer demand trends are positive, we are closely monitoring the evolution of the pandemic and its economic impacts.
The successful cash management actions that we deployed in the third quarter underscores this high variability of our cost structure and our ability to manage through challenging periods should we face further macro level disruption.
I am also very pleased that Winnebago Industries' overall quarterly adjusted EBITDA margin expanded over 70 basis points in the fourth quarter compared to the same period last year as we continued our focus on excellence in operations and delivered our profitable growth safely.
We reimagined our operating processes to support a safe return to running at high speed throughout our fourth quarter and continuing into fiscal year 2021.
Now let us turn to the segments in more detail.
In the Towables segment, fourth-quarter revenues of $414 million were up approximately 35% from the prior year period, primarily driven by strong demand for safe outdoor lifestyle experiences and the strength of our premium Towable portfolio.
The increasing appeal of Grand Design's products and their tireless focus on quality, innovation and service has allowed us to again outpace the industry.
Our adjusted EBITDA margin was 14.8% in the quarter for the Towable segment, up 110 basis points compared to the same period last year as a result of fixed cost leverage and profitability initiatives.
Backlog increased to a record $747.9 million, an increase of approximately 219% over the prior year period as dealers at the end of August had largely depleted much of their inventories to meet high levels of the consumer demand in the fourth quarter.
Our multi-branded Towables portfolio has continued to be resilient and successful in gaining share.
And we still see vast opportunity for growth as demand trends remain positive, overall market size expands and our dealers will look to restore lot inventory levels, especially with our preferred brands.
Our performance emphasizes that our Winnebago brand and our Grand Design Towables lineups remain strong and reflects the continued appeal of both brands with consumers.
Turning to the Motorhome segment, the addition of Newmar's luxury brand to our Motorhome platform is allowing Winnebago Industries overall to compete more effectively in the Class A and Super C categories and more broadly supporting our priority to restore our Motorhome business to a leadership position.
As demand trends continue and new customers come into the RV lifestyle, our Motorhome segment is headed in the right direction to be also more balanced and competitive than ever and well positioned to capture value going forward.
Fourth-quarter Motorhome segment revenues are $301.8 million were up approximately 50% from the prior year period, driven by those same strong demand trends for safe outdoor family experiences.
Excluding Newmar, organic revenues were $175.5 million, down 12.6% from the same period last year.
You may recall that fourth quarter of fiscal year 2019 saw strong Class B and Class C unit sales as we benefited from more normal chassis availability a year ago.
In fourth quarter of fiscal 2020, our strengthening Class B sales more than offset, by the impact of the COVID-19, our Class A and Class C sales that did not recover as quickly after the shutdown in Q3.
Yet Winnebago, our brand, increased its Class C diesel sales in August and throughout our fiscal year.
Adjusted EBITDA margin for the Motorhome segment increased to 6.4% in the quarter, 100 basis points over the fourth quarter in 2019 because of lower input costs.
Our Motorhome backlog increased to some record $1.1 billion at the end of this August, an increase of approximately 536% from the prior year due to depleted dealer inventory, strong consumer demand and the influx of Newmar orders inorganically.
Our fourth-quarter backlog included approximately 7,000 units of Winnebago-branded Motorhome units alone as dealers see increasing promise in the improving lineup of Motorhome products within that brand.
We have also continue to work closely with our suppliers to ensure that we are supporting them and partnering with them in carefully managing the supply chain with more advanced notice on lead times and overall closer communication.
Likewise, we also continue to validate the incredible amount of orders from our dealer partners and prioritize what they need most to continue to sustain impressive retail momentum in the months ahead.
In fiscal year 2021, we have continued to ensure that we are strategically sourcing from our supplier partners in sustainably, replenishing dealer stocks as possible.
Finally, I will touch on our Marine segment.
Like our RV businesses, Chris-Craft's strong premium brand and market position has propelled it to growth in the fourth quarter as more consumers flock to experiencing the outdoors by boat as well.
The planning process for our capacity expansion at the facility in Sarasota is being considered again as we look to fuel this brand as an integral part of our broader outdoor lifestyle solutions platform.
Summer of 2020 saw record retail for our Chris-Craft brand, the introduction of further new models, a decline in field inventory with its dealer partners and a material increase in backlog orders, stretching deep into spring of calendar 2021.
Fourth-quarter consolidated revenues were $737.8 million.
Revenues, excluding Newmar, were $611.5 million, reflecting an increase of 15.3% compared to the fiscal 2019 fourth quarter, driven by the strong rebound in consumer demand in the Towable segment and Class B Motorized products.
Gross profit was $122.5 million in the fourth quarter, an increase of approximately 47% year over year, reflecting strong growth in the Towable segment and the contribution from Newmar.
Gross profit margin of 16.6% was up 90 basis points compared to the same period of last year due to lower Motorhome segment input costs and Towable segment fixed cost leverage, partially offset by segment mix as a result of the acquisition of Newmar.
Operating income was $68.4 million for the quarter, an increase of approximately 53% compared to the fourth quarter last year.
Fiscal 2020 fourth-quarter net income was $42.5 million, an increase of approximately 33%, compared to $31.9 million in the fourth quarter of last year, driven by the growth in operating income, partially offset by increased interest expense.
The increase in interest expense is related to the convertible bond issued to finance the acquisition of Newmar, and separately, the write-off of certain debt issuance costs associated with the termination of the company's Term Loan B, which, as previously announced, was refinanced by a bond issuance during the fourth quarter.
Our earnings per diluted share was $1.25.
Adjusted earnings per diluted share was $1.45, representing an increase of 45%, compared to adjusted earnings per diluted share of $1 even in the same period last year.
Consolidated adjusted EBITDA was $76.5 million for the quarter, compared to $50.8 million last year, an increase of approximately 51%.
Now turning to the full-year fiscal 2020 results.
And as Mike mentioned earlier, the COVID-19 pandemic and the related shutdown of our operations in the third quarter, combined with the momentary disruption to consumer purchasing patterns, had a significant impact on our results for fiscal 2020.
Consolidated fiscal 2020 revenues of $2.4 billion increased approximately 19% from $2 billion in fiscal 2019, positively impacted by the acquisition of Newmar, which closed in Q1 of fiscal 2020, but negatively impacted by the COVID-19 pandemic and related suspension of manufacturing operations.
Gross profit margin decreased 220 basis points, primarily due to the mix impact of adding Newmar as well as the related purchase accounting impacts and further impacted by COVID-19 and associated deleverage during fiscal third quarter.
Operating income for the year was $113.8 million, compared to $155.3 million in fiscal 2019, and net income was $61.4 million.
Full-year earnings per diluted share were $1.84, a decrease of approximately 48% compared to fiscal 2019.
Adjusted earnings per diluted share was $2.58 for fiscal 2020, compared to adjusted earnings per diluted share of $3.45 in the same period last year.
Fiscal 2020 consolidated adjusted earnings per diluted share excludes costs totaling $25 million or $0.74 of per diluted share after tax related to the noncash portion of interest expense on the convertible bond, Newmar acquisition-related costs, debt issuance cost write-off due to termination of the Term loan B and restructuring costs.
Recall also that reported and adjusted earnings per diluted share was also impacted by the 2 million shares issued as consideration in the Newmar acquisition.
Fiscal 2020 consolidated adjusted EBITDA was $168.1 million, a decrease of 6.4% from $179.7 million in fiscal 2019.
Now, before turning to the individual segments, I wanted to mention that amortization of intangibles for the fourth quarter was $3.6 million.
We currently expect amortization of approximately $3.6 million in each quarter of our fiscal 2021.
Now turning to the individual segments, beginning with the Towable segment.
Towable segment revenues for the fourth quarter were $414 million, up approximately 35% from $307 million in fiscal 2019, primarily driven by strong consumer demand for outdoor experiences.
Notably, Grand Design's resilience and popularity with consumers has again enabled the brand to gain market share.
As of just August, Grand Design's market share was 8.7% of the Towables market on a trailing 12-month basis, representing an increase of 1.5 percentage points over the prior year.
Segment adjusted EBITDA for the fourth quarter was $61.3 million, up approximately 46% year over year and adjusted EBITDA margin of 14.8% increased 110 basis points, primarily due to fixed cost leverage and profitability initiative.
For the full-year fiscal 2020, revenues for the Towable segment were $1.2 billion, up 2.5% from fiscal 2019, reflecting strong results for three quarters of our fiscal year, partially offset by the severe impact of the suspension of manufacturing and consumer disruption due to the COVID-19 pandemic in the third quarter.
Segment adjusted EBITDA for the full year was $148.3 million, down approximately 9% from fiscal 2019.
Adjusted EBITDA margin of 12.1% decreased 160 basis points for the full year, driven again by the COVID-related impacts during our fiscal third quarter.
Next, let's turn to our Motorhome segment.
In the fourth quarter, revenues for the Motorhome segment were $301.8 million, up approximately 50% from the prior year, driven by the addition of Newmar.
Excluding Newmar, segment revenues decreased 12.6% compared to the prior year as a result of strong Class B sales, offset by a decline in Class A and Class C sales due to a slower ramp-up of this business following the COVID-19 pandemic.
Segment adjusted EBITDA was $19.5 million, up approximately 81% over the prior year due to improved profitability in the Winnebago-branded business and the addition of Newmar, partially offset by class mix.
Adjusted EBITDA margin was 6.4%, an increase of 100 basis points over the prior year, primarily due to lower input costs, driven by an improvement in our LIFO reserve of $5 million that was recognized in the quarter.
This reduction in the LIFO reserve was driven by the initiatives that produced a dramatic reduction in inventory in the Winnebago Motorhome business, largely recognized in Q3 and Q4.
For the full-year fiscal 2020, revenues for the Motorhome segment were $1.1 billion, up approximately 50% compared to fiscal 2019.
Revenues, excluding Newmar, were $668.4 million, down 5.4% from fiscal 2019 as a result of manufacturing and distribution disruption due to this COVID-19 pandemic.
Segment adjusted EBITDA for the full year was $32.9 million, up 20% over fiscal 2019, driven by the addition of Newmar.
Adjusted EBITDA margin of 3.1% was down 80 basis points for the full year due to the impact of COVID-19 during our fiscal 2020 third quarter, partially offset by the addition of Newmar.
Turning to the balance sheet.
As of the end of the fiscal year, the company had outstanding debt of $512.6 million, comprised of $600 million of gross debt, net of convertible note discount of $74.3 million and our net of debt issuance costs of $13.1 million.
Working capital was $413.2 million.
Our current net debt to adjusted EBITDA ratio was 1.7 times.
At the end of June, we took an opportunity to restructure the Term loan B portion of our outstanding debt.
The action took advantage of favorable financing rates in the debt markets to add further flexibility to our overall debt position by allowing us to extend maturity dates without any maintenance covenant restrictions.
I'll touch more on this a bit later.
Annual fiscal year 2020 cash flow from operations was $270.4 million, an increase of $136.7 million from the same period of fiscal 2019.
Our disciplined approach to preserving cash was critical in our ability to navigate the COVID-related temporary shutdown in Q3.
We have also made dramatic improvements during the year to the inventory position of the Motorhome business, and this was the primary contributor to the extremely strong cash flow generated this year as compared to last year.
And finally, we continue to maintain a very healthy liquidity position.
As Mike mentioned earlier, our cash balance increased to approximately $293 million at the end of the fiscal year, and we currently have nothing drawn on our $193 million ABL.
The effective income tax rate for the full year was 20.5%, compared to 19.5% for fiscal 2019.
On August 19, 2020, the company's board of directors approved a quarterly cash dividend of $0.12 per share payable on September 30, 2020, to common stockholders of record at the close of the business on September 16, 2020.
This represents a 9% increase from the prior dividend of $0.11 per share.
As Mike mentioned earlier, Winnebago Industries returned a total of $15 million to shareholders during the fiscal year 2020.
The acquisition of Newmar in November introduced $300 million of convertible debt.
In late June, during our fiscal Q4, we refinanced our Term loan B and issued some senior secured notes, also valued at $300 million.
There are a couple of important considerations that are deserving of some additional comments.
The first is that the convertible debt instrument, which matures in 2025, is not prepayable.
The secured notes mature in 2028 and prepaying during the first three years is cost prohibitive.
Second, the convertible note will have a dilutive accounting impact on outstanding shares once the average share price during a reporting period exceeds the conversion price of $63.73.
Since we structured the convertible instrument with our call spread overlay, economic dilution to our shareholders does not materialize until the share price exceeds $96.20.
As such, if our reported earnings per share for a reporting period reflects the dilution required by the accounting rules, our adjusted earnings per share will remove this dilution up until the average share price exceeds $96.20.
And finally, as it relates to our capital allocation priorities, and we continue to prioritize reaching our target leverage ratio of 0.9 to 1.5.
Given the nature of our debt instruments, we will achieve this through the utilization of two levers: through the accumulation of cash and the resulting some lower net debt and increasing adjusted EBITDA over the coming quarters, particularly once we lap fiscal '20 Q3 results.
That concludes my review of our quarterly financials.
Mike, back to you.
The environment we are operating under in our industry and our world more broadly is materially different than the one we imagined when new leadership first presented our enterprise strategies and transformation goals for Winnebago Industries in 2017.
However, I am also pleased to say that despite our annual fiscal 2020 financial results being significantly impacted by COVID-19, the relative performance of our diverse and balanced portfolio during these unprecedented times is a reflection of the progress we've made on our enterprise strategies.
We remain a company moving forward positively, culturally, strategically, financially and now also from a corporate responsibility perspective.
Our transformation efforts have undoubtedly positioned Winnebago Industries to be more competitive in the future in the markets we serve and weather potentially challenging times should they now arise, leveraging our highly variable fixed cost structure and strengthened financial position.
As we look ahead to fiscal 2021, we are encouraged by some ongoing demand trends that we are experiencing.
People are rethinking their recreational priorities and turning to the outdoors as a primary venue for leisure and travel and a safer alternative for gathering with loved ones.
The recent fall 2020 KOA Camping Report confirmed that indeed customers new and experienced have flocked to the outdoors and are recreating in record numbers.
They are broadly confident that many of these consumers will continue to do so in calendar year 2021 as well.
We do not see retail momentum for RVs and boats slowing anytime soon.
And with dealer inventory levels exceedingly low, the need for wholesale shipments to restore a full line offering and selection on lots across America is and we will remain high.
Recently, the Recreational Vehicle Industry Association issued their wholesale shipment forecast for calendar 2020 and calendar 2021.
The 424,000 unit forecast for calendar 2020 or roughly 4.5% overall growth is reasonable in our minds for the 2020 period.
Further, the record number of 507,000 units forecasted for wholesale shipments in calendar 2021 also appears reasonable in our view even considering well-documented and real ongoing supply chain challenges.
Underpinning these shipment assumptions is a belief that there remains enough consumer interest in the outdoor industry to drive low to mid-single-digit percentage retail increases in calendar year 2021 as well.
That is saying something considering the crowd retail in the summer and fall of 2020.
And I can communicate that our September and October RV retail at Winnebago Industries continues to grow at rates similar to what we saw in our fiscal 2020 fourth quarter.
With this backdrop, we look forward to growing our position and share in the market as our customers and end consumers continue to view our brands as a trusted and safe way to have extraordinary experiences as they travel, live, work and play in the outdoors.
Barring any unexpected setbacks related to this COVID-19, macroeconomic strife or hangover from a contentious general election cycle later this fall, we are optimistic that our company's current momentum will continue into our fiscal Q1 and beyond.
Our expectation is that we will be working hard with our suppliers and dealers to efficiently work through our backlog in an intentional urgent but disciplined manner and replenish a portion of the dealer pipeline with quality inventory to meet ongoing consumer demand.
We are selectively investing in additional capacity, assembly and our vertical integration capabilities in fiscal 2021 throughout various businesses, and we'll continue to invest and introduce new products and models to drive preference to our brands.
Now as many on the call are aware, supply chain issues do exist in both the RV and marine industries.
As evidenced by our fourth-quarter performance, we are confident that this multifaceted supply chain challenge will also continue to be managed in a fashion by our team that allows us to compete vigorously for retail and lot space in the market.
The supply chain issues are real, but our enterprise strategic sourcing team is working very closely with our purchasing resources within each business unit to chart a mutually agreeable path forward with our supplier partners.
Candidly, we view this as a competitive and strategic differentiation opportunity versus solely a headwind.
In recent meetings with our board of directors, we have achieved alignment on our enterprise strategies for Winnebago Industries for fiscal year 2021, and we have created an organic long-range strategic and financial plan for the next three fiscal years.
This is a plan our senior leadership and our board of directors are excited about.
Given the continued dynamic nature of the ongoing pandemic and about possible further uncontrollable factors in fiscal year 2021, we will not be releasing our next generation of long-term goals publicly quite yet.
Internally, though, we are aligned, but we will wait for a stronger sense of certainty externally before sharing any of our BHAGs.
In light of our increasing cash flow, we also continue carefully any possible business development opportunities.
These are disciplined assessments -- are always carefully considered with other means of managing our capital assets, and our commitment to drive our net leverage ratio to our desired range remains a priority.
We have established five core enterprise strategies for fiscal year 2021 and beyond here at Winnebago Industries: number one, we will strengthen an inclusive high-performance culture; number two, we will build exceptional outdoor lifestyle brands; number three, we will create a lifetime of customer intimacy; number four, we will drive operational excellence and portfolio synergy; number five, we will utilize technology and information as business catalysts.
Going forward, we remain committed to managing our business in a disciplined fashion, so we are best positioned to build on this momentum, capture the numerous opportunities we believe lie ahead and deliver further value to the customers, communities and shareholders we serve.
I will now turn the line back over to the operator to take questions. | compname reports fourth quarter earnings per share $1.25.
q4 adjusted earnings per share $1.45.
q4 earnings per share $1.25.
q4 revenue $737.8 million versus refinitiv ibes estimate of $722.9 million. | 1 |
I'll now discuss the financial results.
We reported net sales of $279.9 million during the third quarter of 2021, which represents an increase of 32%, compared to $212.1 million during the third quarter of 2020.
The increase was largely due to increased demand across all product lines and operating segments, combined with increased pricing mostly related to pass-through of raw material cost inflation.
More specifically, we posted net sales growth of 20.8% in our North American Fenestration segment; 19.3% in our North American Cabinet Components segment; and 85.8% in our European Fenestration segment, excluding the foreign exchange impact and despite the challenges presented by flooding in Germany during the quarter.
As a reminder, both of our manufacturing facilities in the U.K. were shut down in late March of 2020 and did not resume operations until mid to late May 2020.
We reported net income of $13.7 million or $0.41 per diluted share for the three months ended July 31, 2021, compared to $10.8 million or $0.33 per diluted share for the three months ended July 31, 2020.
The increase in net income was mostly due to higher volumes and improved operating leverage.
However, this improvement was somewhat offset by higher taxes, inflationary pressures, and an increase in SG&A during the quarter, which was mostly attributable to more normalized medical costs combined with an increase in stock-based compensation expense.
tax rate was enacted on June 10, 2021.
The increase from 19% to 25% will not be effective until tax years beginning on or after April 1, 2023.
However, companies are required to include the effects of changes in tax laws in the period in which they were enacted.
Therefore, in Q3, we remeasured the deferred tax assets and liabilities that will reverse in 2023 at a new tax rate of 25%.
So to account for this change, we now estimate our tax rate to be approximately 28% this year.
On an adjusted basis, EBITDA for the quarter increased by 18.8% to $32.9 million, compared to $27.7 million during the same period of last year.
The increase was again largely due to increased operating leverage from higher volumes.
Moving on to cash flow and the balance sheet.
Cash provided by operating activities was $18.5 million for the three months ended July 31, 2021, compared to $45.1 million for the three months ended July 31, 2020.
Free cash flow came in at $12.3 million for the quarter, compared to $40.7 million in Q3 of last year.
Higher inventory balance was the driver for the lower free cash flow during the quarter.
This inventory growth is being driven by increases in raw material pricing and its related valuation, along with the strategic purchasing of some critical raw materials as they become available.
The first item is self-explanatory and it's just the proper valuation at lower of cost or market and the nature of first-in-first-out accounting for inventory.
The building of raw materials is needed to compensate for ongoing supply uncertainty and significant increases in demand.
Despite this pressure on inventory costs, we were still able to both repay $15 million in bank debt and repurchase approximately $1.8 million of our stock during the quarter.
Year to date, as of July 31, 2021, cash provided by operating activities was $47.4 million, compared to $47.6 million for the same period last year.
Free cash flow year to date as of July 31, 2021, was $31.4 million, compared to $26.9 million during the same period of 2020.
Our balance sheet is strong.
Our liquidity position continues to increase, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.2 times as of July 31, 2021.
We will remain focused on managing working capital and generating cash in the near term.
However, we do expect inflation, labor costs, and supply chain challenges to continue pressuring margins throughout the fourth quarter of this year.
We will continue to pass these incremental costs to our customers through index pricing, surcharges, and price increases.
However, there are time lags in each case.
In summary, on a consolidated basis, we are reaffirming net sales guidance of approximately $1.04 billion to $1.06 billion, and adjusted EBITDA of $125 million to $130 million in fiscal 2021.
Not unlike others in the building products space, our fiscal third quarter was affected by significant inflationary pressures and material shortages that impacted manufacturing schedules and taxed our operations.
Late in the quarter, the growth of the COVID delta variant led to a resurgence of illnesses and required quarantines, which further impacted the already tight labor market.
In addition, our plant in Heinsberg, Germany flooded in late July during the dose stating rainfall that fell over Western Europe.
Despite these demanding challenges, we are pleased that we were able to announce another strong quarter of financial results and reaffirm our full-year guidance for fiscal 2021.
Within just 14 days of the storms, the facility was back up and operating at full capacity, and not one customer was shut down because of this weather event.
The team there worked long, hard hours to make sure our customers were supported.
And they did a tremendous job under unbelievably difficult circumstances.
Now looking at the macro environment in North America, demand for windows and doors remains very strong.
Supply chain pressures remain the constraint and have resulted in extended backlogs for our customers and longer lead times for end consumers.
Demand for cabinet components also continues to be strong.
And according to KCMA, the number of average backlog days within the industry has risen to 66.9 days versus prior-year levels of 37.7 days.
Although the summer months in Europe usually bring a slight drop-off in demand due to holiday travel, current demand for our products in the U.K. and Europe remains consistently strong.
This trend continued into the third quarter, and we expect the same through the end of our fiscal year.
From a supply perspective, material shortages continue to present a major operational headwind throughout the quarter.
The biggest challenges remain in most chemical feedstock products and aluminum, and we are seeing allocations and short shipments of orders on a regular basis.
While it is still too soon to tell, these shortages could be exasperated -- exacerbated by the impact from Hurricane Ida.
The rapid rate of material inflation continues to be the largest financial headwind we face.
As a reminder, for the most part, we have contractual pass-throughs for the major raw materials we use in North America but there is often a contractual lag that can generally be anywhere from 30 to 90 days long.
These pricing mechanisms are working but will not be fully realized until we see a flattening or decrease in pricing that allows for the catch-up period.
We anticipate that we will begin to see prices peak and possibly begin to drop toward the end of the calendar year.
At the time when index pricing does turn, there will be pressure on our revenue.
However, we do expect to see improved profitability at that time.
The labor market continues to be tight in every market we serve.
During the quarter, we made progress in our recruiting efforts.
But in North America, we are still looking to fill over 400 open positions.
To improve both retention and employee acquisition, we have increased wages in almost all of our domestic plants.
On an annual basis, we have raised wages in North America by approximately $5.1 million, which is being covered largely by price increases that have been passed on to our customers.
We believe these increases will offset the structural change in the labor market and allow us to remain margin neutral.
We are confident that the wage increases will continue to relieve pressure in this area.
With that said, the growth of the COVID Delta variant and related spike in U.S. COVID cases has certainly added pressure, both because of ongoing positive cases and required quarantines for employees.
I will now provide my comments on performance by segment for our fiscal third quarter.
Our North American Fenestration segment generated revenue of $147.8 million, which was approximately 21% higher than prior-year Q3 and compares favorably to Ducker window shipments growth of 14.2% for the calendar quarter ending June 30, 2021.
Strong demand across all product lines, share gains in our screens business, increased capacity utilization on our vinyl extrusion assets, and an increase in index and surcharge pricing all contributed to the above-market performance.
Adjusted EBITDA of $18.3 million in this segment was approximately 2.4% higher than prior-year Q3.
Volume-related operating leverage, the implementation of annual pricing adjustments, operational improvements, and lower SG&A all contributed to the improved performance year over year.
These items were offset by timing lags for index pricing and higher levels of overtime utilization.
For the first nine months of fiscal 2021, this segment had revenue of $422.1 million and adjusted EBITDA of $55.2 million, which represents year-over-year growth of 23.6% and 38.1%, respectively.
This also represents adjusted EBITDA margin expansion of approximately 340 basis points when compared to the first nine months of fiscal 2020.
Our European Fenestration segment generated revenue of $71.1 million in the third quarter, which is $32.8 million or approximately 86% higher than prior year.
Excluding foreign exchange impact, this would equate to an increase of approximately 68%.
As a reminder, our European facilities were shut down for part of last May.
Robust demand for our products continues in both vinyl extrusion and spacers as the repair and remodel markets in the U.K. and Continental Europe remains strong.
Adjusted EBITDA of $14.4 million for the quarter was $6.7 million better than prior year.
This improvement was driven by prior-year COVID impact, along with volume-related operating leverage and pricing actions, which helped to offset inflationary pressures.
On a year-to-date basis, revenue of $181.9 million and adjusted EBITDA of $38 million resulted in margin expansion of approximately 540 basis points as compared to the first nine months of last year.
In our North American cabinet components segment reported net sales of $61.9 million in Q3, which was $10 million or approximately 19% better than prior year.
Favorable index pricing and high order demand contributed to solid revenue growth in the quarter.
Adjusted EBIT in this segment was $2.5 million, which was $0.6 million less than prior year.
As discussed earlier, the timing lag of our contractual pricing index has added significant pressure on margin percentage for this segment.
Although we are being impacted by this timing lag on hardwood, the inflation impact versus prior year Q3 was somewhat minimized by operating leverage from higher volume, along with incremental price increases on certain products.
Year to date, this timing lag has impacted adjusted EBITDA by $6.4 million.
But if we adjust for this inflation, we would have realized approximately 400 basis points of margin expansion in this segment on a year-to-date basis.
Operational improvements and volume-related leverage gains have helped offset the timing-related material impacts.
And when hardwood prices flatten or drop, we can expect to realize margin expansion at that time.
Unallocated corporate and other costs were $2.2 million for the quarter, which is $1.3 million higher than prior year.
The primary drivers of this increase were stock-based compensation expense, operating incentive accruals, and more normalized medical expenses as compared to 2020.
As Scott discussed, our balance sheet continues to improve.
Our operational teams continue to focus on metrics they can control, and our cash flow profile remains attractive.
Our management team and Board are actively engaged in evaluating our capital allocation strategy for fiscal 2022.
But in the short term, our top priorities are to continue paying down debt and accumulating cash.
There appears to be growing confidence that the current cycle within the building products sector will extend for several years, and we are seeing more and more M&A opportunities across our desk.
Given the strength of our balance sheet, we will evaluate potential acquisitions that are both strategic and accretive to our growth and margin profile.
So despite the near-term supply and inflationary pressures, we continue to outpace 2020 for both quarterly and year-to-date revenue, net income, adjusted EBITDA, and EPS.
We have executed on our plan and we have put the company in a position to capitalize on various paths to create shareholder value.
We remain very optimistic on the future.
And, operator, we are now ready to take questions. | q3 sales $279.9 million versus refinitiv ibes estimate of $272.6 million.
qtrly earnings per share $0.41.
expect inflation, labor costs, and supply chain challenges to continue pressuring margins throughout q4 of this year.
reaffirming net sales guidance of approximately $1.04 billion to $1.06 billion in fiscal 2021. | 1 |
Our consolidated earnings for the second quarter of 2021 were $0.20 per diluted share compared to $0.26 for the second quarter of 2020.
For the year-to-date, consolidated earnings were $1.18 per diluted share for 2021 compared to $0.98 last year.
Now I'll turn the discussion over to Dennis.
I hope your summer is going well and that you're staying safe.
On June 30, Washington State officially lifted most of the remaining restrictions that have been in place during the pandemic.
We're excited to see our local economies continue to recover.
We're experiencing increased loads, and customer growth is steady.
Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variants and case count in our communities.
We're ready and able to successfully adjust our business as needed and also continue to provide care and compassion for those who are struggling.
Now let's look at some highlights from our second quarter.
We had a challenging second quarter, which included an unprecedented heat wave that brought with it several consecutive days of triple-digit record-breaking temperatures across the region.
On June 29, Spokane temperature soared to 109 degrees, setting new record -- a new record high temperature and was even higher in many of our neighborhoods.
That same day, Avista experienced a major increase in customer usage, which resulted in the highest energy usage in our company's 132-year history.
The intense temperatures, combined with record high usage, strained parts of our electrical system and caused some of the equipment that runs our electric grid to overheat.
Six of our 140 distribution substations were impacted.
To prevent the equipment from overloading and to avoid extensive and costly damage to our electric system, we implemented protective outages for customers served by the equipment that was most impacted by the heat.
Over the course of the event, we were able to reduce the impact to customers through system modifications.
We appreciate our customers' patience for those who experienced outages.
Higher customer loads, related to the extended heat wave, were the primary driver for an increase in net power supply cost to serve our customers, which negatively affected the Energy Recovery Mechanism, or ERM.
Overall, we've experienced hotter and drier-than-normal weather across the Pacific Northwest, which contributed to lower-than-normal hydroelectric generation and increased power prices.
For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads.
As a result, Avis Utilities' earnings were below expectations for the second quarter.
AEL&P's earnings met expectations in the second quarter, and they are on track to meet the full year guidance.
It was a strong quarter for our other businesses, which exceeded expectations due to gains on our investments and the sale of certain subsidiary assets associated with Spokane steam plant.
Wildfire resiliency continues to be a focus for Avista.
Our region has experienced extremely dry conditions all spring and summer.
And combined with high temperatures, wildfire risk is high.
In response to these conditions, Avista has been operating in, what we call, dry land mode since late June, and dry land mode decreases the potential for wildfires that could occur when reenergizing a power line.
Normally, under normal conditions, these lines, located in rural and/or forested areas, are generally reenergized automatically.
However, during the current dry weather conditions, Avista's line personnel physically patrol in outage area before a line is placed back into service.
This can require more time to restore service, but it decreases a potential fire danger.
This practice is in line with Avista's wildfire resiliency plan, which was released last year, building on prevention and response strategies that have been in place for many years.
Avista has committed to a comprehensive 10-year wildfire resiliency plan that includes improved defense strategies and operating practices for a more resilient system.
In regards to regulatory matters, we are pleased to have reached an all-party settlement in our Idaho general rate case.
The new rates are fair and reasonable for our customers, the company and our shareholders and will allow Avista to continue receiving a fair return in Idaho.
Our Washington general rate cases continue to work their way through the regulatory process.
Our hearings have been held, and we expect a decision by the end of September.
In Oregon, we expect to file a rate case in the fourth quarter of 2021.
We are confirming our 2021 earnings guidance with a consolidated range of $1.96 to $2.16 per diluted share.
While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista Utilities by $0.10 per diluted share and raise other by $0.10 per diluted share.
For 2022, we are lowering consolidated earnings guidance by $0.15 per diluted share to a range of $2.03 to $2.23 per diluted share.
For 2023, we are confirming our earnings guidance with a consolidated range of $2.42 and to $2.62 per diluted share.
Although we expect to experience headwinds in 2022 from regulatory lag, we are confident that we can meet our earnings guidance for 2023 and earn our allowed return.
Looking ahead, we'll continue focusing on our utility operations, while prudently investing in the necessary capital to maintain and update our infrastructure to provide safe, reliable and affordable energy to our customers and our communities.
I know everybody is sitting on the edges or seat waiting for the Blackhawk's next acquisition, which is a Spokane native.
We got Tyler Johnson, a 2-time Stanley Cup Champion, who is a Spokane native.
So we're pretty excited about that.
There's your Hawks update.
As Dennis mentioned, we're confirming our 2021 earnings guidance, lowering our utility guidance for '21 and also '22 and confirming '23 consolidated guidance.
Our guidance -- I'll spend a little time on that.
Our guidance assume, among other things, a timely and appropriate rate relief in our jurisdictions.
That's very important as we need -- Dennis mentioned, we settled our Idaho case.
We're still awaiting approval from the commissions, which we expect before those rates go into effect September 1.
For 2021, we expect Avista Utilities to contribute in the range of $1.83 to $1.97 per diluted share, and the lower end of our guidance in '21 and '22 for the Avista Utilities is primarily due to increased regulatory lag.
That's due to increase capital expenditures primarily due to growth and higher-than-expected depreciation expense.
But that is, we believe, all timing, and we begin -- as we begin to plan for our next Washington general rate case to be filed early in the first quarter of '22, we expect that to be a multiyear rate plan as required under the new law.
We will seek to include all capital investment through the end of the rate plan period in rates in an effort to earn our allowed return by 2023.
In addition, we have experienced an increase, as Dennis mentioned, in actual and forecasted net power supply cost.
Although the midpoint of our guidance range does not include any benefit or expense under the ERM in Washington, the increase in power supply cost has reduced the opportunity for us to be in the upper half of the guidance range.
And our current expectation for the ERM is a surcharge position within the 90-10 sharing -- company sharing band, which is expected to decrease earnings by $0.08 per diluted share.
And recall, last quarter, our estimate for the ERM for the year was in a benefit position, which was expected to add $0.06 per diluted share.
In addition, we are also absorbing more net power supply cost under the PCA in Idaho.
For 2021, as Dennis mentioned, we expect AEL&P to contribute $0.08 to $0.11.
And we increased the range in our other businesses by $0.10, which really offsets the utility reduction, and that's largely due to a range of $0.05 to $0.08 of diluted share because of investment gains and the gain we experienced from the sale of Spokane Steam Plant.
Our guidance generally includes only normal operating conditions and does not include unusual or nonrecurring items until the effects are known and certain.
Moving on to earnings for the second quarter.
Avista Utilities contributed $0.11 per diluted share compared to $0.26 in 2020.
Compared to the prior year, our earnings decreased due to an increase in net power supply costs, as Dennis mentioned, mainly due to higher customer loads from the heat wave, and we had lower-than-normal hydroelectric generation because of the hot and dry conditions.
Our hydroelectric generation is about 91% of -- our expectations are normal for this year.
The ERM in Washington also moved significantly.
Had a pre-tax expense of $7.6 million in the second quarter of '21 compared to a pre-tax benefit of $0.4 million in 2020.
Year-to-date, we've recognized $3.3 million of expense in '21 compared to $5.6 million in benefit in 2020.
In addition to the higher power supply cost, we also had higher operating expenses in the quarter, mainly due to the timing of maintenance projects, as many of those maintenance projects were delayed in 2020 because of COVID-19, whereas in 2021, we returned to our original schedules and performed that maintenance in the second quarter.
The higher maintenance costs were partially offset by lower bad debt expense as we are continuing to defer bad debt through our COVID-19 regulatory deferrals.
Moving on to capital.
As Dennis mentioned, we're committed to be continuing to invest the necessary capital in our utility infrastructure.
We currently expect Avista Utilities to have increased capital expenditures up to $450 million in 2021 and $415 million in 2022 -- or $445 million in '22 and '23.
That's a $35 million and $40 million increase in '21, '22 and '23, $40 million in '23 as well.
And this is really to support continued customer growth.
Our customer growth's about 1.5%, which is up from 0.5% to 1% in prior expectations.
We expect to issue approximately $140 million of long-term debt and $90 million of common stock, including $16 million that we've already issued through June on the common stock side in 2021.
The increase in long-term debt and common stock is to fund the increased capital expenditures. | compname posts q2 earnings per share $0.20.
q2 earnings per share $0.20.
confirming 2021 consolidated earnings per share guidance with a range of $1.96 to $2.16.
lowering our 2022 consolidated earnings guidance to a range of $2.03 to $2.23 per diluted share.
for 2023, confirming earnings per share guidance with a consolidated range of $2.42 to $2.62. | 1 |
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. | 1 |
As usual, we start today's call with the CFO, who will review Vishay's fourth quarter and year 2020 financial results.
Dr. Gerald Paul will then give an overview of our business and discuss operational performance, as well as segment results in more detail.
We use non-GAAP measures, because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide.
I will focus on some highlights and key metrics.
Vishay reported revenues for Q4 of $667 million, higher than our original expectations, partially due to foreign currency effects.
EPS was $0.26 for the quarter, adjusted earnings per share was $0.28 for the quarter.
During the quarter, we repurchased 2.6 million principal amount of our convertible debentures due 2041 and recognized the US GAAP loss on extinguishment.
I will elaborate on these transactions in a few minutes.
COVID-19 continues to have an impact on our business.
We see strong signs of recovery during Q4.
Similar to the first three quarters 2020, we have identified certain COVID-19 related charges, net of certain subsidies, which are directly attributable to the COVID-19 outbreak.
These items were insignificant to Q2, Q3, and Q4 results, but are added back when calculating our non-GAAP adjusted earnings per share for comparability.
Such measures exclude indirect impacts such as general macroeconomic effects of COVID-19 on our business and higher shipping costs due to reduced shipping capacity.
Revenues in the quarter were $667 million, up by 4.2% from previous quarter and up by 9.4% compared to prior year.
Gross margin was 22.8%, adjusted gross margin excluding COVID cost was 22.9%.
Operating margin was 9%, adjusted operating margin excluding COVID cost was 8.9%.
EPS was $0.26, adjusted earnings per share was $0.28.
EBITDA was $95.0 million or 14.4%, adjusted EBITDA was $96.2 million or 14.4%.
Revenues in 2020 were $2,502 million, down by 6.2% from previous year.
Gross margin was 23.3%, adjusted gross margin excluding COVID costs was 23.4%.
Operating margin was 8.4%, adjusted operating margin excluding corporate costs was 8.5%.
EPS was $0.85, adjusted earnings per share was $0.92.
EBITDA was $352 million or 14.1%, adjusted EBITDA was $364 million or 14.6%.
Reconciling versus prior quarter, adjusted operating income quarter four 2020 compared to adjusted operating income for prior quarter based on $27 million higher sales or $23 million higher excluding exchange rate impact, adjusted operating income decreased by $2 million to $60 million in Q4 2020 from $61 million in Q3 2020.
The main elements were average selling prices had a negative impact of $2 million, representing a 0.3% ASP decline.
Volume increased for the positive impact of $10 million, equivalent to a 4% increase in volume.
Variable cost increased with a negative impact of $4 million, primarily due to increased costs for freight duties and metal.
Fixed cost increased with a negative impact of $5 million, primarily due to the acquisition, and higher year-end repair and maintenance costs.
Inventory impact had a positive effect of $5 million.
Exchange rates had a negative effect of $4 million.
Versus prior year, adjusted operating income Q4 2020 compared to adjusted operating income in quarter four 2019, based on $58 million higher sales or $44 million excluding the exchange rate impact, adjusted operating income increased by $19 million to $60 million in Q4 2020 from $41 million in Q4 2019.
The main elements were average selling prices had a negative impact of $19 million representing a 2.8% ASP decline.
Volume increased with a positive impact of $27 million, representing 10.3% increase.
Variable cost decreased with a positive impact of $9 million.
Cost reductions, lower material prices, as well as improved manufacturing efficiencies more than offset increases in labor and freight costs as well as metal prices.
Fixed cost decreased with a positive impact of $2 million, primarily due to lower travel cost which more than offset inflation.
Inventory impacts had a positive effect of $4 million, exchange rates had a negative effect of $5 million.
2020 versus 2019, adjusted operating income for the year 2020 compared to adjusted operating income for the year 2019.
Based on $166 million lower sales or $180 million lower excluding exchange rate impact, adjusted operating income decreased by $73 million to $214 million -- from $287 million in 2019.
Average selling prices had a negative impact of $71 million, representing a 2.8% ASP decline.
Volume decreased with a negative impact of $53 million, representing 4.2% decrease.
Variable cost decreased with the positive impact of $32 million, cost reductions and lower material prices as well as improved manufacturing efficiencies more than offset increases in labor and freight cost and metal prices.
Fixed cost decreased with the positive impact of $15 million, primarily due to lower travel costs and general belt tightening, which more than offset wage inflation.
Inventory impact had a positive effect of $8 million, exchange rates had a negative effect of $5 million.
Selling, general and administrative expenses for the quarter were $92 million, which includes a net benefits of $0.6 million of subsidies in excess of identified COVID cost.
Selling, general and administrative expenses for 2020 was $371 million, which includes a net benefit of $1.5 million of subsidies in excess of identified COVID costs.
For Q1 2021, our expectations are approximately $103 million of SG&A expenses.
The increase was primarily due to uneven attribution of stock compensation expense, incentive compensation accruals, and wage inflation, which are not completely offset by the impact of our restructuring program.
For the full year, our expectations are slightly above $400 million at the exchange rates of quarter four.
This increase year-over-year is primarily due to the weakening of the US dollar versus our relevant currencies, increased travel cost anticipated in the second half of the year and incentive compensation accruals and wage increases not completely offset by the impact of our restructuring program.
Based on our cost cycle, our SG&A expenses will be at the highest recorded level in Q1.
During the quarter, we were able to repurchase the final $3 million principal amount of our convertible debentures due 2041.
Last Thursday, we completed the redemption of our convertible debentures due 2040, of which only $300,000 principal amount is outstanding.
These actions complete the programs we have undertaken over the past three years to retire the convertible debentures due 2040, 2041, and 2042, which had certain tax attributes, which were no longer efficient after US tax reforms.
We continue to have a series of convertible notes outstanding, which are due in 2025, while we did not be purchase any of our convertible notes due 2025 during quarter four.
During 2020, we opportunistically repurchased $135 million principal amount of the convertible notes due 2025.
The average repurchase price for the notes was 95.3% of face value.
By reducing our fixed term debt, repurchase of the convertible notes provides us with future flexibility to better utilize our revolver and to adjust our debt levels as necessary.
We continue to be authorized by our Board of Directors to repurchase up to an additional $65 million of convertible due 2025, subject to market and business conditions, legal requirements, and other factors.
We had total liquidity of $1.5 billion at quarter end.
Cash and short-term investments comprised $778 million and the useful capacity on our credit facility is approximately $730 million.
Our debt at year-end is comprised primarily of the convertible notes due 2025.
The principal amount or face value of the convert is $466 million.
The carrying value of $395 million net of unamortized discount and debt issuance costs.
There were no amounts outstanding on our revolving credit facility at the end of the year.
However, we did utilize revolver from time to time during Q4 to meet short-term financing needs and expect to continue to do so in the future.
No principal payments are due until 2025 and the revolving credit facility expires in June 2024.
Vishay will early adopt the new accounting standard for convertible debts, effective January 1, 2021.
First on to the new standard, our convertible debt will no longer be bifurcated into debt and equity components and we will no longer be required to amortize the related debt discounts as non-cash interest expense.
This means that our reported debt balance will increase to approximately the face value of the convert.
It also means that our US GAAP interest expense will decrease to approximate the cash coupon.
We expect interest expense for Q1 to be approximately $4.4 million.
The new standard also requires application of the if-converted method for earnings per share share count, which would have added 14 million shares to our diluted earnings per share share count.
In response to this and consistent with our previously stated intention to net share settle, we amended the indenture for the convertible notes due 2025, requiring Vishay to pay the principal amount of any converted note in cash with any additional conversion value settled in shares of common stock.
This results in a similar impact on the diluted share count to that which was achieved under the old standard when assuming net share settlement.
Total shares outstanding at quarter end were 145 million.
The expected share count for earnings per share purposes for the first quarter 2021 is approximately 145 million.
Our global cost reduction programs that were announced in mid 2019 have now been fully implemented with lower cost of approximately $15 million annually.
The full-year effective tax rate on a GAAP basis was approximately 22%.
The full year normalized tax rate was approximately 21%.
Both the quarters mathematically yield the tax rate of approximately 19% for GAAP and approximately 11% normalized.
Our year-to-date GAAP tax rate includes the unusual tax benefits related to the settlement, some of the convertible debentures from Q1 and Q4 and an adjustment to uncertain tax positions $4 million in Q4.
Our year-to-date normalized rate excludes the unusual tax items as well as the tax effects of the pre-tax loss and extinguishment of debt, the identified COVID costs and the Q2 restructuring charge.
Our effective tax rate for the full year was lower than we expected at the end of Q3 due to changes in certain processes and business practices, as we continue to adapt our financial and capital structure in response to US tax reform.
We expect our normalized effective tax rate for 2021 to be between 22% and 24%.
Our consolidated effective tax rate is based on an assumed level of mixed income among our various taxing jurisdictions.
A shift in income could result in significantly different result.
Also a significant change in tax laws or regulations could result in significantly different result.
Cash from operations for the quarter was $126 million, capital expenditures for the quarter was $53 million, free cash for the quarter was $73 million.
For the year, cash from operations was $315 million, capital expenditures were $124 million, but approximately for expansion $83 million, for cost reduction $9 million, for maintenance of business $32 million.
Free cash generation for the year was $192 million.
The year includes $60 million cash taxes paid related to cash repatriation plus $15 million cash taxes paid for the current year instalment of the US tax reform transition tax.
Vishay has consistently generated in excess of $100 million cash flows from operations in each of the past now 26 years and greater than $200 million for the last now 19 years.
Backlog at the end of quarter four was at $1,240 million or 5.6 months of sales.
Inventories increased quarter-over-quarter by $1 million, including an exchange rate impact.
Days of inventory outstanding were 79 days.
Days of sales outstanding for the quarter were 45 days.
Days with payables outstanding for the quarter were 31 days, resulting in a cash conversion cycle 94 days.
The year 2020 for Vishay and its business partners has been overshadowed by a completely new experience, a global pandemic.
During the year, there were several phases of the pandemic impacting our business in very different ways.
From numerous plant shutdowns mainly in Asia and temporary shortages of supply in the early part of the year over drastic negative reactions of many customers in particular in the automotive segment in the second quarter to an extremely steep and broad recovery of orders since October.
Vishay managed to adapt to a fast-changing economic environment fairly well, keeping up efficiencies, minimizing fixed costs, controlling inventories, and capex.
Vishay in 2020 achieved a gross margin of 23.3% of sales versus 25.2% in 2019, and adjusted gross margin of 23.4% of sales versus 25.2%.
Operating margin of 8.4% of sales versus 9.8% in 2019, and adjusted operating margin of 8.5% versus 10.7% in 2019.
Earnings per share of $0.85 versus $1.19 in 2019 and adjusted earnings per share of $0.92 versus $1.26 in 2019.
The generation of free cash also in 2020 remained on a quite excellent level.
We in 2020 generated free cash of $192 million, which includes taxes paid for cash repatriation of $16 million.
The fourth quarter, while benefiting from an accelerated economic recovery, suffered from higher than expected freight costs and metal prices.
Additionally, the US dollar weakened versus practically all currencies in which we just incurred costs, but achieved no sales.
Vishay in the fourth quarter achieved gross margin of 22.8% of sales versus 23.7% in Q3, adjusted gross margin of 22.9% versus 23.7% in Q3.
Operating margin of 9% of sales versus 9.6% in the third quarter, adjusted operating margin of 8.9% versus 9.6% in Q3.
Earnings per share of $0.26 versus $0.23 in quarter three and adjusted earnings per share of $0.28 versus $0.25 in Q3.
Currently, the economic environment for electronics in general can be expressed as friendly to booming.
The pandemic even raised its consumption in several market segments and automotive came back to the full extent.
There is some economic -- some economic recovery was already seen in the third quarter, but now it has developed quite drastically in the course of the fourth quarter.
In particular, distribution contributed and continues to do so, also driven by some anxieties, concerning potentially upcoming shortages of supply.
We have realized reduced price pressure across the board and lead times in general are stretching out.
All regions enjoyed growth in the quarter, lead by automotive and distribution in Europe.
There is a strong continued broad performance in Asia, and growth is also in the Americas to be seen, despite the weakness of oil and gas and commercial avionics.
Global distribution currently is very confident, concerning the short and mid-term business outlook.
In fact, there is growing nervousness concerning the availability of components in particular of semiconductors.
In the year 2020, POS of global distribution was 3% below 2019, mainly due to a very weak second quarter.
POS in quarter four 2020 on the other hand was 4% over prior quarter and 9% over prior year.
POS in quarter four was strong in particularly in Asia, with 9% above prior quarter, whereas in Europe and in Americas, POS remains virtually on the levels of the third quarter.
Distribution inventories in the fourth quarter came down again by $24 million.
Inventory turns of global distribution increased to 3.1 from 2.8 in prior quarter.
In the Americas, 1.6 turns after 1.5 in Q3 and 1.4 in prior year.
In Asia, 5.0 after 4.3 in Q3 and 3.3 in prior year.
In Europe, 3.2 after 3.0 in Q3 and 2.8 in prior year.
What can be stated is that Asian distribution has a very low inventory level currently.
Coming to the industry segments, continued strong orders come from automotive, as OEMs attempt to recoup volume lost during the second quarter closures.
Production volumes of light vehicles are approaching pre-Corona levels, but the electronic content has grown and continues to do so.
Advanced driver-assist systems, 48V hybrid systems, autonomous driving and in particular electric vehicle charging programs boost the volume.
Industrial continues to provide major growth opportunities, despite the present weakness of the oil and gas sector.
Industrial automation, new power generation and transmission systems as well as increased residential development propel growth.
The market for computers and related products remains remarkably strong, driven by continued demand for tools to support global work from home trends.
The AMS sector continues to be burdened by an extremely weak market for commercial avionics, will remain.
For Telecom, we for the mid-term continue to expect the major upstream in the context of the introduction of 5G, more short-term 4G systems will continue to grow.
Quarantine restrictions favor consumer products in general and medical continues to show stable growth.
Let me comment on our business in the fourth quarter in particular, mostly due to a high demand from distribution Q4 sales, excluding exchange rate impact came in slightly above the upper end of our guidance.
We achieved sales of $667 million versus $640 million in prior quarter and $610 million in prior year.
Excluding exchange rate effects, sales in the fourth quarter were up by $23 million or by 4% versus prior quarter and up versus prior year by $44 million or by 7%.
Sales in the year 2020 were $2,502 million versus $2,668 million in 2019, a decrease of 7%, excluding exchange rate effects.
The book-to-bill ratio in the fourth quarter, may I say jumped really to 1.44 from 0.99 in Q3, mainly driven by Asian distribution; 1.89 book-to-bill for distribution after 0.99 in Q3, 0.96 for OEMs after 1.01 in Q3.
1.61 for semiconductors after 0.98, 1.27 for passives after 1.0.
1.15 for the Americas after 0.92 in Q3.
1.75 for Asia after 1.04 in Q3.
And finally, 1.27 for Europe after 1.01 in Q3.
Backlog in the fourth quarter climbed to an extreme high of 5.6 months after 4.3 in quarter three, 6 months in semis after 4.3 in the third quarter and 5.2 months in passives after 4.4.
There is further decrease in price pressure 0.3% prices down versus prior quarter and 2.8% down versus prior year.
In semis, there's less price pressure due to the current high demand minus 0.2% prices versus prior quarter, minus 3.9 versus prior year.
Passives price decline is on normal levels 0.5 down versus prior quarter and minus 1.7% versus prior year.
Some comments on operations.
In 2020, we were not completely able to offset the normal negative impacts on the contributive margin by cost reduction and by innovation, despite good manufacturing efficiencies.
During the year, we suffered from increasing transportation costs, increasing metal prices and in particular in the fourth quarter from the impact of a weakening US dollar.
Adjusted SG&A costs in the fourth quarter came in at $93 million, $2 million below expectations, when excluding exchange rate effects.
Adjusted SG&A costs for the year 2020 were at $373 million, 15 million or 4% below prior year at constant exchange rates, mainly due to less traveling and general belt-tightening.
Manufacturing fixed cost in the fourth quarter came in at $133 million, in line with expectations when excluding exchange rate effects.
Manufacturing fixed cost for the year 2020 were $513 million flat versus prior year at constant exchange rates.
Total employment at the end of 2020 was 21,555, 4% down from prior year.
Excluding exchange impacts, inventories in the quarter remained virtually flat.
Inventory turns in the fourth quarter improved to 4.6 from 4.4 in the prior quarter.
In the year 2020, inventories were flat versus prior year.
Inventory turns for the entire year 2020 were at a very satisfactory level of 4.3.
No change to prior year.
Capital spending in 2020 was $124 million versus $157 million in prior year, $83 million for expansion, $9 million for cost reduction, and $32 million for maintenance of business, some acceleration vis-a-vis previous expectations of programs had been required in view of the sharply increasing orders.
For 2021, we expect increased capex of about $175 million, required to fulfill a strong demand.
Concerning cash flow generated, we generated in 2020 cash from operations of $315 million, including $16 million cash taxes for cash repatriation compared to $296 million cash from operations in 2019, including $38 million cash taxes for cash repatriation.
We generated in 2020 free cash of $192 million including $16 million cash taxes for cash repatriation, compared to a free cash generation of $140 million in 2019, including $38 million cash taxes for cash repatriation.
I think we can say that Vishay also in a year of an unprecedented economic destabilization has continued to live up to its reputation as an excellent and variables producer of free cash.
Let me go to our main product lines and as that is always with Resistors.
The Resistors, we enjoy a very strong position in the auto, industrial, mill and medical market segments.
We offer virtually all Resistor technologies.
Vishay's traditional and historically growing business in the second quarter had suffered substantially from the weakness, especially in automotive, but now is in process of a fast recovery.
Sales in the fourth quarter were $161 million, up by $15 million or by 10% versus prior quarter and up by $8 million or 5% versus prior year, all excluding exchange rate impacts.
Sales in 2020 of $606 million were down by $56 million or by 8% versus prior year again, excluding exchange rate impacts.
Book-to-bill in the fourth quarter for Resistors was 1.24 after 1.06 in prior quarter and backlog for Resistors increased from 4.5 months to 4.9 months.
Due to higher volume, gross margin in the quarter increased to 26% of sales from 24% in prior quarter.
Gross margin for the year 2020 was at 25% of sales down from 28% in 2019 due to still lower volume.
Inventory turns in the fourth quarter were at 4.5.
Inventory turns for the full year were at a good level of 4.1.
Low price decline for Resistors minus 0.1% versus prior quarter and minus 2% versus prior year.
The acquisition ATP is in process to be integrated and we do expect a successful year 2021, based on more volume and on an even higher focus on specialty products.
Coming to Inductors, the business consists of power inductors and magnetics since years our fast growing business with Inductors represents one of the greatest success stories of Vishay.
Exploiting the growing need for investors in general, Vishay developed the platform of robust and efficient power inductors and leads the market technically.
With the Magnetics, we are very well positioned in specialty businesses, demonstrating steady growth.
Sales of inductors in Q4 were at $75 million, down by $4 million or 6% versus prior quarter and down by $2 million or 3% versus prior year, excluding exchange rate impact.
Sales in 2020 of $294 million were slightly down versus prior year by $6 million or by 2%, again excluding exchange rate impacts.
The temporary slowdown of automotive in 2020 also had an impact on the growth of Inductors.
Book-to-bill in quarter four for Inductors was 1.03 after 0.96 in prior quarter.
The backlog is at 4.6 months after 4.3 months in prior quarter.
Gross margin in the quarter was at 30% of sales, down versus prior quarter, which was at 34% of sales, but this has been a record.
The exchange rate and higher transportation cost burdened to performance in the fourth quarter to a degree.
Gross margin for the year 2020 was at excellent 32% of sales, virtually on the same level as in prior year.
Inventory turns in the quarter were at a very high level of 5.0 as compared to 4.6 for the whole year.
We planned for some inventory additions for supporting service.
There is some price pressure predominantly at power inductors minus 1.7% versus prior quarter at minus 3.6% versus prior year.
We continuously expand our manufacturing capacitors for power inductors and we do expect to return to traditional growth rates in 2021 and ongoing financial success in our Inductor lines.
Coming to Capacitors, our business with Capacitors is based on a broad range of technologies with a strong position in the American and European market niches.
We enjoy increasing opportunities in the field of power transmission and of electric cars namely in Asia, especially in China.
Sales in Q4 were $92 million, 2% below prior quarter and 6% below prior year, which excludes exchange rate effects.
Year-over-year Capacitor sales decreased from $423 million in 2019 to $362 million in 2020 or by 15% at constant exchange rates.
This was strongly impacted by delays of governmental projects and by a non-repetition of a specific 2019 program, two things came together.
Book-to-bill ratio in quarter four was 1.54 after 0.95 in the previous quarter.
We received now a large order or large orders for power capacitors from China.
The backlog increased substantially to 6.2 months from 4.4 months in Q3.
Gross margin in the quarter was at 18% of sales, down from 20% mostly due to a less favorable mix.
Gross margin for the year 2020 was at 19% of sales, down from 22% in 2019 due to lower volume.
Inventory turns in the quarter increased to 3.8 as compared to 3.6 for the whole year.
Prices were stable minus 0.2% versus prior quarter and plus 0.4% versus prior year.
We do expect increased volume and better profitability in 2021.
Vishay's business with Opto products consists of infrared emitters, receivers, sensors and couplers as well as of LEDs for automotive applications.
The business in 2020 experienced a significant recovery from disappointing results in prior year that had been burdened by major corrections in the supply chain.
Currently, we see a really sharp increase in demand.
Sales in the quarter were $68 million, 5% above prior quarter and 29% above prior year at constant exchange rates.
Year-over-year sales with Opto products went up from $223 million to $237 million or by 5% when excluding exchange rate effects.
Book-to-bill in the fourth quarter was 1.46 after 0.97 in the prior quarter and the backlog increased substantially to 5.9 months after 4.6 months in the third quarter.
Gross margin in the quarter came in at satisfactory 28% of sales after 33% in the third quarter, which had been a spike.
Gross margin for the year 2020 recovered to a level of 28% of sales as compared to 24% in prior year, which had been depressed primarily due to low volume.
Very high inventory turns of 6.0 for Opto products in Q4 as compared to 5.5 in the year 2020.
Prices were fairly stable, in fact 1.2% up versus prior quarter and minus 1.1% versus prior year.
We remain confident that Opto products going forward will contribute noticeably to our growth and we are in process to modernize and expand our higher growth in Germany.
Diodes for Vishay represents a broad commodity business, where we are largest supplier worldwide.
Vishay offers virtually all technologies as well as the most complete product portfolio.
The business is in very strong position in the automotive and industrial market segments and keeps growing steadily and profitably since years.
Diodes for a few quarters had suffered from too high inventory levels in the supply chain and from the weakness of its main markets.
Now the business has entered the phase of strong recovery.
We currently see a fairly dramatic upturn in demand.
Sales in the quarter were $139 million up by $15 million or about 12% versus prior quarter and up by $14 million or 11% versus prior year, which excludes exchange rate effects.
Year-over-year sales with Diodes decreased still from $557 million to $503 million, a decline of 10% at constant exchange rates.
Book-to-bill ratio in Q4 climbed abruptly to 1.65 after 1.05 in the third quarter.
Backlog increased to 6.2 months from 4.7 months in prior quarter.
Gross margin in the quarter improved to 18% of sales as compared to 17% in the third quarter.
Gross margin in the year 2020 was at 18% of sales, down from 20% in prior -- down from 20% in prior year due to substantially lower volume.
Inventory turns increased to 4.8, as compared to 4.4 for the whole year.
We see a reduced price pressure, stable prices plus 0.2 really versus prior quarter at minus 3.7% versus prior year.
We expect profitability of Diodes to return to more historic levels with increasing volume.
Vishay is one of the market leaders in MOSFETs transistors.
With MOSFETs, we enjoy a strong and growing market position in automotive, which in view of an increased use of MOSFETs and automotive will provide a successful future.
We currently experience like in Diodes, a quite dramatic increase in demand.
Sales in the quarter were $132 million, 2% below prior quarter, but 12% above prior year at constant exchange rates.
Year-over-year sales with MOSFETs decreased slightly from $509 million to $501 million by 2% excluding exchange rate impacts.
Book-to-bill went up sharply to 1.64 in the quarter after 0.93 in quarter three.
Backlogs climbed to 5.7 months as compared to 3.7 months in the third quarter.
Gross margin in the quarter was at 22% of sales.
No change from prior quarter.
Gross margin in the year 2020 came in at 23% of sales, a reduction from 25% in 2019 due to a combination of higher metal prices and inventory reduction.
Inventory turns in the quarter were 4.3 as compared to 4.0 for the entire year.
Price decline is relatively normal minus 1.2% versus prior quarter, minus 5.6% versus prior year.
But given the high market demand, we expect prices to stabilize going forward.
MOSFETs in general remain key for Vishay's growth going forward.
I think there is no need to emphasize that 2020 has been a year of unprecedented challenges for the people globally, for the economy in general, and naturally also for Vishay.
Nevertheless, the following should be highlighted.
Electronic components continue to be a success story, also during difficult times.
Vishay is a remarkably stable enterprise that reacts quickly and professionally to changes that has a viable business model and pursues its strategies also during times of severe challenges.
We remain excited about the fairly overwhelming opportunities electronics increasingly will enjoy in the future.
Vishay is prepared to participate to the full extent.
Fortunately, concerning the pandemic, there is light at the end of the tunnel and we, despite still existing obstacles, expect the strong year 2021.
For the first quarter, we at quarter four exchange rates guide to a sales range between $705 million and $745 million at the gross margin of 25% of sales, plus/minus 60 basis points.
We will now open the call to questions.
Shelby, please take the first question. | compname reports q3 adjusted earnings per share of $0.63.
q3 adjusted earnings per share $0.63.
q3 earnings per share $0.67.
q3 revenue $814 million.
sees q4 2021 revenues of $805 to $845 million. | 0 |
Today, I'm joined by President and Chief Executive Officer, Lal Karsanbhai; Senior Executive Vice President and Chief Financial Officer, Frank Dellaquila; and Executive Vice President and Chief Operating Officer, Ram Krishnan.
Please join me on Slide two.
Turning to Slide three.
I'd like to briefly highlight that Emerson has been publishing a corporate social responsibility report for many years now.
We have renamed the report The Emerson Environmental, Social and Governance Report and are excited to highlight all of the goals, momentum and global standards that our organization is working toward.
In particular, our environmental sustainability framework, greening of Emerson, by Emerson and with Emerson, captures our internal sustainability efforts, our enablement of our customer sustainability journeys through our products and solutions and our collaboration efforts with various sustainability stakeholders.
I encourage you to review the document next month when it is published.
I'd like to briefly mention our recent Emerson Exchange Virtual Series, which took place from November through March.
Emerson Exchange is a chance for our customer base to interact with other users, industry experts and Emerson technology leaders.
Despite the obvious in-person limitations of the pandemic, Emerson had a tremendously successful virtual engagement with customers, focusing on digital transformation, sustainability, technology and many other topics.
This virtual framework dramatically expanded the reach of this already very popular user event.
Due to the success of the hybrid format, we will likely be adopting such a format going forward.
More details to follow as the time and place for the next Emerson Exchange event is finalized.
Over to you, Lal.
I would like to say a few things before passing it on to Frank.
Firstly, to our global team, three things.
This was one that was delivered based on strong execution, which required agility and creativity as we jumped over a number of hurdles over the last three months.
The result was top-class profit leverage over 40% across our operations, well done by everyone.
Momentum is building, and it's more broadly today and across a large number of our markets than it was three months ago.
This expansion across both platforms, now as the cycle expands, will enable us to make critical technology investments, building on our strong differentiation and customer relevance.
You energize me every day in the journey and on the journey that we're taking together.
Secondly, I would like to recognize David Farr, who stepped -- whose Board service concluded today after more than 20 years.
Jim is a highly qualified independent director who is extremely passionate about people, culture and the future of Emerson.
I look forward to working alongside Jim and our entire Board.
Frank, over to you.
We had a strong quarter, and I'd like to take you through the highlights of that over the next several slides.
The strengthening recovery that Lal referred to in most of our end markets, combined with the benefits from our cost reset actions, drove strong operating performance and strong financial results in the second quarter.
Adjusted earnings per share for the quarter was $0.97, ahead of our guidance midpoint of $0.89 and representing 9% growth versus the prior year.
Demand strengthened significantly with sales ahead of expectations at 2% underlying growth and March orders toward the high end of expectations at 4% underlying growth.
Within that growth number for the orders, significantly, Automation Solutions continues its steady improvement in both orders and sales, while Commercial & Residential Solutions continues to experience robust demand across all its lines of business and in all geographies with 11% sales growth and 21% orders growth for the trailing three months through March.
The cost reset benefits for the program that we implemented almost two years ago are being realized as planned, driving adjusted segment EBIT growth of 15% and 150 basis points of increased margin to 19.1%.
Additionally, cash flow continues to be strong, up 37% year-over-year with free cash flow up nearly 50%.
This represents 125% conversion of net earnings.
We continue to execute on the remaining elements of our cost reset actions.
With the bulk of it behind us at this point, we initiated $21 million of additional restructuring in the quarter.
Please turn to the next slide, if you would, for comments on the EPS, the earnings per share bridge.
Operational performance was very strong in the quarter, adding $0.14 to adjusted EPS.
As we guided in February, stock compensation was a significant headwind in the quarter due to the mark-to-market impact, which was caused by the difference in the share price at the end of last year's second quarter and this year's second quarter.
Of course, you'll recall that last year, share prices in general were all severely depressed with the onset of COVID and we closed last year's second quarter at $48 versus $90 this year.
And that headwind was within $0.01 of the guidance that we gave you in February.
Tax, currency and other miscellaneous items netted to about $0.04 of tailwind and a small impact from share repurchase.
So in total, again, adjusted earnings per share was $0.97 versus the guide of $0.89.
Please go to the next slide for comments on the P&L.
So as I mentioned, underlying sales growth exceeded expectations at 2% and it was 6% on a reported basis, including acquisitions and currency.
Gross profit slipped just a bit, 10 basis points, mainly due to business mix, given the growth in our Commercial & Residential Solutions business.
SG&A increased by 10 basis points, but the real story here is that excluding the stock compensation impact, operationally, it was down 220 basis points, indicative of the magnitude of the cost reduction activity and the flow-through of the benefits.
We had very strong leverage on SG&A, and the spend was actually down year-over-year when you exclude the impact of the stock comp.
Adjusted EBIT margin was 18.2%, and our effective tax rate was within one point of last year.
Share count at 603 million.
And again, adjusted earnings per share at $0.97.
If you please turn to the next slide, we'll talk about earnings and cash flow.
Adjusted segment EBIT increased 15% with the margin increasing 150 basis points to 19.1%, as I said earlier.
Leverage on the volume and cost reset benefits offset the material cost headwinds that we did see in the quarter.
Again, stock comp was nearly a $100 million headwind.
It was partially offset by some other corporate items.
Adjusted pre-tax earnings were down 20 basis points to 17.3%, again, as the impact of the mark-to-market on the stock comp [Indecipherable].
Operating cash flow was very strong, almost a record again at $807 million, up 37%.
Free cash flow at $707 million was up 48%, driven by the strong earnings and favorable balance sheet items.
Lastly, trade working capital was down to 16.8% of sales as the impact and the distortions from the COVID-related volume decline are beginning to normalize and as the businesses do a good job managing inventory as we return to growth.
Please turn to the next slide, we'll go through Automation Solutions.
Orders continue to turn upward here.
We were at negative 5% on a trailing three-month basis, making good progress, and we're on the trajectory that we have been mapping out for several months.
Underlying sales were above expectations at negative 2%, and we're encouraged to see the continued sequential improvement in order rates underpinning the sales.
China was very strong, and they were favorable comps, but also due to good strength in discrete, chemical and energy markets.
Our demand in North America improved sequentially, but it did lag other world areas.
However, there are noteworthy pockets of growth, very encouraging signs in both discrete, life science, food and beverage and power generation.
Importantly, we also continue to see increasing KOB3 activity across our process automation customer base, driven by increased STOs and focused spend on opex and productivity.
Margin in the platform increased 180 basis points of adjusted EBIT, 230 basis points at adjusted EBITDA driven by the cost reset savings.
The OSI integration continues to go well.
The expected synergies are being realized, and we are increasingly encouraged in validating the case that we made for the acquisition when we did it last October.
Backlog is roughly flat sequentially at $5.3 billion, but it is up 14% year-to-date.
Please turn to the next slide, where we review Commercial & Residential Solutions.
The story here is very, very strong growth.
Orders continue to strengthen with the March underlying trailing three-month rate at 21%.
The demand is primarily driven by ongoing strength in residential end markets, but significantly cold chain, professional tools and other commercial and industrial markets are also picking up and contributing to the growth.
All businesses in all regions were positive, indicative of the trend.
Strong growth in China, over 50%, was attributable to commercial HVAC and cold chain demand in addition to the favorable comp.
Europe grew 9% on the strength of continued demand for heat pumps and other energy-efficient sustainable solutions.
Margins improved 40 basis points at the adjusted EBIT level.
Cost reduction benefits were somewhat offset by price/cost headwinds, which we'll discuss a little more when we cover the guidance.
Commercial & Residential backlog has increased almost 60% year-to-date to about $1 billion.
This is about $400 million above what we would consider normal for this business.
Operations are working through the significant challenges to meet strong customer demand across most of the businesses in this platform.
Please go to the next slide, and we'll talk about the updated guidance for the year.
Based on the strength we see in orders, the increasing pace of business, we are very encouraged and we are improving our sales outlook for the year.
We now expect underlying sales in the range of 3% to 6% overall, with Automation Solutions roughly flat and Commercial & Residential up in the 12% to 14% range.
The stronger volume will drive improved profitability.
We now expect 17.5% adjusted EBIT margin for the entire enterprise.
Cash flow was also projected higher at $3.3 billion operating cash flow and $2.7 billion of free cash flow, an increase of $150 million.
Our tax, capital spending, dividend, share repurchase assumptions remain as they were.
We're raising adjusted earnings per share guidance by $0.20 at the midpoint from $3.70 to $3.90, and we're tightening the range to plus or minus $0.05 from plus or minus $0.10.
We're doing this, increasing the guidance in the face of additional headwinds to profitability, because we're very encouraged by the underlying strength of the business and the read-through of the cost reset actions that the business has been working very diligently now for almost two years.
The additional headwinds, you can see in the margin there on the right of the slide, mainly $50 million more of unfavorable price/cost, driven by continuing increases in raw materials costs and about another $20 million of stock comp expense versus what we estimated back in February.
The speed and the magnitude of the price increases in key inputs, steel, copper, plastic resins is unprecedented.
Operations are actively and effectively working to mitigate the margin impact through selected price and cost containment actions, and the good work that they're doing gives us the confidence to raise the guidance despite these increased headwinds.
On the plus side, we expect to retain about $10 million more in the year of the COVID-related savings than we previously estimated as basic activity like travel and everything that goes with it comes back in more slowly than we would have thought a couple of months ago.
If you please go to the next slide, I'll give you an update on orders.
So as I mentioned earlier, our underlying trailing three-month orders turned positive in the month of March at 4%.
This is consistent with the upper range of the guidance that we provided to you in February.
It's driven by ongoing strength in Commercial & Residential Solutions, as you can see, at 21%, and continued significant improvement in Automation Solutions as our global markets recover.
And increasingly, we see improvement in our traditional process industries as well in North America.
We expect general demand to remain strong for the balance of the year.
We expect the Automation Solutions markets to accelerate through the second half and the Commercial & Residential HVAC demand will go up somewhat later in the year, but we would expect to see some of the other end markets, commercial, professional tools and such, recover to partially offset that tapering off in Commercial & Residential.
So all in all, we believe we have a good outlook for the second half of the year.
If you please go to the next slide, the underlying sales growth outlook.
Based on what we see and the pace of the improvement in orders, for the second half, we see growth in the high single-digits range at about 7% to 11%, and that will drive the full year growth of 3% to 6%.
We expect net sales to be just a bit above $18 billion.
I'll just cover a few charts here with the group.
Again, increased momentum turning to -- on Chart 15 here.
First, on Automation Solutions, we are -- we were led through the recovery in the first half by our discrete and early cycle businesses within the platform.
And essentially, what's occurred as we've navigated through the second quarter is a broader recovery in their -- in the mid-cycle elements of this platform.
So we see a return to growth in Q3, which is very positive after five down quarters in this business and continued demand in short cycle as well as the acceleration in the core process automation markets in the back half of the year, yielding a 4% to 8% range in the second half and a flat year guidance on sales.
If you turn to Page 16, I'll give you some color on what's going on in the world areas.
Perhaps, before I do that though, I'll just paint it from a KOB perspective.
KOB3 has been incredibly strong, both in our discrete spaces, but more interestingly, as we navigated the second quarter into our process spaces.
Frank referenced the shutdown turnaround activity, which is up double -- mid-double -- teens for the year and the STO schedules are holding in full, honestly, as we go into the summer, into the fall season, which is very encouraging.
The site walk downs are up almost 50% year-over-year, also very encouraging.
And of course, the long-term service agreements are up almost 40% across the world in the business.
Very encouraging to see and really provides the fuel for the underlying activity we're seeing in the process space.
On a KOB1 basis, things are not completely stopped.
Obviously, we digested a significant LNG wave, but there's more activity on the horizon.
We've entered the feed stage on two very important projects: the Baltic LNG and the Golden Island BASF in China.
Those are important opportunities for us in automation.
And secondly, we were awarded the Sempra Costa Azul LNG project on the Pacific Coast, in the Baja Peninsula of Mexico, which has a significant value for us and was awarded and will be booked here in the third quarter.
So there is some activity.
We continue to engage on the KOB1.
And as that starts to loosen up a little bit, I think we're very well positioned.
The tale of the tape, honestly, for the remainder of the year for this business is going to be the Americas.
It's going to be a significant swing from a down 16% first half to a second half in that 10% midpoint.
And we'll see that, we saw that already as we entered April, and we'll continue to see that recovery, I think, as we go through the latter half of the year into 2022.
Europe, an incredibly strong first half, driven by life sciences, activity around biofuels, the number of KOB2-type project awards, and we continue to see that strength, and I feel confident that, that strength will be there into the second half of the year.
Of course, across all of this, the discrete environment has been very, very good into Asia, Europe and in North America, whether it's automotive, medical or semiconductor, and we expect that strength to remain there.
So overall, feeling much better about the second half here and feeling very good about how North America is shaping up for us in automation.
Turning to Chart 17, some comments on Commercial & Residential.
What a great year this team is having.
And obviously, the beneficiaries of a tremendous residential cycle.
Much of it was driven by pandemic inventory levels -- pre-pandemic inventory levels, a prebuild in the cooling season that then we also benefited from a secular shift into suburbs and high family home construction and renovation.
All of that has led into incredible residential strength through the year.
Obviously, my expectation is that it starts to dampen as we get into the latter parts of the fiscal year.
However, the mid-cycle professional tools, cold chain businesses are accelerating, and that's what we see here in this very balanced perspective for this business throughout 2021, and I'm very encouraged by what we're seeing in the later cycle pieces.
Of course, we -- there's some good underlying technology evolutions as well that will impact the residential, be it the refrigerant changes or the heat pump moves in Europe, which are -- which will continue to drive good growth for the businesses.
And then turning to Page 18.
Again, a very balanced picture here from a world area perspective.
And overall, a strong second half with the commercial industrial segment of this business continuing to improve as the residential market start to taper, as I discussed.
I think all the world areas should grow, again, in the low double-digit to mid-teen range as we go into the second half.
In the Americas, we are seeing residential demand remained strong in the near term and the commercial market is really starting to accelerate.
And the cold chain piece, particularly, which is driven by transport and aftermarket, and then we see the tools momentum building in the professional channel.
So very encouraged by that.
Europe, I mentioned heat pump activity.
We expect that to stay strong.
And of course, a surge in construction should bolster our plumbing and electrical tools business.
And then lastly, in Asia, China is the headline contributor to growth as some of you have already noted, and demand is driven by commercial air conditioning and cold chain solutions.
So with that, Pete, I'll turn it to Page 19, and we'll go to Q&A. | compname reports q1 adjusted earnings per share $0.97.
q2 adjusted earnings per share $0.97.
expect overall continued improvement in industrial and commercial demand over remainder of 2021.
q2 net sales of $4.4 billion up 6%.
expect that residential demand will remain robust, but begin to taper in second half of year.
sees fy 2021 net sales growth 6% - 9%.
sees fy adjusted earnings per share $3.90 plus or minus $0.05.
sees fy 2021 gaap earnings per share $3.60 plus or minus $0.05. | 1 |
I'm joined by Christa Davies, our CFO; and Eric Andersen, our president.
Our strong performance in 2021 is the direct result of deliberate steps we've taken that are enabling us to win more, do more and retain more with clients.
We're driving top and bottom-line results and are exceptionally well positioned to continue to deliver ongoing performance in 2022 and over the long term.
Most important, we want to express deep gratitude to our Aon colleagues around the world for their performance and results this year and for everything they've done for clients and for each other.
Our colleagues delivered a fantastic Q4 and a very strong finish to an outstanding year.
We achieved organic revenue growth of 10% in the fourth quarter, with double-digit growth in commercial risk and reinsurance, driven by net new business generation and client retention.
In commercial risk, we saw strength across the world, driven by net new business and retention in the core.
We also saw strength in more discretionary areas of the portfolio as economic growth and client activity continued to increase, including double-digit growth in project-related work and in transaction solutions as our teams responded to M&A deal flow and increased client demand.
Within health and wealth solutions, we saw double-digit growth in priority areas that we've been disproportionately investing in in the last several years, including voluntary benefits in health solutions and in delegated investment management in wealth solutions, which remains an essential part of our portfolio.
Our full year organic revenue growth of 9% reflects the strength and momentum of our Aon United strategy, which is designed to drive top and bottom-line results.
To that point, operating income increased 17% year over year.
Full year operating margins expanded 160 basis points to 30.1%, with margins of 32.8% in the fourth quarter, reflecting ongoing efficiency improvements, net of investment and long-term growth.
Earnings per share increased 22% for the full year, free cash flow exceeded $2 billion and we completed $3.5 billion of share buyback in 2021, a strong indication of our confidence in the long-term value of the firm.
Looking forward to 2022 and beyond, we continue to expect mid-single digit or greater organic revenue growth, margin improvement and double-digit free cash flow growth.
Looking back on the year, we would offer three observations that drove performance in '21 and reinforce our continued strong momentum in 2022.
First, as complexity and uncertainty has increased around the world, clients are demanding a partner capable of providing them greater clarity and confidence to make better decisions that will protect and grow their businesses.
In 2021, organizations and individuals continue to face the ongoing challenges of COVID and resulting effects in supply chain, growing concerns over climate change, commercial property, retirement readiness, regulatory changes, cyber and workforce resilience.
Against that backdrop, our decade-plus focus on Aon United and the content capability it allows us to deliver has never been more relevant.
Second, our colleagues feel that relevance and they take great pride in our ability to deliver existing and new sources of value to clients.
They recognize that these external challenges facing our clients create opportunity for them to bring better solutions and grow professionally.
We know this is what engages our colleagues and why they're feeling more relevant, more connected and more valued.
And we're seeing the impact of this focus.
In our recent all-colleague survey, engagement levels remain at all-time highs, in line with top-quartile employers.
Ultimately, we know that by creating an exceptional colleague experience or ensuring a better client experience, both of which translate into better performance for the firm.
And third, we continue to accelerate our innovation strategy by using our Aon United operating model to replicate successful solutions and applying those capabilities to new client bases, paving the way for innovation at scale.
We're incorporating our data, analytics and insight to direct existing capabilities to previously unmet client needs.
This allows us to serve existing clients in new and customized ways, bring existing solutions to new clients and expand our addressable market.
Let me highlight a few examples that demonstrate how we scale innovation to help our clients, both in new ways and from new sources.
Historically, you heard us talk about Aon Client Treaty, pre-underwritten insurance capacity we established at Lloyd's that we used to offer clients more easily and efficiently access capital for their placements.
When we designed this program over five years ago, we analyzed every historic placement, quantified the risk parameters around business replacement on Lloyd's and then prearranged capital to back those risks.
Aon Client Treaty provides more efficient access to capital for clients and insurers and we see ongoing opportunity to apply this concept to different geographies and risk classes using the same proprietary data and analytics backbone supported by Aon Business Services.
One new offering derived directly from this capability is a solution the team designed called Marilla, which enables reinsurers and investors to invest across our global reinsurance client portfolio.
This provides a broad entry point into global reinsurance risk that benefits our clients by enabling capital to access markets more efficiently.
This first of its kind solution could not have been designed without a proprietary analytic capability and we see important opportunities to build on this platform for future growth across Aon.
Another example to highlight is within voluntary benefits, where we're developing innovative solutions at scale and driving double-digit growth.
The offering combines user insight around enrollment from our active healthcare exchanges and capabilities from acquisitions like Univers and Farmington.
Our analytics platform and dashboards assess and illustrate planned features, product usage, claims experience and overall plant performance, providing insight into employee demand and satisfaction.
This work has been formed by 20 years of enrollment data from over 4 million participants, which enables us to rapidly develop bespoke solutions for our clients that strengthen their total rewards offering and reinforce their human capital strategy at a time when this has never been more essential.
These examples demonstrate how we help our clients access capital end markets in ways that never existed before.
Within that backdrop of increasing and changing risk, we're not only bringing our clients better solutions, we're also working more closely with them to understand their biggest challenges which in turn guides further innovation.
Our focus on building innovative capabilities that scale across Aon to better meet our clients' needs is also highlighted by our recent appointment of Jillian Slyfield as our chief innovation officer.
Jillian's digital experience and deep connections with Aon and across the industry position her exceptionally well to ensure that we're rapidly distributing new solutions to clients.
To summarize, 2021 was a year of incredible performance and a year that positions us for growth, innovation and momentum for 2022.
As we look forward, this momentum is further reinforced by global economic and societal trends and the resulting challenges and opportunities for our clients, which means that our Aon United strategy becomes even more relevant as we help clients make better decisions to protect and grow their businesses.
The capability and track record that we've built gives us confidence in our ability to drive further value for our clients, colleagues, society and shareholders.
As Greg highlighted, we delivered another strong quarter of performance across our key metrics to finish the year.
In the quarter, we delivered 10% organic revenue growth, the third consecutive quarter of double-digit organic growth, which translated into double-digit adjusted operating income and adjusted earnings-per-share growth, continuing our momentum as we head into 2022.
As I reflect on full year results, first, organic revenue growth was 9%, including double-digit growth in commercial risk solutions and health solutions.
I would note that total revenue growth of 10% includes a modest favorable impact from change in FX, partially offset by the impact of certain divestitures completed within the year.
Most notably, the retiree healthcare exchange business, as we continue to shift our portfolio toward our highest growth and return opportunities.
As we look to 2022, we're continuing to monitor various macroeconomic factors, including the underlying drivers of GDP, asset values, corporate revenues and employment, inflation, government stimulus and the impacts of COVID variants, all of which impact our clients and our business.
We continue to expect mid-single-digit or greater organic revenue growth for 2022 and over the long term.
Moving to operating performance.
We delivered substantial operational improvement, with adjusted operating income growth of 17% and adjusted operating margin expansion of 160 basis points to a record 30.1% margin.
The investments we have made in Aon Business Services give us further confidence in our ability to expand margins, building on our track record of approximately 100 basis points average annual margin expansion over the last decade.
We previously described the repatterning expenses that incurred within 2021, which have no impact on year-over-year margins.
While certain expenses may move from quarter to quarter, we do not expect further repatterning.
We expect the 2021 expense patterning to be the right quarterly patterning going forward before an expense growth.
During the year, as we previously communicated, we saw revenue growth outpace expense growth and investments.
While we do expect expenses to increase in 2022 due to certain factors such as increased investments in colleagues and a modest reduction of T&E, we think about growing margins over the course of the full year.
We expect to deliver margin expansion in 2022 as we continue our track record of cost discipline and managing investments and long-term growth on an ROIC basis.
We translated strong adjusted operating income growth into double-digit adjusted earnings per share growth of 22% for the full year, building on our track record of double-digit adjusted earnings per share growth over the last decade.
As noted in our earnings materials, FX translation was an unfavorable impact of approximately $0.03 in the fourth quarter and was a favorable impact of roughly $0.23 per share for the full year.
If currency will remain stable at today's rates, we would expect an unfavorable impact of approximately $0.16 per share or approximately $48 million decrease in operating income in the first quarter of 2022.
In addition, we expect noncash pension expense of approximately $11 million for full year 2022 based on current assumptions.
This compares to the $21 million of noncash pension income recognized in 2021.
Turning to free cash flow and capital allocation.
We continue to expect to drive free cash flow growth over the long term based on operating income growth, working capital improvements and structural uses of cash enabled by Aon Business Services.
In 2021, free cash flow decreased 23% to $2 billion reflecting strong revenue growth, margin expansion and improvements in working capital, which were offset by $1 billion termination fee payment and other related costs.
I'd observe that excluding the $1 billion termination fee payment, free cash flow grew $400 million or approximately 15% from $2.6 billion in 2020.
Our outlook for free cash flow growth in 2022 and beyond remains strong.
Given this outlook, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation as we believe we are significantly undervalued in the market today, highlighted by the approximately $2 billion of share repurchase in the quarter and $3.5 billion of share repurchase in 2021.
Over the last decade, we've repurchased over a third of our total shares outstanding on a net basis.
In 2022, we expect to return to more normalized levels of capex as we invest in technology and smart working.
We expect an investment of $180 million to $200 million.
As we've said before, we manage capex like all of our investments on a disciplined return on capital basis.
We also expect to invest organically and inorganically in content and capabilities to address unmet client needs.
Our M&A pipeline is focused on our highest priority areas that will bring scalable solutions to our clients' growing and evolving challenges.
We continue to assess all capital allocation decisions and manage our portfolio on a return on capital basis.
We ended 2021 with a return on capital of 27.4%, an increase of more than 1,500 basis points over the last decade.
Turning now to our balance sheet and debt capacity.
We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile.
In addition, we issued $500 million of senior notes in Q4.
As we said before, growth in EBITDA, combined with improvements in our year-end pension and lease liability balances, increases the capacity we have to issue incremental debt while maintaining our current investment-grade credit ratings.
Our net unfunded -- funded pension balance improved by nearly $500 million in 2021, reflecting continued progress and a result of the steps we've taken over the last decade to derisk this liability and reduce volatility.
This reduction in volatility is significant for many of our clients, who still have pension obligations on their balance sheets.
Current market conditions and funding status are giving many clients a chance to reduce the risk of future volatility related to funding status or regulatory changes.
Our retirement team's insight and analytics in this space can help our clients access new capital to efficiently reduce their risk, often with a partial pension risk transfer, creating a long-term opportunity for us to help our clients manage their balance sheet risk effectively.
In summary, 2021 was another year of strong top and bottom-line performance, driven by the strength of our Aon United Strategy and Aon Business Services.
We returned nearly $4 billion to shareholders through share repurchase and dividends in 2021.
The success we achieved this year provides continued momentum as we head into 2022.
We believe our disciplined approach to return on invested capital, combined with expected long-term free cash flow growth, will unlock substantial shareholder value creation over the long term. | q2 revenue rose 16 percent to $2.9 billion.
total operating expenses in q2 increased 16% to $2.2 billion. | 0 |
At the heart of McDonald's is the experience we offer.
And for 65 years, we've created iconic experiences for billions of people around the world.
Along the way, we've always focused on following our customers' needs, finding the most convenient and engaging ways for them to enjoy McDonald's.
At our founding, the restaurant experience was relatively simple: Customers would walk up to the front counter, place their orders and get hot, delicious fresh food served to them quickly.
In the early 1970s, McDonald's pioneered the drive-thru as a new service channel for customers.
And in the last few years, we've added even more service channels with delivery, curbside pickup, kiosks and table service.
At the heart of each of these innovations was our global mobile app, which has evolved our customer experience from the physical world to the digital world.
As this evolution continues, our digital offerings will become even more important to serving, interacting with and delighting our customers around the world, and the insights generated from these platforms will help us further improve their experience.
Our marketing power and scale will continue to be critical throughout this journey, turning the various customer touch points into a holistic and compelling brand experience.
But our aspirations are even higher.
And to reach these goals, we need to create a more frictionless customer experience across all our service channels.
Our customers should be able to move seamlessly between the in-store, takeaway and delivery service channels so that we offer even more convenience and better personalization.
That's why we were excited to announce earlier this week the creation of a team that has oversight for the end-to-end customer experience under the leadership of our first Chief Customer Officer in McDonald's history, Manu Steijaert.
Manu will oversee everything from the physical restaurants that we design and build to the digital experiences that we embed along each step of the customer journey.
As we finished the global rollout of EOTF, Manu and his team will now be focused on what's next to drive a new layer of sustained growth for our system that leverages the foundations that we've built.
For the past 18 months, our digital customer engagement, global marketing, data analytics and restaurant solutions teams have worked to standardize our infrastructure and align the system against some common frameworks.
These efforts ultimately paved the way for MyMcDonald's Rewards, our first global digital offering that we are now deploying across our largest markets.
MyMcDonald's Rewards is just the first example of how we will lead as a digital innovator by leveraging our scale and engaging with our customers in a truly integrated way.
Manu is the ideal choice to integrate these teams and take their work to the next level, with an intense focus on driving incomparable customer-centric innovation.
He's been an important part of the McDonald's system for more than 20 years at every level.
Manu knows these teams well and has an incredibly deep understanding of the needs of our customers, one rooted in his early experience as a crew member in his parent's McDonald's franchise in his native Belgium.
We believe that connecting these teams will enable us to deliver the seamless omnichannel experience that our customers want and only McDonald's can provide, transforming the way customers connect with, interact with and experience our brand.
Further strengthening our ways of working to better serve our customers is one of many ways we're working to accelerate the Arches today.
This complements the work underway to accelerate the Arches with investments in customer-centric creative marketing that only McDonald's can offer so fully.
That marketing made a measurable impact in the second quarter with the global debut of our incredibly successful Famous Orders marketing platform.
I'll have more to say about that a bit later.
We're accelerating the Arches by committing to our core menu.
We're tapping into customer demand for the familiar and making the chicken, burgers and coffee our customers love even more delicious.
We're borrowing from what has worked well in other markets like the growing success of the McSpicy Chicken Sandwich.
McSpicy launched in China over 20 years ago, and customers can now enjoy this great-tasting sandwich in multiple markets around the world.
Late last year, we launched McSpicy in Australia as part of their new chicken sandwich lineup.
And earlier this month, it debuted in the U.K. to great fanfare.
We also continue to leverage our familiar favorites and create new ones to make our menu even more craveable.
In the U.S., the momentum from the successful launch of our Crispy Chicken Sandwich continued into the second quarter as we supported the platform with culturally relevant advertising, just one more way that our beloved core menu continues to drive growth while anchoring a customer experience that is second to none.
We also know that the customer experience today reaches beyond the physical walls of our restaurants.
And that's why we're accelerating the Arches to better serve our digitally connected customers.
To give you a sense of the growing digital connection we have to our customers, we have the most downloaded QSR app in the United States.
And earlier this month, we were proud to launch our new loyalty program, MyMcDonald's Rewards, in the U.S. The loyalty of every McDonald's fans has been unmatched for 65 years.
And with these new digital connections, we're able to do an even better job of rewarding them for it.
We already have over 22 million active MyMcDonald's users in the U.S., with over 12 million enrolled in our new loyalty program, MyMcDonald's Rewards.
And that's before national advertising for loyalty, which began earlier this week.
Well, it is a good example of how our core menu and personalized marketing come together through digital channels to build a stronger relationship with our customers.
Our digital systemwide sales across our top six markets were nearly $8 billion in the first half of 2021, a 70% increase versus last year.
And that's why we're moving aggressively to bring MyMcDonald's Rewards to our top six markets.
We currently have loyalty programs in place in France and the U.S. Germany and Canada plan to launch MyMcDonald's Rewards before the end of this year, followed by the U.K. and Australia in 2022.
We're just as excited about our drive-thrus through which much of our business has come from this year and about delivery.
Over 80% of our restaurants across 100 markets globally now offer delivery.
We're excited about our success with multiple 3PO partners.
And as I said last quarter, we continue to innovate.
Overall, our recent successes show that our M, C and D growth pillars working in concert can deliver unmatchable experiences for our customers and drive growth unlike anything else in customer retail.
Of course, our work to accelerate the Arches is built on the foundation of the very core of McDonald's success: running great restaurants.
As we open our dining rooms, return to regular hours and get back to full staffing, we know that world-class execution will be more important than ever.
While the Delta variant has brought more stops and starts to the COVID story around the world, people are venturing out and establishing new routines.
That includes a return to in-person dining.
Today, about 70% of our dining rooms in the U.S. are open.
By Labor Day, barring resurgences, it will be nearly 100%.
Internationally, the majority of our restaurants are now operating all channels, including dine-in, but many continue to operate with limited hours or restricted capacity.
We're working hard to get back to normal.
Not only are we more resilient today than we were heading into the pandemic.
As Kevin will tell you, we are building from a position of strength.
I'm pleased to share that global comp sales were up 40% in the second quarter or 7% on a two-year basis.
Our performance has continued demonstration of the broad-based strength and resiliency of our business.
We've surpassed 2019 sales levels for the second consecutive quarter and now at an accelerated rate.
Turning to the segment performance for the quarter.
We grew comp sales across all segments versus 2019 levels as business recovery progresses at varying degrees around the world.
In the U.S. our momentum continued with Q2 comp sales up 26% or 15% on a two-year basis, our strongest quarterly two-year growth in over 15 years.
And we saw double-digit positive comps across all dayparts on a two-year basis, while at the same time, franchisees continue to achieve record-high operating cash flow.
Our performance in the U.S. is the result of an accumulation of decisions that we've made over the last 18 months.
This includes bold marketing initiatives, investing in the core menu and strengthening our digital offerings with an underlying focus on running great restaurants.
As customers in the U.S. began to venture out more during the second quarter, we continued to see strong average check growth driven by larger order sizes and menu price increases.
That's been bolstered by growth in delivery and digital platforms as well as robust menu and marketing programs.
This includes an advertising rehit of our Crispy Chicken Sandwich, which continues to perform at an elevated level and the success of our BTS meal.
Both initiatives attracted customers and drove incremental sales in the quarter.
In our International Operated Markets segment, which has been historically strong, recovery is taking hold.
Comp sales were up 75% in the quarter or nearly 3% on a two-year basis as we lapped the peak in 2020 restaurant closures.
Remember, in some cases, full country operations were shut down in Q2 last year due to the pandemic.
Although we're continuing to monitor recent resurgences of COVID in countries around the world, Western Europe began to reopen during the quarter, allowing us to bring back indoor dining, still with some restrictions in place.
IOM segment comp sales began exceeding 2019 levels in May.
Strong performance continued in Australia.
The market benefited from continued growth in delivery and successful marketing and core menu news, including the BTS Famous Orders and 50th Birthday Big Mac promotion.
While Australia produced strong results for the quarter, outbreaks of the COVID-19 Delta variant throughout the country have led to recent lockdowns and reduced customer mobility.
Momentum accelerated in both the U.K. and Canada in Q2.
In the U.K., the national lockdown ended, and the market reopened dining rooms in mid-May.
The market saw record digital engagement with a significant portion of sales coming through digital channels, where customers place delivery orders and used self-order kiosks as dining rooms reopened.
Canada benefited from strong marketing activity featuring our core menu, including the BTS Famous Orders meal.
In France and Germany, comp sales were still below 2019 levels for the quarter.
While some restrictions are still in place, indoor dining reopened for both markets in June, and we've seen steady improvement since then.
As we look ahead to Q3, we expect comps to surpass pre-pandemic levels across all of our big five international markets.
The past year has shown us that when markets reopen, customer demand for McDonald's returns quickly.
Comp sales in the International Developmental Licensed segment were up 32% for the quarter or relatively flat on a two-year basis.
Performance was largely driven by positive results in Brazil, Japan and China.
Japan maintained momentum in Q2 with comps up nearly 10%, achieving an impressive 23 consecutive quarters of comp sales growth.
The market's performance was driven by strong menu and marketing promotions, delivery growth and our ability to continue serving customers their favorites safely and conveniently throughout state of emergency waves across the country.
In China, comps were strong for the quarter but have yet to return to 2019 levels due to COVID resurgences in Southern China, resulting in operating restrictions.
The market continues to build its digital member base with a successful MyMcDonald's app launch and focused delivery expansion in the breakfast and evening dayparts.
In addition, China surpassed the 4,000-restaurant mark in June and is now on pace to open over 500 new restaurants this year.
Given our slightly quicker recovery and continued momentum around the world, we now expect full year systemwide sales growth in the mid- to high teens in constant currencies.
However, there's still some uncertainty as we continue to see pandemic-related stops and starts in markets around the world, especially now with the Delta variant.
As we look ahead to the rest of 2021, we're finding ways to capitalize on our strengths.
As we've seen, the growth pillars of accelerating the Arches are deeply interconnected, reinforcing and bolstering one another.
It is at the intersection of our MCD that we continue to deepen our connection with customers and create a consistent and enjoyable experience, proving that the whole is greater than the sum of its parts, which brings us back to our Famous Orders platform.
When it launched in the U.S. last year, our goal was to create an ambitious marketing campaign, one that would leverage our customers' favored core menu items, speak to a new generation in authentic ways and increase digital engagement without adding any restaurant complexity, all while positioning us for the longer term.
The Famous Orders platform was based on a simple idea but unites all our customers, including famous celebrities, is everyone has their go-to McDonald's order.
The Travis Scott then J Balvin Famous Orders broke records in the U.S.
This quarter, the BTS Famous Order took that ambition global, connecting our marketing, core menu and digital strategies in 50 markets.
And it was our first Famous Order with custom packaging and app-exclusive content.
It has been, to borrow a BTS lyric, Dynamite.
We saw significant lifts in McNuggets sales and record-breaking levels of social engagement.
McDonald's customers and BTS fans all over the globe downloaded our app, ordered Chicken McNuggets with delicious sweet chili and cajun dipping sauces and posted about it on social media, leading McDonald's to trend number two on Twitter globally and number one in the U.S. And then the BTS ARMY took it a step further and memorialized the partnership, creating shoes, accessories and frame memorabilia from our packaging.
They were so appreciative of the meal that the BTS ARMY went out of their way to prepare snacks for our crew and managers in Malaysia, the Philippines and Vietnam to support them on launch day.
The Famous Order platform is the M, C and D in action.
Both Famous Orders and MyMcDonald's Rewards are also reminders of the unrivaled convening power of McDonald's.
And this is just the beginning of the digital customer journey at McDonald's.
As we create more personal and seamless McDonald's experiences and make it easier for our crew to connect with our customers, we're giving customers multiple reasons to continue to come back to McDonald's.
By using digital, we'll also leverage our advantages in value and convenience, daypart and menu breadth and our biggest advantage, our size and scale.
Now for more on the financial performance in Q2, I'll pass it back to Kevin.
Adjusted earnings per share in Q2 was $2.37, which excludes a gain on the further sale of some of our ownership in McDonald's Japan and a onetime income tax benefit in the U.K. In year-to-date, adjusted operating margin was 43%, reflecting improved sales performance across all segments and higher other operating income compared to last year.
Total restaurant margin dollars grew $1.3 billion in constant currencies with improvement in both franchised and company-operated restaurant margins, mostly driven by higher comp sales as a result of COVID-19 impact last year.
Company operating margins in the U.S. were strong as we continue to see top line growth driven by higher average check.
In the IOM segment, company operating margins improved significantly in Q2 as sales have recovered to pre-pandemic levels.
G&A decreased 1% in constant currencies for the quarter, primarily due to lapping our $160 million incremental marketing investment last year, offset by higher incentive-based compensation and increased spend in restaurant technology.
Our adjusted effective tax rate was 21.7% for the quarter.
And we're projecting the tax rate for the back half of 2021 in the range of 21% to 23%.
And finally, foreign currency translation benefited Q2 results by $0.13 per share.
Based on current exchange rates, we expect FX to benefit earnings per share by about $0.03 to $0.05 for Q3, with an estimated full year tailwind of $0.20 to $0.22.
As usual, this is directional guidance only as rates will likely change as we move through the year.
I'm proud of all that we've accomplished during the past 18 months.
It's a remarkable testament to the resiliency of the McDonald's system.
But as we turn our focus to the incredible opportunities that lie ahead of us, it's also reminded us of where we must go.
For 65 years, the one unassailable truth about McDonald's is that we get better together.
There's a reason why it's one of our core values.
Continually finding ways to better ourselves and our system is how we keep our business relevant, not just for this generation but the next.
How do we get better together today?
We get better together by focusing on our people.
In this highly competitive market for talent, successful employee recruitment and retention is fundamental to drive growth.
That's why in May, we announced a 10% increase in the average hourly wage at our company-owned restaurants in the U.S., with the goal to get to a $15 an hour wage by 2024.
We get better together through diversity, equity and inclusion.
Today, 23% of our U.S.-based suppliers come from diverse backgrounds, more than double the industry average.
We have set a goal to increase purchases of goods and services from diverse-owned suppliers by 10% over the next four years.
That will put us in a position where 1/4 of our U.S. spend is with diverse-owned suppliers by 2025.
And we've committed to doubling our national advertising spend with diverse-owned media here in the United States between 2021 and 2024.
We get better together by serving our customers but also serving a larger purpose in communities across the world.
Our part in the national We Can Do This campaign continues this month with McDonald's hot McCafe cups and McDelivery seal stickers, both of which lead customers to vaccines.gov.
In Canada, we're doing something similar around This Is Our Shot.
It's a national campaign through which McDonald's will supply information in restaurant and drive-thru orders, while supporting a digital campaign to replace vaccine hesitancy with confidence.
Finally, we get better together through our commitment to our planet.
In May of 2014, we were one of the first major corporations of our size to publicly commit to a sustainability framework.
We promised that we would report on our progress against our 2020 sustainability goals by the fall of this year.
As we prepare to release our impact report, I've never been prouder of the difference we are making in the world.
We are working closely with partners across the globe today to source food locally and responsibly, to expand our use of sustainable packaging and to power our restaurants with renewable energy sources.
It's the ultimate example of our three-legged stool in action, where owner-operators, suppliers and employees each play a critical role in our efforts to protect the planet.
We're working every day to set ambitious goals and to hold ourselves accountable, to be known not just for what we do as a company but how we do it.
It's part of our broader commitment to transparency and to following clear science-based guidelines from the experts.
We know we still have much work to do, but our internal strategy and the external landscape are converging to create a moment unlike any other.
We are aware of our unique role in the world.
We are inspired by all the opportunities that lie ahead.
Over the back half of this year, I'm looking forward to getting back into the restaurants around the world and spending more face time with our people.
I'm amazed with everything that our system has accomplished over the past 18 months, and we can't wait to write the next great chapter of the McDonald's story together.
With that, we'll begin Q&A. | mastercard inc sees q4 forecasted growth for revenue of mid 20's.
mastercard inc - sees q4 forecasted growth for revenue of mid 20's.
mastercard inc - sees q4 forecasted non-gaap revenue growth, currency-neutral, excluding acquisitions of low 20's. | 0 |
I am Patrick Suehnholz, Greenhill's Head of Investor Relations.
And joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.
These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions.
For a discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We reported second quarter revenue of $43.2 million and a loss per share of $0.45.
For the year-to-date, we had revenue of $112.2 million and a loss per share of $0.34.
Revenue for the year-to-date was 2% lower than our figure from last year when we had a slow first half that was followed by a strong second half.
Industry data makes clear that global M&A activity has been very strong for the year-to-date, we see that in what has been a significant increase versus last year and the year before in the number of new assignments we are winning.
We also see the result of a more active market in the number of deal announcements we are associated with, as shown on the transaction list we regularly update on our website.
This past quarter, we announced the second highest number of transactions in any quarter in our history and on a trailing four quarters basis, our number of transaction announcements is at the highest level ever by a meaningful margin.
Many of those transactions have been for major companies but for the year-to-date, the sizes of deals that have completed have skewed toward the smaller end of the scale, resulting in soft year-to-date revenue.
In the second half, we expect the size of completed deals and related fee events to significantly increase such that we should get to a full-year revenue outcome that shows improvement over what was a respectable year for our firm in 2020.
We saw the first versus second half play out similarly to the way I'm describing both last year and the year before.
On a regional basis, for the full year we expect to show a stronger year than last year in the US and Canada and a much stronger year in Australia, offset by reduced revenue in Europe where we had a particularly strong revenue year last year.
By type of advice, M&A is where we are seeing the greatest opportunity.
Restructuring activity is materially lower given the strength in credit markets, but we are making progress in our strategic initiative to be more active in financing advisory assignments of various kinds.
In the private capital advisory area, we continue to be busy with secondary transactions in Europe and Asia, including an increasing number of complex fund restructuring transactions, led by fund general partners.
In addition, over the course of the year-to-date, we've succeeded in building out a global primary fundraising team and we expect to start seeing revenue from that group already in the current quarter.
In all our businesses, we are making progress on our strategic initiative to do more business with financial sponsors.
In addition to two more recruits in the private capital advisory area.
We have other recruits in progress.
We already see this year as an important one in terms of recruiting and we should see more success in that regard in the second half.
Now turning to costs, our compensation costs were lower than last year in absolute terms, given our objective to bring quarterly compensation more in line with quarterly revenue but our compensation ratio was still higher than our target range.
Our objective is to bring the ratio down to our target range for the full year, while still paying our team increased compensation in absolute dollars.
Where we end up in terms of compensation cost and expense ratio for the year depends as always on our revenue outcome for the year.
Our non-compensation costs were materially lower than last year and are running at a rate slightly better than our target.
Our interest rate expense continues -- interest expense, rather, continues to trend lower given declining debt levels and continued low short-term interest rates.
We continue to estimate our annual tax rate will be in the mid-20% range after adjusting for the impact of charges relating to the vesting of restricted stock, which is consistent with our prior guidance.
We ended the quarter with $92.5 million of cash and $306.9 million of debt and we paid down another $15 million of that debt after quarter end.
We also declared our usual $0.05 quarterly dividend.
And lastly as of quarter end, we have bought back 1.5 million shares and share equivalents for a total cost of $23.8 million and had an additional $26.2 million of repurchase authority available for the year ahead through next January.
As I said last quarter, our principal focus is on deleveraging but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders.
Our employees currently own about half of the economics of the firm through stock and restricted stock and are thus fully aligned in trying to drive shareholder value in the quarters and years to come.
To sum up, we recognize that our first half is an outlier relative to peers in what is a strong M&A market.
At our smaller scale, the random timing of deal completions has a large impact and can result in a weak quarter or even multiple quarters.
Last year, we saw that same phenomenon, yet with the help of a record quarter at year-end got to a very respectable full year result.
This year, we have the benefit of what is a significantly higher pace of new assignments and of deal announcements.
Looking beyond this year, the same smaller scale that today results in greater quarterly volatility is what creates future upside potential for our shareholders.
First, the strategic moves we are making should reduce future quarterly volatility as well as increase annual revenue.
The effort to develop a financing advisory business and to devote more resources to serving financial sponsors should be particularly important in diversifying and growing our revenue base.
Second, the successful rebuilding and expansion of our Private Capital Advisory business should also add to revenue diversity and scale starting later this year.
And lastly, with our lower cost, declining debt and interest expense and much reduced share count, the benefits of increased revenue would be magnified in terms of net income and shareholder value creation.
With that, I will take any questions. | compname reports q2 revenue of $43.2 mln.
q2 revenue fell 10 percent to $43.2 million.
q2 loss per share $0.45. | 1 |
We would like to allow as many of you to ask questions as possible in our allotted time.
So, we would appreciate you limiting your initial questions to one.
Since 2016, Virgil has been a beloved member of the Nike, Jordan and Converse family.
He was a brilliant creative force who shared a passion for challenging the status quo and pushing forward a new vision, while inspiring multiple generations along the way.
But what stood out to me personally about Virgil, was his humility and humanity.
We offer our condolences to the many who shared a connection with Virgil.
He will be missed greatly.
As we look at Q2, the creativity and resilience of our entire NIKE, Inc. team helped deliver another strong quarter.
The results we delivered offer continued proof that our strategy is working, even as we execute through global macroeconomic constraints.
Whenever there's turbulence, I always go back to the fundamentals and for Nike, that means putting the consumer at the center and leveraging our long-term competitive advantages, which include a culture deeply rooted in innovation, a brand that deeply connects with consumers, fueled by compelling storytelling, and an unmatched sports marketing portfolio and we believe a fourth emerging competitive advantage for us is Digital, as we are one of the few brands that can directly connect with and serve consumers at scale.
We also continue to benefit from structural tailwinds that have accelerated during the pandemic.
Tailwinds that include a larger movement of health and fitness that is taking place around the world, consumers' desire to wear athletic footwear and apparel in all moments of their lives and an expanding definition of sport, and last, the fundamental shift in consumer behavior toward digital plays to our increasing digital advantage.
As I've said before, challenges create opportunities for strong brands to get stronger and that's what's happening here.
And we are now in a much stronger competitive position today than we were 18 months ago, and that trend continues.
We are seeing this strength come to life this holiday season.
Our brands' deep connection with the consumer is driving strong holiday sales, most notably with North American Digital leading the industry over Black Friday week, with close to 40% growth.
And our Singles Day performance showcased our brand strength in greater China as we added 13 million new members, and Nike was again the number one sport brand on TMall.
More broadly, this holiday season has shown the power of our digital transformation across the globe.
Digital is the engine driving our Consumer Direct Acceleration strategy.
And Q2 was another incredible quarter for sport led by our deep roster of athletes and teams.
Let me just touch on a few of the highlights from the quarter.
Following the exciting end of the WNBA and MLB seasons, the energy around sport continues with the NBA, NFL, European soccer and upcoming college football bowl season, where 16 of the top 20 teams and three out of the four Playoff participants are Nike teams.
When these leagues are as exciting as they are today, our business benefits.
Nike athletes continue to lead the way across the sports landscape, highlighted by Barcelona captain Alexia Putellas, who won the Ballon d'Or as the best female footballer in 2021.
We were also thrilled to see Marcus Rashford receive his MBE from Prince William last month, an honor very well deserved for his work to support vulnerable children during the pandemic.
And congratulations to Cristiano Ronaldo for reaching yet another remarkable milestone by becoming the first player in recorded history to score 800 career goals in official matches.
And I also have to give a special shout-out to Shalane Flanagan who was wearing the Nike Air Zoom Alphafly Next%, when she completed the six World Marathon Majors in six weeks running each of them in under two hours and forty-seven minutes.
This achievement offers all of us a reminder of the joy and unrelenting spirit of sport.
As we deliver against our Consumer Direct Acceleration Strategy, we continue to drive separation as the most innovative sports brand by delivering a constant pipeline of new products that sets the standard and what's more, we're aligning against our key growth drivers of Women's, Jordan and Apparel, as well as to our commitments to sustainability.
In Women's, we launched a brand new shoe designed specifically for dancers.
The Nike Air Sesh, was designed by Tinker Hatfield, in collaboration with professional dancers and it choreographers prioritizes both style and performance with a mid-cut leather upper and a cushion foam under the foot.
We launched the Air Sesh for Nike members first, with a wider release to take place soon.
As we continue to accelerate our strategy and fuel the expanded definition of sport, we are able to more deeply connect with women and create an even sharper focus.
And this quarter also saw the debut collection from the Serena Williams Design Crew, our apprenticeship program that advances diversity in design.
The Crew connects innovation, design and purpose in a uniquely powerful way, fueled by our commitment to the full spectrum of sport for women, across performance and lifestyle.
Serena joined us on campus a few months back to help open the Serena Williams Building at our World Headquarters.
Along with our LeBron James Innovation Center, these two buildings represent the most remarkable investment in sport innovation in the world.
We were also thrilled to see the Jordan Brand launch the AJ36.
The AJ36 is NIKE Inc.'s first shoe using leno-weave, a process that creates material that is uniquely strong, lightweight and adaptable to all foot shapes making the AJ36 one of the lightest Air Jordans ever.
Consumers can expect to see us iterate on this innovation in future seasons.
In Apparel, we're driving energy in the market through design that resonates with consumers.
The latest NBA City Edition and MLB City Connect uniforms are great examples as we grow the culture of the sport by listening to local team communities and using thoughtful design to celebrate the game.
We also launched FIT ADV, the next generation of performance apparel that combines weather-ready tech and innovative design to help athletes take on extreme conditions.
This represents the pinnacle of Nike apparel innovation and is currently in Nike's performance apparel collections.
And next year, it will be available in Nike lifestyle products across all platforms.
And finally in sustainability, we launched Alphafly Next Nature, our most sustainable performance shoe and our first sustainable performance running shoe.
This continues the progress made by our Cosmic Unity sustainable basketball shoe by reaching more than 50% total recycled content by weight.
Learnings from the Alphafly Next Nature will be scaled across our running line, creating higher performing products with more sustainable materials.
We know the future of sport depends on a healthy planet and we remain committed to doing our part to protect that future.
As we connect consumers with the strongest innovation, athlete roster and brand storytelling in the world, we are also elevating their experience through One Nike Marketplace.
We are creating the marketplace of the future, where we serve consumers with seamless, consistent, and premium experiences.
Through Nike membership, we increasingly know and serve our consumer across a connected marketplace.
I'd like to highlight three examples from this quarter of how Nike is driving a more elevated and premium member experience across the marketplace.
First, we recently launched new wellness content and workouts featuring Megan The Stallion in our Nike Training Club app.
Megan's content drove record high engagement, drawing 2 times increase in daily active users in NTC, and her curated looks saw more than double the demand, compared to any other product content viewed during that same time period.
Second, ahead of Singles Day in Greater China, we activated a new member experience on TMall and improved the onboarding journey.
As a result, the Nike Flagship store on TMall was the number one brand for new member recruitment across sport, driving a 20 point increase in member demand penetration this year.
And third, just last month, we announced a partnership with one of our strategic retail partners, Dick's Sporting Goods, who shares our vision for the future of retail specifically, shopping and experiences that are amplified by digital and personal to each consumer's journey.
This new partnership allows shoppers to link their Nike member account and their DSG account together to unlock exclusive offers, products and experiences.
Recently, I had an opportunity to visit one of DSG's newest concepts, the House of Sport door in Rochester, NY.
I must say I was blown away at the store's unique service model, interactive sport experience and enhanced showcasing of product, which creates a true destination for consumers and will alter future expectations at retail.
Our partnership with DSG is a new model for how brands and retailers work together delivering product, experience, and connection service to delight consumers at scale.
We are fulfilling our vision, that through connected member experiences and inventory, powered by connected data and technology, we can provide consumers with greater access to the very best of Nike with more speed, convenience and connection to our brand and sport than ever before.
As we look forward there is even more opportunity to connect consumers with Nike across digital platforms that integrate sport, innovation, culture, and commerce.
For example, we recently opened a new space in our New York digital studio to produce the weekly Sneakers livestreams that are driving industry leading engagement metrics.
Weekly content includes launch previews in our Sneakers Live Heating Up show, and a new Jordan franchise presented through the lens of female Jordan fans, called J-Walking.
Our stories go deep and engage a two-way interaction with the community.
As a result, our consumer engagement is 3 times the industry average for livestreams.
And speaking of Sneakers and Jordan, the first set of invitations for the AJ11 Cool Grey was sent to the largest female-focused group yet and sold out in the first hour.
The group was selected utilizing our new Dedication Score designed to reward member groups with high product affinity.
We continue to see exclusive access serve as a defining marketing mechanism to connect with consumers.
In Q2, we also launched the 3D immersive world of NIKELAND on Roblox.
Nike is meeting young athletes wherever they are, encouraging them to let their imaginations run wild and rewarding real-world movement through new virtual experiences.
The Nike, Jordan and Converse brands have always thrived at the intersection of sport, creativity, innovation and culture.
The RTFKT acquisition allows us to extend this reach to serve and delight consumers and creators in both the physical and virtual worlds.
We will invest in the very talented RTFKT team, creator community and cutting-edge innovation to deliver next generation experiences that involve the RTFKT and NIKE Inc. brands.
Today, we are stronger than we were before the pandemic, and I couldn't be more excited by the opportunity ahead of us.
Our results this quarter are evidence that our strategy is working.
Through all we've navigated, this team has worked together with creativity and resilience to serve our consumers and serve our communities.
As you've heard us say before, Nike is a growth company with boundless potential.
And our Consumer Direct Acceleration strategy is transforming our operating model by driving deeper and more direct connections with consumers through digital.
Our teams continue to navigate through unprecedented levels of volatility with flexibility, agility and grace, leveraging the operational playbook we created at the onset of the pandemic to stay focused on what matters most.
We have embraced new ways of working, elevated experienced players into new leadership roles, reorganized the company to create even deeper focus on the consumer, and developed new capabilities to serve consumers directly with speed and at scale.
Nike's second quarter financial results were in line with the expectations we established 90 days ago, fueled by continued Brand momentum, the strength of our product franchises with extraordinary levels of full price realization, and strong season-to-date Holiday sales, offset by lower levels of available inventory supply relative to marketplace demand.
As John mentioned, we had an incredible Black Friday week with Nike Direct in North America and EMEA increasing over 20% versus the prior year, on top of last year's meaningful gains.
To accomplish this, I'm particularly proud of the work by our supply chain teams.
In late October, I was able to visit our North America distribution centers in Pennsylvania, Tennessee and Mississippi, to review our expanding digital fulfillment capabilities and holiday readiness plans.
Our teams are executing those plans with precision, optimizing available inventory to meet demand with improved service levels and lowering carbon impact, all enabled through technology and automation.
Staying on the topic of supply chain a little longer.
Factory reopening in Vietnam is on plan.
Nearly all impacted factories began reopening in October.
As of today, all factories are operational and employee attendance rates have improved, with weekly footwear and apparel production now at roughly 80% of pre-closure volumes.
In total, Vietnam factory closures caused us to cancel production of roughly 130 million units due to three months of lost production volume and several months to ramp back to full production.
Compared to ninety days ago, we are increasingly confident supply will normalize heading into fiscal '23.
Turning to our digital business.
Nike's digital growth is outperforming comparisons and being fueled by our member-centric focus.
Nike Digital grew 11% in the quarter, on a currency neutral basis, setting the pace for the industry.
Nike Digital is now 25% of total NIKE Brand revenue, up 3 points versus the prior year and more than double the digital mix in fiscal '19.
Enhanced onboarding experiences are attracting millions of new members into the top of the funnel, and we are focused heavily on member engagement and buying.
Member engagement grew 27% and repeat buyers grew 50% versus last year, driving overall higher AUR, AOV and member buying frequency.
40% of total digital demand this year is coming from our mobile apps, highlighting the strength of our digital platform.
We now have over 79 million engaged members across our Nike ecosystem.
And as Nike's digital ecosystem continues to grow, we are beginning to see the compounding benefits of scale from brand awareness and consumer connection, to data informed personalization and inventory utilization, to loyalty.
This quarter, we held our first globally coordinated Member Days event, setting records in member engagement.
From member exclusive product offerings to our first livestreamed member events from our Nike Town London and Passeig de Gracia Store in Barcelona, we created a distinct member experience and set a record for weekly active users on the Nike App in North America.
Now moving to one final topic.
Connecting with today's consumer means serving them with the product they want when and where they want it.
Consumers want a premium, seamless and personalized experience, with minimal friction across their journey to explore, engage, connect and purchase products from the brands they love.
As we've discussed before, Nike is focused on creating One Nike Marketplace that elevates the brand by creating direct consumer connections through fewer, more impactful wholesale partners, with a connected mobile digital experience at the center built for the Nike member.
Over the past four years, North America has reduced the number of wholesale accounts by roughly 50%, while delivering strong growth and recapturing consumer demand through Nike Direct and our strategic wholesale partners leading the way for Nike.
In the second quarter, North America Digital grew 40% versus the prior year, pushing Nike Digital to 30% of total North America marketplace, bringing Nike Direct to 48% of total.
In order to enable this growth and drive the shift in marketplace composition, we have accelerated investment to evolve our distribution network and scale a digital first supply chain, leveraging advanced analytics, automation and technology.
We have opened two new regional service centers on both coasts, which are able to deliver more units to consumers with shorter delivery times.
We also enabled ship from store capabilities across our store fleet, all leveraging advanced analytics from our Celect acquisition.
On automation, we have added more than 1,000 robots in our distribution centers to handle the digital growth.
In our digital distribution center in Memphis, robots handled more than 10 million units that would have otherwise required manual labor.
We continue to scale O2O consumer services across our store fleet, including buy online, pick up in store, and digital order returns in store.
Volumes are relatively small today, but we have significant opportunity to scale.
We have also established new fulfillment models with key strategic partners to create inventory visibility across the marketplace and optimize full price digital demand.
When we do this right, the consumer wins.
The progress being made to create One Nike Marketplace has accelerated North America's revenue growth and gross margin expansion for yet another quarter, illustrating how Consumer Direct Acceleration will fuel Nike's growth and profitability toward the fiscal '25 outlook we shared in June.
Now let me turn to the details of our second quarter financial results and operating segment performance.
NIKE, Inc. revenue grew 1% and was flat on a currency neutral basis, led by 8% growth in Nike Direct offset by a 6% decline in wholesale, due to optimization of available inventory supply.
Nike Digital grew 11% and Nike-owned stores grew 4% with significant improvements in traffic and higher conversion rates.
Gross Margin increased 280 basis points versus the prior year, driven primarily by higher Nike Direct margins due to lower markdowns, higher full price mix and foreign currency exchange rates, partially offset by increased freight and logistics costs.
SG&A grew 15% versus the prior year primarily due to normalization of spend against brand campaigns, digital marketing investments to support heightened digital demand, strategic technology investments and wage related expenses.
Our effective tax rate for the quarter was 10.9% compared to 14.1% for the same period last year.
This was due to a shift in our earnings mix and the effects of stock-based compensation.
Second quarter diluted earnings per share was $0.83, up 6% versus the prior year.
Before we move into operating segment results, I want to recall a few points I made last quarter regarding the impact of Vietnam factory closures on the short-term performance of each of our geographies, beginning in the second quarter.
North America and EMEA finished the first quarter with high levels of in transit inventory, resulting in prior season supply that was arriving late due to longer transit times, which could be sold in the second quarter.
We saw that in our Q2 results.
However, Greater China and APLA, located closer to our sourcing base with shorter standard transit times, experienced a decline in units sold in the second quarter due to lost production and lower available inventory supply.
We also saw that reflected in our Q2 results.
With that in mind, let's review the operating segments.
In North America, Q2 revenue grew 12% and EBIT grew 21%.
Demand for Nike remained incredibly strong, with season-to-date holiday retail sales across the total market growing double-digits, energized by the continued momentum from the return to sport and the beginning of an outstanding holiday season.
Performance sport dimensions delivered strong double-digit retail sales growth, led by Running, Fitness, and Basketball, on lower levels of sell-in due to available inventory supply.
Womens retail sales grew high double-digits, more than twice the rate of men's, with strong growth across both footwear and apparel.
Nike Direct had an outstanding quarter, growing 30% versus the prior year.
As I mentioned earlier, Digital maintained its momentum growing 40% and setting holiday records on Black Friday week.
Nike-owned stores also delivered strong double digit growth, with traffic trending toward pre-pandemic levels, and strong increases in AUR, due to lower closeout inventory levels and significant year-over-year improvements in markdown rates and promotions.
Despite strong retail sales momentum in the wholesale channel, revenue declined 1% as marketplace inventory levels remain lean, and Vietnam factory closures and longer transit times disrupt the flow of inventory supply to meet marketplace demand.
In EMEA, Q2 revenue grew 6% on a currency neutral basis and EBIT grew 22% on a reported basis.
Season-to-date holiday retail sales across the total market grew double-digits, with strong growth across all consumer segments.
The region was energized by the start of the global football season and the Champions League tournament across the continent.
Nike players continue to dominate on the pitch with the Mercurial boot being the lead scorer in a number of European professional leagues.
We saw a strong consumer response for the Mercurial boot and launch of the Champions League third kit.
Wholesale revenue grew 6% on a currency neutral basis as we comp prior year market closures.
Nike Direct also grew 6% led by double digit growth in Nike-owned stores as we comp prior year store closures, with traffic improvement due to tourism picking up and back to school holidays.
Nike Digital was down 1% as we compare to extraordinary levels of off price sales in the prior year, as the geography leveraged digital in the prior year to liquidate excess inventory.
This quarter, our full price Digital business grew over 20%, resulting in a 30 point improvement in full prices sales mix, double-digit growth in AUR and improvement in markdown rates and promotions.
This contributed to strong year-over-year expansion in gross margin and return on sales profitability.
In Greater China, Q2 revenue declined 24% on a currency neutral basis and EBIT declined 36% on a reported basis, however, season-to-date holiday retail sales across the total market have trended more favorably.
Results for this quarter were as expected, as we navigated lower full price product supply due to the Vietnam factory closures.
We saw disproportionate impacts to our wholesale revenue, which declined 27% on a currency neutral basis.
Nike Direct declined 21%, with declines in both digital and physical retail channels.
COVID-related lockdowns continue to drive volatility in retail traffic, however, we did see traffic recover to pre-pandemic levels at times throughout the quarter.
Digital declined 27%, partially impacted by delay in product launch timing on Sneakers.
Over the 11.11 consumer moment, we drove stronger digital performance with significant member acquisition and higher AOV through better engagement with consumers.
While challenging, we continue to leverage our operational playbook and remain optimistic about the longer term in Greater China.
This quarter, we extended our Joy of Sport brand campaign, utilizing local influencers, Olympians and other athletes that are part of Nike's leading sports marketing portfolio in Greater China.
The Jordan brand added to the energy by announcing their first female athlete signing in Asia, with basketball player Yang Shu Yu.
To support this activity and normalize our marketing investment levels, we increased our investment in demand creation in the second quarter by more than 40% versus the prior year.
Our local team remains focused on creating distinctive and authentic connections with Chinese consumers.
We celebrated the 40th anniversary of Nike's operations in China by using the Express Lane to reintroduce the original Nai-ke collection, with robust storytelling on the history and heritage of these iconic products.
During our first launch, all product sold through in the first hour.
We will continue to expand the Express Lane to bring unique, localized offerings to the consumer, leveraging our most popular global product franchises to drive uniquely Nike energy in the marketplace.
We see encouraging signs in Greater China and while inventory supply has been a major disruption in the marketplace, we continue to expect fiscal '22 to be a year of recovery.
Having said that, we expect to see sequential improvement from here, beginning in the third quarter.
Now moving to APLA.
Q2 revenue declined 6% on a currency neutral basis and EBIT declined 8% on a reported basis.
Double-digit revenue growth, on a currency neutral basis, in SOCO was offset by declines in Asia Pacific territories which faced a greater impact from Vietnam factory closures as well as the business model shift in Brazil.
Season-to-date holiday retail sales across the total market grew versus the prior year, despite supply disruptions and door closures in SEA&I and Pacific.
Nike Direct grew 6%, led by Nike Digital growth of 25%.
Our teams maximized market moments with all territories delivering successful Member Days and locally relevant activations including Singles Day in South East Asia, Buen Fin in Mexico and Cyber Week in Japan.
Mexico's digital business more than doubled as we enabled a localized assortment and fulfillment capabilities through the Nike App.
Finally, APLA continues to leverage the Express Lane, their digital ecosystem and global partnerships to create locally relevant product and meaningful engagement with consumers around the world.
Consumers in APLA are highly connected, and our team continues to innovate on digital experiences that are locally relevant.
The Dia De Los Muertos footwear pack saw 100% sell through and this story was extended to the world through our new partnership with Roblox.
Now let's turn to our financial outlook.
As we approach the end of the second year of the pandemic, it is becoming even more challenging to compare quarters and fiscal years due to multiple waves of COVID-related disruption at different times, across the consumer marketplace and now supply chain.
We expect the operating environment to remain volatile as COVID-variants continue to cause disruption to business operations.
Our fiscal '22 financial outlook reflects inventory supply significantly lagging consumer demand across Nike's portfolio of brands.
However, Nike's long-term market opportunity is larger than ever, and so we remain focused on what we can control in the short-term and on where we are heading through our Consumer Direct Acceleration strategy and on what is required to deliver on our fiscal '25 financial outlook.
Specifically for fiscal '22, we continue to expect Revenue to grow mid single-digits versus the prior year, in line with guidance from 90 days ago.
For Q3, we expect revenue to grow low single-digits versus the prior year, due to the ongoing impact from lost production from COVID-related disruptions in Vietnam.
We are raising our gross margin guidance to expand 150 basis points versus the prior year.
We expect to continue benefiting from exceptional demand against the backdrop of lean marketplace inventory.
Full price realization will remain above our long-term target, with lower channel markdowns.
However, we expect product costs to rise in the second half due to higher macro input costs.
We are also planning for supply chain cost for the full year to increase relative to our estimates 90 days ago, with a greater impact in the second half.
Last, we now expect foreign exchange to be a 55 basis points tailwind versus prior year.
We continue to expect SG&A to grow mid-to-high teens for the full year as demand creation spend normalizes and we continue to invest in the capabilities to support our consumer-led digital transformation.
We now expect our effective tax rate to be in the low teens for the full year.
Consumer Direct Acceleration is driving our business forward and it is transforming our financial model.
We continue to prove that we can manage through the uncertainty and volatility in the current operating environment But we are doing more than just managing through, we are building Nike for the future with deeper consumer connections, a pipeline of product innovation to serve the needs of the modern athlete, and new operational capabilities required to serve consumers directly and digitally, at scale.
We have a clear vision of our brands' long-term future, and so we remain focused on what is required to win over the long-term. | compname reports q2 earnings per share of $0.83.
q2 earnings per share $0.83.
q2 revenue rose 1 percent to $11.4 billion.
qtrly nike brand digital sales increased 12 percent, or 11 percent on a currency-neutral basis.
qtrly gross margin increased 280 basis points to 45.9 percent.
nike - qtrly revenue in greater china & apla declined, largely due to lower levels of available inventory resulting from covid-19 related factory closures.
while closures had impact across portfolio, n. america & emea delivered growth due to higher levels of in-transit inventory entering q2.
higher quarter-end inventories driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions. | 1 |
2020 was a year with many facets.
We started the year confident that the commodity price headwinds faced over the past several years would ultimately transform into tailwinds.
Then a pandemic hit and basically turned all of our worlds upside down.
Like most other public companies have started in the earnings cycle, navigating the choppy waters of 2020 was truly a challenge.
Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees, while continuing to provide our essential services to the industries and communities we serve.
We implemented significant changes and safety protocols across our global operations to protect our employees, serve our customers and ensure business continuity.
We did incur direct costs of about $7.5 million related to these actions to protect our employees from COVID.
This doesn't include the plant disruptions, production slowdowns or customer order delays.
The result of our efforts allowed us to continue our operations through fiscal 2020 with minimal disruption.
Your hard work made 2020 one of our best years in Darlings long history.
We finished the year strong with a combined EBITDA, adjusted EBITDA of $214.5 million in fourth quarter.
All of our segments in the Global Ingredients platform put up solid results as the $146.3 million of EBITDA in the base business was the best quarterly performance of 2020 and reflected the growing momentum of an improved pricing cycle.
The Feed segment ended the year with a solid performance of $90.2 million of EBITDA, driven by the higher raw material volumes and better prices in both proteins and fats for the quarter.
The commodity price momentum has certainly carried into 2021 as prices are close to their 10-year mean reversion average.
We believe that 2021 results for the Feed segment should increase significantly over the previous year.
I'll dive into that a little later in the call.
Our Food segment continued to show strength, finishing 2020 with its best quarterly performance in our history.
Our collagen peptide sales drove better results posting approximately $50 million of EBITDA for the fourth quarter.
With our three new Peptan facilities online last year, we anticipate solid growth in this segment for 2021.
Now, as we had indicated on our third quarter call, Diamond Green Diesel had its turnaround in early fourth quarter, which led to DGD selling approximately 57 million gallons of renewable diesel at $2.40 per gallon or contributing $68.2 million of EBITDA to Darling during the fourth quarter.
For the year, DGD certainly met our expectations, selling 288 million gallons of renewable diesel at an average of $2.34 per gallon.
Darling's share of EBITDA from DGD for 2020 was $337.3 million.
Our European Bioenergy business reported another solid quarter, which we believe will be steady through 2021.
This decision was based on the go-forward unfavorable industry economics for biodiesel.
Our action does free up valuable low carbon feedstocks that can be sold to DGD and also helps us focus our energy on making DGD the best low cost renewable diesel producer in the world.
Brad will cover the particulars of the asset impairment charge related to these shutdowns a little later in the call.
Our current take on the economic recovery is bullish.
Ag commodity markets are experiencing a very favorable pricing environment.
The energy market also is stronger than a year ago with ULSD trading above where it was at the end of February 2020.
These two together make for a strong operating environment for Darling and DGD.
We believe as the U.S. and world economies reopen later this summer, demand for eating out, taking road trips will help us to maintain a good percentage of the improved commodity price environment we are experiencing today.
At the top, we'd like to point out that our fiscal 2020 was a 53-week year with the extra week in our fourth quarter.
Also I will speak to several adjusted amounts, which reflect the shutdown of our two biodiesel plants with a restructuring and asset impairment charge recorded in the fourth quarter of 2020 and also adjusting the Q4 '19 and fiscal year 2019 results for the retroactive blenders tax credits related to 2018 and 2019 all being recorded in our fourth quarter 2019 results.
We think this will give a better comparison of our results period-to-period.
The previously mentioned pre-tax restructuring and asset impairment charge of $38.2 million related to the shutdown of the two biodiesel facilities included a goodwill impairment charge of $31.6 million, other long-lived asset charges of $6.2 million and $0.4 million of restructuring charges.
Now, for a few of the highlights; net income for the fourth quarter of 2020 totaled $44.7 million or $0.27 per diluted share compared to a net income of $242.6 million or $1.44 per diluted share for the 2019 fourth quarter.
Net income for fiscal 2020 was $296.8 million or $1.78 per diluted share compared to $312.6 million or $1.86 per diluted share for fiscal 2019.
In the fourth quarter of 2020, we recorded a 30.6 million after-tax restructuring and asset impairment charge related to the shutdown of our Canada and U.S. biodiesel facilities.
Excluding this charge, adjusted net income was $75.3 million or $0.45 per diluted share.
Additionally, the fourth quarter of fiscal 2019 included retroactive blenders tax credits related to 2018, as well as for all of 2019.
Excluding these credits for periods prior to the fourth quarter of 2019 resulted in an adjusted net income for the fourth quarter of 2019 of $50.1 million or $0.30 per diluted share.
Excluding the restructuring and asset impairment charge related to the shutdown of the two biodiesel facilities adjusted net income for fiscal 2020 was $327.4 million or $1.96 per diluted share.
Excluding the retroactive blenders tax credits related to 2018 adjusted net income for fiscal 2019 was $226 million or $1.34 per diluted share.
Now, turning to our operating income, we recorded $74.4 million of operating income for the fourth quarter of 2020 compared to $293.3 million for the fourth quarter of 2019.
Excluding the pre-tax $38.2 million restructuring and asset impairment charge adjusted operating income for the fourth quarter of 2020 was $112.5 million.
Excluding the retroactively reinstated blenders tax credits recorded in the fourth quarter of 2019 for prior periods, the adjusted operating income for the fourth quarter of 2019 was $100 million.
Therefore, on a comparative basis the fourth quarter of 2020 adjusted operating income improved $12.5 million over the fourth quarter of 2019.
The fourth quarter 2020 gross margin increased $29.8 million over the prior year amount, which partially offset the $38.2 million impairment charge and a $10 million increase in depreciation and amortization, which was partially attributable to the Belgium Group and Marengo acquisition assets added in the fourth quarter of 2020.
Operating income for fiscal 2020 was $430.9 million as compared to $475.8 million for fiscal 2019.
Excluding the $38.2 million restructuring and impairment charge, the adjusted operating income for fiscal 2020 was $469.1 million.
Operating income for fiscal 2019 was $475.8 million.
Excluding the retroactive blenders tax credits related to 2018 adjusted operating income for fiscal 2019 was $389.2 million.
The $79.9 million increase in adjusted operating income for fiscal 2020 as compared to fiscal 2019 was primarily due to a gross margin increase of $108.3 million and a larger contribution and equity earnings from our renewable diesel joint venture Diamond Green Diesel.
These improvements more than offset a $20 million increase in SG&A, asset sales gains of $20.6 million in fiscal 2019 and a $24.7 million increase in depreciation and amortization.
SG&A increased $20 million in fiscal 2020 as compared to fiscal 2019, primarily due to increases in insurance premiums, labor cost, COVID-related costs and foreign currency effect, which were partially offset by lower travel cost.
Interest expense declined $1.7 million for the fourth quarter 2020 as compared to the 2019 fourth quarter amount and declined $6 million for fiscal 2020 as compared to fiscal 2019.
Turning to income taxes, the company's 2020 effective tax rate of 15.1% is lower than the federal statutory rate of 21% primarily due to the biofuel tax incentives.
Tax expense and cash tax payments for 2020 were $53.3 million and $36.8 million respectively.
For 2021 we are projecting the effective tax rate to be 20% and cash taxes of approximately $40 million.
Looking at the balance sheet at year-end January 2, 2021 debt was reduced $141.4 million during the year with a net paydown of $189.8 million.
The bank covenant leverage ratio ended the year at 1.90.
Capital expenditures totaled $280.1 million for 2020 as we plan to spend approximately $312 million on capital expenditures in fiscal 2021.
The company received $205.2 million in cash distributions in 2020 from our Diamond Green Diesel joint venture.
Lastly, we repurchased approximately 2.2 million shares of common stock totaling $55 million during fiscal 2020 and paid approximately $29.8 million in cash in the fourth quarter of 2020 for the Belgium Group and Marengo acquisitions.
Now diving into 2021, with the commodity price improvement and continued strong raw material volumes, we believe that our Food, Feed and Fuel segments prior to adding Diamond Green Diesel should generate between $565 million and $600 million of EBITDA.
That's a conservative 12% to 20% improvement over 2020.
DGD, we believe will be able to earn at least $2.25 a gallon EBITDA in 2021 and should produce between 300 million gallons and 310 million gallons this year, which would generate between $335 million and $350 million of EBITDA for Darling share.
This range does not include any additional upside for renewable diesel gallons that could be produced in 2021 as the 400 million gallon expansion is on track to commission in early Q4.
We should know better in the middle of the year the exact timing of when the Norco expansion will be approximately online.
Now, the DGD Port Arthur location is making excellent progress with all key long lead equipment items ordered and site work nearing completion.
This 470 million gallon renewable diesel facility should be operational by the back half of 2023 securing Diamond Green Diesel's leadership position as the largest low-cost producer of renewable diesel in North America.
We anticipate all costs of both expansion projects will be funded by the internal cash flow of Diamond Green Diesel.
However, we still anticipate DGD putting a non-recourse revolver in place shortly.
Now, let's do something different and turn to the feedstock question.
I will try and answer this question now but sure you will ask it again during the Q&A.
Darling believes there's adequate low carbon feedstocks to supply the 1.2 billion gallon renewable diesel platform of DGD.
We do expect growth in animal fats and certainly think that used cooking oil will recover a little this year and grow in the future years.
Our approach for keeping our feedstock advantage for DGD is twofold.
What can Darling do to render or collect more out of our footprint today, either through process or technology improvements or competitive positioning and what are the bolt-on opportunities to grow our volumes of animal fats and waste oils around the world?
We do believe there are multiple avenues for us to pursue in expanding our feedstock footprint and we have faith that our large global presence will put us on a pathway to get results that others might not be able to achieve.
Operating animal byproduct businesses on five continents allows us to see what no one else can see and provide supply chain arbitrage that will make our renewable diesel platform second to no one.
As we grow another year older and wiser we continue to position our company in the best place to take advantage of the changing times.
We are excited about our outlook for 2021, encouraged by the growth of our low carbon fuel standards around the world and we are doubly pleased with the great progress at Diamond Green Diesel and our joint venture partner Valero as we are now inside of nine months of the biggest renewable diesel project in North America starting up.
So with that Alicia, let's go ahead and open it up to question and answers. | compname reports q3 sales of $1.2 billion.
q3 sales $1.2 billion. | 0 |
I'll then hand the call over to our Head of Operations, Dave Striph, who will speak to the results of our Operating Asset segment.
Jay Cross will provide updates on our development activity in Ward Village.
And finally, our CFO, Correne Loeffler, will conclude the call with a review of our financial results before we open the lines for Q&A.
With that, let me start out by saying our positive second quarter results marked a significant milestone for the Howard Hughes Corporation.
During this time last year, COVID-19 emerged as a significant obstacle that we had to navigate for the better part of the year.
Despite the enormous challenges of the past year, our team of dedicated employees, irreplaceable assets and highly sought after communities withstood the various hurdles presented by the pandemic.
I am pleased to report that all of our business segments are demonstrating great strength and resiliency and now have either surpassed or are closely approaching pre-pandemic levels.
Our Master Planned Communities continue to generate strong results with the acceleration of land sales driven by robust home buyer demand, demand that began to strengthen in the second half of last year and is carried into the first half of 2021.
An integral part of our strategy is our ability to sell residential land to homebuilders at higher prices over time, driven by the amenities created by our commercial developments that are integrated throughout our communities.
During the quarter, our commercial assets delivered strong year-over-year and sequential NOI growth in our Operating Asset segment with notable improvements across retail, hospitality and the Las Vegas Ballpark.
Turning to condo activity in Hawaii.
Ward Village has continued to experience elevated sales despite being limited to a mostly virtual condo tour experience.
All three towers currently under construction are now 86% presold and are all progressing on time and on budget.
Finally, at the Seaport, we experienced improvement with the continuation of the greens, increased rooftop events and robust restaurant activity, all of which continue to drive increased foot traffic to the area.
Now taking a deeper dive into the drivers of our MPC segment.
Over the past several quarters, our communities located in the Las Vegas and Houston regions were able to capitalize on the demand from out-of-state migrations as homebuyers living in densely populated high-cost states set a better quality of life with a focus on expansive open spaces and best-in-class amenities.
This view was further solidified by the latest midyear report released in July by the Robert Charles Lesser Corporation, where our communities in Summerlin and Bridgeland ranked among the top-selling Master Planned Communities in the country.
Summerlin was ranked as the third top-selling MPC in the U.S. and was the top-selling MPC in Nevada.
Bridgeland was ranked 13th on the national list.
While some of the pandemic-driven migration trends that I just highlighted have moderated, regional builder inventories have been depleted and remain at or near all-time lows.
Additionally, homebuilders have recently shifted to a just-in-time home delivery strategy in order to combat supply chain constraints, which have also contributed to a reduced available supply.
Overall, housing demand within our communities has remained strong, and new home permits have remained elevated, all of which point to increased homebuilder demand for land to replenish their depleted inventories.
During the quarter, our MPCs delivered tremendous results as the strength in land sales, combined with earnings from our Summit joint venture in Summerlin, helped drive the segment's earnings higher.
In addition, new home sales, a leading indicator of future land sales, grew 23% year-over-year.
Summerlin had an all-around great quarter, selling 49 acres of residential land, while also increasing its price per acre 14% compared to the same period last year.
Builders continue to purchase more of our land to keep up with demand, which is evidenced by the closing of three super pad sites during the quarter.
Additionally, Summerlin saw a 66% year-over-year increase in new home sales, demonstrating the demand from homebuyers in this region remains strong.
Another significant driver to Summerlin's success was derived from the earnings generated at The Summit, our joint venture with Discovery Land.
The Summit's increase in earnings was due to closing of 16 units during the quarter versus three units during the prior year period.
In Bridgeland, land sales softened in the quarter with 25 acres of residential land sold compared to 38 acres in the prior year period.
Bridgeland's new home sales slowed a bit during the quarter as well, as homebuilders paused the selling of lots and began listing homes on the market at a much later stage in the construction process.
A change in sales strategy for homebuilders in Bridgeland that was driven by ongoing supply constraints that impacted material costs and delivery times.
We view both the decline in land sales as well as the decline in home sales this quarter as a temporary pause driven by this change in homebuilder sales strategy that meaningfully limited supply and was not the result of any change in underlying demand.
As builders now begin to release these partially constructed new homes to the market and return to the more traditional model of selling lots, we expect that sales will rebound in the coming quarters.
The Woodland Hills delivered positive results across the board with significant year-over-year increases in land sales, new home sales and growth in the price per acre of land sold.
The results produced by this MPC continue to impress and have maintained an accelerated pace over the past several quarters.
Turning to the Seaport.
We continue to experience numerous areas of improvement with the reopening of the Manhattan economy.
We have begun hosting various rooftop events, such as high school and college graduations and, most notably, ESPN's Annual SB awards.
We continue to see strong demand for the future events at The Rooftop, which is a great sign coming out of the pandemic.
We've also made tremendous progress with our restaurant space.
During the quarter, we increased the number of open restaurants from two to seven.
Of these openings, two were related to concepts by acclaimed chef, Andrew Carmellini, restaurants Carne Mare and Mister Dips.
Both of these have displayed very strong initial results.
Lastly, we relaunched our Summer Concert Series on The Rooftop at Pier 17, which was canceled last year due to the pandemic.
We held our first concert in late July to a sold-out crowd.
And have several more concerts lined up through October, several of which are already sold out.
With that, I'll hand the call over to Dave Striph.
Results of the second quarter that David just highlighted clearly display the strength of our business as the economy continues to reopen.
In particular, our Operating Asset segment generated robust results that I would like to touch on in more detail.
Our commercial properties delivered improved results during the quarter as the portfolio continues to inch closer to pre-pandemic levels.
Our Operating Assets segment generated NOI of $57.9 million in the quarter, which was a material improvement year-over-year and sequentially.
The results delivered in the second quarter by our retail properties were one of the top highlights from our portfolio of high-quality assets.
Retail NOI increased for the third consecutive period totaling $14.8 million in the quarter, increasing 72% year-over-year and 23% sequentially.
While we generally experienced improvements throughout the majority of our retail assets, the largest drivers of this impressive performance were concentrated in Downtown Summerlin, Ward Village and the Outlet Collection at Riverwalk.
Specifically in Downtown Summerlin, we are beginning to see activity surpass pre-pandemic levels as sales per square foot in June totaled $668 compared to $636 in June of 2019.
Our retail assets have continued to improve with consecutive increases in collection rates, which have been steadily improved to 80% from a low of 50% in the second quarter of last year.
Hospitality was another sector severely impacted by COVID, which caused our hotels to shutter for an extended period of time just over one year ago.
Our hotels have experienced a meaningful recovery and during the quarter, generated $2.7 million of NOI compared to a slight loss in the prior quarter and a $1.8 million loss in the prior year period.
The improved occupancy at our hotels was largely driven by an increased volume of leisure travelers during May and June.
The Las Vegas Ballpark had a tremendous quarter, generating quarterly NOI of $3.1 million.
This was substantially higher than the $1.1 million loss reported during the prior year period due to the cancellation of the Minor League Baseball season in 2020.
For 2021, the season began in May, and our team, the Las Vegas Aviators has hosted several games at full capacity with additional games scheduled to continue through the majority of the third quarter.
The continuous lease-up of our latest multifamily assets helped drive quarterly NOI to $7.4 million, a 94% increase year-over-year and a 29% increase sequentially.
Just as we have seen robust demand in single-family housing, interest remains high for available units at our multifamily properties.
With most of our assets leasing at or above pro forma projections, we have additional projects underway in Bridgeland, Summerlin and Downtown Columbia to further capitalize on this momentum.
Office NOI increased 2% sequentially to $26.3 million as strong leasing velocity more than offset the tenant expirations experienced during the prior quarter.
I'm pleased to report that we experienced a rapid increase in office leasing momentum during the quarter, specifically in the Woodlands.
Year-to-date, we have executed 216,000 square feet of new and renewal leases with 95% of that activity occurring in the second quarter.
In addition, we have nearly 300,000 square feet of leases in progress, predominantly concentrated in the Woodlands.
This provides a strong pipeline of opportunities that could potentially close in the second half of 2021.
Furthermore, we have limited lease expirations that do not exceed 10% of our office portfolio during a given year until 2025.
With that, I will hand the call over to our President, Jay Cross.
As you can tell from the comments thus far, demand within our communities from both the residential and commercial perspective remains strong.
As such, we need to ensure that our communities are equipped with the right products that residents and tenants are seeking.
Last quarter, I highlighted the commencement of two million square feet of construction across several asset types, including multifamily, office and a condo tower.
We've made great progress on the initial construction phase of these projects.
And while we have encountered material shortages in some instances due to the supply constrained market, we do not expect any material impacts over the course of development.
This is due to our rigorous budgeting process and ongoing supply chain management.
There are a number of additional projects on the horizon as we continue to see an abundance of opportunities to diversify our product mix across the portfolio.
For instance, in Bridgeland, we continue to experience strong demand for housing and see a need to offer additional products into the market.
As I mentioned during our Investor Day and on last quarter's call, we plan to develop a single-family for rent community in Bridgeland that will encompass 263 homes distributed across three product types.
This is a first for Howard Hughes and will offer a complementary product between single-family for purchase and our multifamily offerings.
The thesis is to provide tenants the flexibility of renting while still having access to many of the offerings a traditional home can provide such as three- and four-bedroom configurations, private outdoor space and an attached garage.
The typical renter might be an executive looking for a temporary housing solution, a single parent or young couples for the family seeking a temporary home as they save to make a down payment for their first home.
The single-family for rent project is still in the preplanning stages, and we look forward to providing additional updates in the coming quarters.
Seaport, we continue to make great strides on the development front.
Tin Building remains on track for completion by the end of 2021, and we look forward to having an official brand opening in the spring of '22.
The exterior of the building is largely complete, the interior is well along and the integration of omnichannel capabilities for enhanced mobile ordering and delivery will establish the Tin Building as a one-of-a-kind food home.
At 250 Water Street, we continue to advance our plans for this site following the New York City Landmark Preservation Commission's approval of our proposed design for a 28-story mixed-use building.
The proposal is now moving through the city's land use review process to obtain final approvals anticipated later this year.
Additionally, we have agreed with the city on an extension to our ground lease to 99 years, subject to a separate land use review process, which will also include our contribution to the Seaport Museum's revival, improvements to the Esplanade and the opening of an important drive way around the Tin Building.
This separate process is also on track for year-end completion.
Shifting our attention to Hawaii.
At Ward Village, condominium sales continued to progress at elevated levels.
During the quarter, we contracted to sell 45 condos, which has further reduced our already limited supply of available units.
The pace of continued sales has been incredible, especially when one considers the impacts of Hawaii's COVID-related travel restrictions.
Last quarter, we broke ground our latest tower, Victoria Place.
And of its 349 units, only 23 condos remain, which speaks to the level of demand we are seeing in Ward Village.
Our other two towers under construction, 'A'ali'i and Ko'ula are well sold at 87% and 81% and remain on time and on budget, with completion expected in the fourth quarter of 2021 and 2022, respectively.
Finally, we sold out our third condo tower in Hawaii during the quarter with the closing of the final unit at Anaha for $12.9 million.
During the second quarter, our operational teams were able to capitalize on improving market conditions and delivered improved financial performance across all of the company's business segments.
First, our MPCs delivered strong results in the quarter with earnings before taxes, or EBT, of $69.8 million, which is a 10% increase compared to an EBT of $63.4 million in the prior quarter and a 66% increase compared to an EBT of $42.2 million in the prior year period.
Next, our operating assets generated $57.9 million of quarterly NOI, which represented a 20% increase compared to an NOI of $48.4 million in the prior quarter, and a 42% increase compared to an NOI of $40.8 million in the prior year period.
Lastly, we sold 45 condo units in Hawaii, just one shy of the 46 units sold in the prior quarter and a 246% increase compared to the 13 units sold in the prior year period.
At the Seaport, we recorded a $4.4 million loss in NOI, which is only 1% lower compared to the prior quarter and 18% lower compared to an NOI loss of $3.7 million in the prior year period.
Despite the loss in NOI, we experienced a meaningful improvement in visitor traffic.
It was driven by an increase in events and strong restaurant activity.
Even with the impact of labor shortages, several of our restaurant concepts were still able to meet or exceed their stabilization targets based on recent sales per square foot.
This demonstrates the strength of the customer demand.
We are very pleased with our quarterly performance and look forward to continuing this momentum into the second half of the year.
Taking a look at GAAP earnings.
For the second quarter, we reported a net income of $4.8 million or $0.09 per diluted share compared to a net loss of $34.1 million or $0.61 per diluted share during the prior year period.
The increase in net income from the prior year period was primarily driven by strong results generated by our MPC and Operating Assets segments.
Aided by our strong second quarter performance, I am pleased to report that we remain on track to meet all of our previously disclosed guidance targets established at the beginning of the year.
To reiterate our 2021 guidance, we expect MPC EBT to range between $210 million to $230 million and expect operating asset NOI to range between $195 million to $205 million.
For the first half of 2021, our G&A totaled $42.1 million, representing a 31% decrease compared to $61.3 million in the prior year period.
Based on our current run rate, we expect G&A to be within our guidance range of $80 million to $85 million in 2021.
Based on the presale volume at 'A'ali'i as well as our other sales at Ko'ula and Anaha, we remain confident we can generate between $100 million to $125 million of condo profits in 2021, which was our original guidance for the full year.
Once construction is complete at 'A'ali'i in the fourth quarter, we will close on the units currently under contract and begin to recognize the associated sales proceeds.
Now turning our attention to noncore asset sales.
In May, we sold Monarch City, a 229-acre land parcel outside of Dallas, resulting in a book gain of $21.3 million before realizing a noncash tax expense of $4.6 million.
This sale generated net proceeds of $49.9 million, bringing our total net proceeds from noncore asset sales to $263.7 million since the fourth quarter of 2019.
We will continue to pursue the sale of our other noncore assets and remain focused on achieving maximum value for these dispositions.
Finally, as we turn our attention to the balance sheet.
We continue to maintain a robust liquidity position and a strong balance sheet.
We ended the quarter with just over $1.2 billion of liquidity that comprised of $1.1 billion of cash and $185 million of undrawn revolving credit facility.
Over half of our debt issuances don't mature until 2026 or later.
And we have ample liquidity to address our near-term maturities as well as to fund our net equity requirements for our development projects.
Our strong financial position provides us the flexibility to nimbly execute on future projects, targeting outsized risk-adjusted returns.
Before we open up the lines for Q&A, I'd just like to take a minute to reiterate a few key points.
First, our business is designed to deliver perpetual cycle of value creation.
As we sell land to homebuilders, new residents move into our communities and create a need for commercial amenities.
As we build out these amenities by constructing commercial assets, it helps drive the overall value of our land hire.
We have nearly 10,000 acres of raw land across the country that enables us to repeat this process for decades to come.
This model remains true for our condo developments in Ward Village, but on a vertical level, where we have nearly five million square feet of entitlements remaining.
Second, our strong balance sheet leaves us well positioned to evaluate opportunities and react quickly based on current market conditions.
As Jay mentioned, we have already commenced two million square feet of development in the first half of 2021, and are in the early stages of planning for additional projects.
Third, our management team is now fully established.
We come from unique backgrounds with diverse expertise in development, finance and operations that when mended together, position us to nimbly execute and deliver superior results.
Combined with the support of our Board, we're all aligned and focused on creating meaningful value for all of our stakeholders.
Lastly, we finished the first half of 2021 with strong operational and financial performance across the board.
We believe our business is poised for continued growth, and we are well positioned heading into the second half of 2021 as we remain on target to achieve our full year guidance.
With that, I'd now like to begin the Q&A section of the call.
We'll answer the first few questions that have been generated by Say Technologies and will be read by John Saxon.
John, can you read the first question? | howard hughes q1 loss per share $1.20.
q1 loss per share $1.20. | 0 |
Additionally, the content of this conference call may contain time-sensitive information that is only accurate as of the date hereof.
We do not undertake and specifically disclaim any obligation to update or revise this information.
As a reminder, Annaly routinely posts important information for investors on the company's website, www.
Today, I'll provide an overview of the current macro environment, briefly discuss our performance during the quarter and full year 2021 and close with our outlook for the year ahead.
Ilker will then provide more detailed commentary on our investment portfolio, while Serena will discuss our financial results.
And as noted, our other business heads are also here to provide additional color during Q&A.
Now, beginning with the macro landscape, we saw increasingly challenging market conditions in the fourth quarter and into 2022 as the robust performance of the U.S. economy has made it evident that a withdrawal of pandemic era stimulus is imminent.
economy grow 5.7% in real terms in 2021, marking the best annual growth in nearly 40 years.
Meanwhile, the labor market has seen a rapid recovery as employers added 6.4 million jobs last year and the unemployment rate fell to 3.9%.
Both measures suggest that the labor market has recovered significantly since the onset of the pandemic.
Stimulus measures fueled this rapid recovery, which has also spurred inflation to generational highs as seen in December when the consumer price index reached 7% year over year.
Although much of this increase in prices was initially seen as temporary, ongoing elevated price gains across various categories of goods and services raise the risk that inflation could persist for some time.
Accordingly, current macroeconomic conditions have led to a meaningful shift by the Fed, which now views less accommodative monetary policy is the primary way to ensure parts of its mandate, full employment and stable prices are being met.
In addition to an accelerated taper, Fed has begun to signal a larger number of hikes than previously expected.
Front-end rate markets are pricing roughly 25 basis point rate hikes this year beginning in March, up from just two -- one quarter ago.
Given the uncertainties around the economy, the Fed is likely to direct market pricing and hike in line with it rather than provide forward guidance well ahead of time.
The Fed has also begun to discuss shrinking its balance sheet, and we expect the Fed will let assets run off at a pace faster than the prior taper of $50 billion per month.
Now, this notable shift in policy expectations and higher volatility have led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy, best seen through the spread widening in agency MBS in recent weeks.
Turning to Annaly's portfolio, agency MBS underperformed given weaker demand following the initiation of Fed taper and a flattening of the yield curve.
In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation with total assets decreasing by approximately $5 billion to $89 billion in the quarter.
As a result, economic leverage declined slightly from 5.8 times to 5.7 times.
Now, we were certainly not immune to the spread volatility as we experienced an economic return of negative 2.4% however, we generated earnings available for distribution of $0.28, unchanged from the prior quarter and exceeding our dividend by $0.06 per share.
With respect to capital allocation, in line with recent quarters, we increased the allocation to our credit businesses by approximately 200 basis points to 32% in the fourth quarter as prospective returns continued to favor credit.
Looking back on the full year, our credit allocation increased approximately 10 percentage points from December 2020, even with the successful sale of our commercial real estate business, which underscores the favorable fundamentals and strong execution from our resi credit and middle market lending businesses.
Now, I'll touch more on our outlook shortly, but notably, both market and business-specific tailwinds remain favorable for our credit businesses.
Now, 2021 was a transformative year for Annaly, marked by the sale of our CRE business, the launch of our mortgage servicing rights platform and the expansion of our residential credit business.
The collective impact of these initiatives has increased our presence throughout residential housing finance and allow us to allocate capital effectively where returns are most attractive, a key differentiator for Annaly.
Now, I'd like to briefly touch on notable milestones in our businesses and how they have better equipped Annaly to be nimble in the midst of volatility.
First, our MSR business had a solid year with assets increasing over $500 million throughout 2021 to $645 million.
We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships and build out of the operations and infrastructure necessary to scale the business efficiently.
As a result of these efforts, we have proven to be a key player in the market ending the year as the fifth largest bulk buyer of MSR.
And with over $200 million of MSR commitments already through the end of January, we're continuing to see progress toward fully scaling the platform and we expect to see increased market activity given diminished originator profitability.
Our residential credit platform, which grew nearly 90% last year, remains diversified with the ability to deploy capital efficiently in either whole loans or securitized markets.
The generation of assets for Annaly's balance sheet, while controlling strategy, diligence and servicing outcomes remains paramount to our investment approach.
Business activity was enhanced by the launch of our whole loan correspondent channel which expanded our sourcing capabilities through the addition of new strategic partners and product offerings.
We've also benefited from new bulk partnerships established outside of our correspondent channel and altogether, these efforts helped drive the group's record $4.5 billion in whole loan purchases last year, which exceeded the amount of originations in both the prior two years combined.
Further, Onslow Bay remains a programmatic issuer of securitizations, pricing 13 whole loan transactions totaling $5.3 billion since the beginning of 2021 with OBX being the fourth largest nonbank issuer of prime jumbo and expanded prime MBS over the past two years.
And with housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead as we build on our origination and securitization momentum.
Now, shifting to our 2022 outlook.
Our portfolio is well prepared for volatility, which we anticipated would materialize as the Fed normalizes monetary policy.
First, we have thoughtfully reduced our economic leverage to one and a half turns since the onset of COVID to 5.7 times, the lowest it's been since 2014.
Our defensive leverage profile is further supported by our low capital structure leverage with 88% of our equity in common stock and minimal asset level structural leverage as highly liquid agency MBS make up the vast majority of our portfolio.
Second, we have substantial liquidity with $9.3 billion of unencumbered assets up $500 million year over year.
And this liquidity is complemented by a wide array of financing options, including our own broker-dealer.
And finally, we are conservatively hedged to mitigate interest rate risk with a year-end hedge ratio of 95%, and we expect to remain close to fully hedged over the near term.
Now, with ample liquidity and historically low leverage, we are well positioned to take a more offensive posture if and when the opportunity presents itself.
While agency returns are increasingly attractive as Ilker will elaborate on, we believe there will be better tactical opportunities out the horizon, and we'll be patient given uncertainty around the market and the Fed.
But should assets continue to widen past current levels, which we deem close to fair value, we stand ready to add fundamentally desirable assets.
Now, Finally, before handing it off to Ilker to discuss our portfolio in greater detail, I wanted to congratulate him on recently being named our Chief Investment Officer.
I've worked with Ilker at three different institutions for the better part of the past 20 years, and I cannot think of an individual more knowledgeable about mortgages and prepayments or better suited to help us drive success for Annaly into the future.
As you discussed, the fourth quarter was challenging for Agency MBS due to a combination of factors.
The Fed initiated and then accelerated the taper, which in conjunction with risk of sentiment caused by the virus variant and geopolitical risks led to significant curve flattening and an uptick in interest rate volatility.
Mortgage investors, notably banks turned their attention to 2022 without Fed support and decreased the pace of their purchases.
MBS underperformance was broad-based across the coupons stack with supply weighing on to upside threes, while higher coupons struggled into the curve flattening.
Although our portfolio was not immune to these sectors, we had been proactively reducing our MBS based exposure throughout 2021.
In fourth quarter, we reduced our agency holdings by roughly $5 billion, primarily through TBA sales, bringing the total 2021 portfolio reduction to $10 billion.
Through this resizing, our portfolio construct remains well positioned across the coupon stack.
In lower coupons, we continue to favor TBAs, which maximize our liquidity profile and despite the initiation of the taper, dollar roll financing remains special in the context of 30 to 40 basis points.
Meanwhile, our specified portfolio is based up in coupon, up in quality and is roughly four years season, which should provide resilient cash flows as we shift out of the financing environment and into on debt favors for extension protection.
In terms of our interest rate exposure, we adjusted hedges toward the front end of the yield curve by selling additional short-term treasury futures, which increased our hedge ratio to 95% of our liabilities.
We have also added short-term software swaps, which are an efficient hedge to our repo-funding levels.
Our conservative hedge portfolio is integral to managing high volatility market environments like the one we experienced recently.
At the current rate levels, to converge the profile of the Agency MBS market has improved meaningfully, but we continue to pursue a conservative approach to managing interest rate risk.
Since the year-end, we have seen a higher in rates and repricing in MBS as the market digests technical impact of Fed monetary policy tightening.
Following the move, wider MBS spreads are within a few basis points of their average 2018 levels, which was the last time the Fed was reducing balance sheet.
When drawing historical comparisons, we believe mortgage cash flows are currently more attractive compared to 2018 for multiple reasons.
Other fixed income alternatives are relatively tight from a historical perspective.
More of the mortgage universe is locked away in Fed and bank held-to-maturity portfolios and the prepayment outlook is much better for the mortgage universe.
In higher coupons, remaining borrowers did not refinance after months with historically low mortgage rates.
So we anticipate they would be less reactive to changes in rates going forward.
Meanwhile, due to very high realized home price appreciation, cash-out refinancings should alleviate extension risk in lower coupon mortgages.
All these factors should materially improve the profile and predictability of mortgage cash flows.
Consistent with these trends, our portfolio paid 21.4 CPR in Q4, 7% slower than in Q3, and we expect a further deterioration of approximately 15% in Q1 of 2022.
With respect to our MSR platform, our fourth quarter purchases brought the portfolio to nearly $650 million in market value net of runoff.
Additionally, as David mentioned, with over $200 million in bulk MSR commitments in January and the recent price appreciation due to the sell-off in rates, our current MSR portfolio has reached nearly $1 billion in market value.
The sector remains very active due to consistent disposition of MSR by the originator community.
Coupled with wider spreads, we see this as an attractive growth opportunity for our MSR business which is complementary to our core agency strategy.
Turning to residential credit.
We continue to execute our primary strategy of acquiring expanded residential whole loans through Onslow Bay.
The economic value of residential credit portfolio grew by approximately $330 million quarter over quarter, primarily through the addition of $1.7 billion of whole loans, the retention of assets manufactured through our OBX securitization platform and the deployment of capital into short spread duration securities.
Return on our securitization strategy remains in the low double digits with minimal recourse leverage.
The residential credit portfolio ended Q4 with $4.6 billion of assets representing $3.1 billion of the firm's capital.
Our view on housing fundamental strength remains intact despite mortgage rates increasing as the shortage of one to four units single-family housing in the United States continues to be a long-term structural issue that has no near-term resolution.
The supply demand imbalance of housing stock, combined with the strength of the consumer's balance sheet has continued to play out in outsize on price appreciation, positive resolution out of forbearance agreements and stable delinquency roll rates, all benefiting our existing portfolio.
Lastly, our middle market lending portfolio had an active quarter closing nine deals totaling over $325 million in commitments, while five borrowers repaid.
Middle market lending ended the fourth quarter with nearly $2 billion in assets, up 4% from the prior quarter.
The portfolio's strong credit profile is demonstrated through a 10% increase in underlying borrowers' average EBITDA since closing and a nearly 30% reduction in system reserves throughout the year with no loans on non-accruals.
And as discussed last quarter, the close of our private closed-end fund allows for increased capital allocation flexibility and provides recurring fee revenue to the REIT.
As David discussed, the current environment is marked by challenging conditions as the Fed begins to remove with accumulative policy that has supported asset prices and financial conditions since the onset of the pandemic nearly two years ago.
We remain focused on protecting the portfolio through defensive positioning and proactive hedging.
In addition, a key focus will be to opportunistically grow our MSR and residential credit businesses which should provide strong returns and diversification benefit to our broader portfolio.
Although we remain patient in light of recent spread widening in Agency MBS, the improving cash flow fundamentals and increased prospective returns on the sector should provide attractive reinvestment opportunities and even potentially bring leverage back to levels more consistent with our historical leverage considerate of our overall capital allocation framework.
With this, I will hand it over to Serena to discuss our financials.
Today, I'll provide brief financial highlights for the quarter and as of December 31, 2021 and discuss select year-to-date metrics.
As discussed earlier, the last quarter of the year exhibited challenging market conditions resulting from a risk off sentiment over the Omicron variant and anticipation around the initiation of the Fed tapering.
Notwithstanding this more difficult economic return environment, we have again delivered solid earnings and ample coverage, approximately 125% of our dividend.
To set the stage with some summary information.
Our book value per share was $7.97 for Q4, and we generated earnings available for distribution per share of $0.28.
Book value decreased $0.42 for the quarter primarily due to lower other comprehensive income of $680 million or $0.47 per share on higher rates and spread widening and the related declining valuations on our agency positions, as well as the common and preferred dividend declarations of $349 million or $0.24 per share, partially offset by GAAP net income of $418 million or $0.29 per share.
Our multifaceted hedging strategy continued to support the book value, albeit in a more muted fashion this quarter due to the aforementioned spread widening with swaps, futures and MSR valuations contributing $0.16 per share to the book value during the quarter.
Combining our book value performance with our fourth quarter dividend of $0.22, our quarterly and tangible economic returns were negative 2.4%.
Subsequent to quarter end, as Ilker and David both mentioned earlier, we continue to see significant spread widening impacting the valuation of our assets, which is partially offset by the benefit of our MSR investments and rate hedging strategy through January with our book value ending the month down 3% compared to December 31, 2021.
Diving deeper into the GAAP results, we generated GAAP net income for Q4 of $418 million or $0.27 per common share, net of preferred dividends, down from GAAP net income of $522 million or $0.34 per common share in the prior quarter.
The most significant drivers of lower GAAP income for the quarter is the unrealized losses on investments measured at fair value through earnings of $15 million in comparison to unrealized gains of $91 million in Q3 and realized losses on disposal of investments in the quarter of $25 million as compared to gains of $12 million in Q3 along with the previously referenced lower net gains on the swaps portfolio by $42 million.
As I mentioned earlier, the portfolio continued to generate strong income with EAD per share of $0.28, consistent with Q3 earnings, and we continue to generate strong earnings while prudently managing lower leverage resulting in an EAD ROE per unit of leverage of 2.3%.
We have previously communicated that we anticipate earnings to moderate.
Notwithstanding this, we expect earnings to sufficiently cover the dividend for the near term, all things equal.
Average yields remained flat at 2.63% compared to the prior quarter.
However, dollar roll income contributed to EAD in Q4 reaching another record level at $118.5 million.
EAD also benefited from higher MSR net servicing income associated with the growth of the MSR portfolio and lower G&A expenses, which I will cover further later.
The portfolio generated 203 basis points of NIM ex PAA, down one basis point from Q3 driven by the improved TBA dollar roll income, offset by higher swap expense on a lower average receive rate.
Now, turning to our financing.
As I noted in the prior quarter, we have benefited from our ample liquidity position and the robust financing market during 2021 with the previous quarter marking nine consecutive quarters of reduced economic cost of funds for the company and our year-to-date economic cost of funds being 79 basis points, down 55 basis points in comparison to the prior year.
During Q4, the market pricing a more aggressive Fed tightening cycle, resulting in repo rates increasing across the curve.
This upward trend along with higher swap rates impacted our overall cost of funds for the quarter rising by nine basis points to 75 basis points in Q4, and our average REPO rate for the quarter was 16 basis points compared to 15 basis points in the prior quarter.
Moving now to our operating expenses.
Efficiency ratios improved by seven basis points in the fourth quarter with opex to equity of 1.21%.
And for the entire year, the opex to equity ratio was 1.35% compared to full year 2020 of 1.55% as we realize the benefits we projected from the reduction in compensation and other expenses following the disposition of our acreage business and the internalization of our management.
As a result of our continued build-out of our MSR and residential credit businesses, which are more labor-intensive and additional vesting of stock compensation issued in prior years, we anticipate that the range of opex to equity for 2022 and long range will be 1.4% to 1.55%.
And to wrap things up, Annaly maintained an abundant liquidity profile with $9.3 billion of unencumbered assets down modestly from the prior quarter at $9.8 billion, including cash and unencumbered Agency MBS of $5.2 billion.
Much of the reduction in unencumbered agency securities was due to pressure on valuation, which is partially offset by increased unencumbered CRT, CMBS and non-agency securities.
Operator, we can now open it up to Q&A. | q1 gaap earnings per share $1.23.
qtrly book value per common share of $8.95, up $0.03 quarter-over-quarter. | 0 |
We will also present certain non-U.S. GAAP financial information.
A reconciliation of those figures to U.S. GAAP financial measures is available on our website.
Lastly, relative to the Ilim joint venture, slide two provides context around the joint venture's financial information and statistical measures.
We will begin our discussion on slide three.
In the third quarter, International Paper grew revenue, earnings and margins, and we continued to generate strong cash from operations.
We continue to see strong demand for corrugated packaging and solid demand for absorbent pulp.
We're making strong progress on price realization from our prior increases.
Having said that, the supply chain and input cost environment remains very challenging and it impacted our results much more than we anticipated.
The widespread supply chain constraints limited our ability to capture the full opportunity that comes with the strong level of demand that we're seeing.
Our mills performed well.
However, stretched supply chains impacted volume in our Industrial Packaging and Global Cellulose Fibers businesses.
Containerboard inventories in our packaging network improved in the latter part of the third quarter, and we are in a much better position as we enter the seasonally strong fourth quarter.
Input costs in the third quarter rose by about $230 million or $0.46 per share, which was more than 2 times what we had anticipated, with cost pressure in just about every category.
Our Ilim joint venture delivered another strong performance, with equity earnings of $95 million.
On capital allocation, we continue to make significant progress strengthening our balance sheet.
In the third quarter, we reduced debt by $235 million.
I would also highlight that our pension plan is fully funded.
This is a significant milestone that further strengthens the company.
In the third quarter, we also returned $411 million to our shareholders, including $212 million of share repurchases.
On October 1, we completed the spin-off of the Printing Papers business.
IP received a $1.4 billion payment from Sylvamo, and we retained a 19.9% interest in the new company, which we intend to monetize within one year.
The teams did an outstanding job executing the transaction in a very challenging environment.
We are laser-focused on strengthening the company and building a better IP for all of our stakeholders.
Tim and I will share more about the progress we're making during today's discussion.
Turning now to slide four.
We delivered EBITDA of $938 million and free cash flow of $519 million in the third quarter, which brings our free cash flow nearly $1.6 billion year-to-date.
Revenue increased by nearly $600 million or 12% when compared to last year.
And if we exclude the Printing Papers business, third quarter revenue grew by 14% as compared to last year.
We also expanded our margins in the third quarter with realization of our prior price increases.
We expect continued margin expansion in the fourth quarter.
Moving to the quarter-over-quarter earnings bridge on slide five, third quarter operating earnings per share were $1.35 as compared to $1.06 in the second quarter.
Price and mix improved by $0.43 per share, with strong price realization across the three businesses.
Supply chain constraints limited our ability to capture the full benefit of a strong demand backdrop.
We replenished our containerboard inventories in the latter part of the third quarter, which positions us well entering the seasonally strong fourth quarter.
In our cellulose fibers business, demand for absorbent pulp is solid.
Our pulp shipments were constrained due to significant port congestion and our backlogs remain stretched.
Our mills performed well.
Operating costs benefited by about $35 million of onetime items, including the sale of nitrogen credits and insurance recovery related to the winter storm earlier this year.
Supply chains are stretched, and transportation costs are elevated for both inbound materials and outbound shipments.
Every mode of transportation is tight, and we expect the transportation environment to remain tight for the foreseeable future.
Maintenance costs decreased as expected.
Input costs rose by $0.46 per share or about $230 million, which is more than double what we had anticipated for the quarter.
Higher fiber and energy cost accounted for about 80% of this increase.
Corporate expenses were essentially flat.
Tax expense was lower by $0.04 per share in the third quarter, with an effective tax rate of 18% as compared to 21% in the second quarter.
Most of this was related to adjustments to our federal tax provision after finalizing our 2020 tax return in the third quarter.
Equity earnings were lower sequentially following the final monetization of our stake in GPK in the second quarter.
Turning to the segments, I'll start with Industrial Packaging on slide six.
We are seeing strong demand across all channels, including boxes, sheets and containerboard.
Third quarter shipment across our U.S. channels improved by 1.3% year-over-year.
However, box shipments were hampered by low containerboard inventories and stretched supply chains.
We successfully replenished inventories across our box system in the latter part of the third quarter, which puts us in a much better inventory position as we enter the seasonally strong fourth quarter.
We expect supply chains to remain stretched for the foreseeable future, which requires us to carry more inventory given the slower velocity across our network.
To put the velocity into context, our mill-to-box plant containerboard supply chain is currently running three to four days longer than our normalized flow, and in some lanes, even longer.
Taking a look at third quarter performance.
Price and mix was strong.
Our March increase is essentially fully implemented, with $128 million of price realization in the third quarter.
Volume was lower by $45 million.
Box shipments in North America were impacted by low containerboard inventory, especially in the first half of the quarter.
Volume in EMEA was seasonally slower, as expected, representing about $10 million of the sequential decrease.
Operations and costs were essentially flat sequentially.
Our mill system performed at 100% and provided much needed inventory relief to our box system.
In the third quarter, we also received insurance proceeds of about $15 million related to the winter storm.
These benefits were largely offset by unplanned maintenance costs.
We are not seeing any relief on supply chain costs and are managing risk associated with transportation capacity and congestion across the rail and truck networks.
Input costs increased by nearly $190 million in the quarter.
OCC and wood fiber accounted for $120 million of that total.
Energy accounted for another $45 million, primarily in our recycled containerboard mills and our box plants.
Taking a closer look at fiber, our North American packaging fiber mix is around 65% virgin wood and 35% OCC.
Wood fiber costs rose sharply in the third quarter due to continued wet conditions across the Southern and Eastern regions as well as inbound transportation constraints.
Wood inventories are below our control limits, and we expect difficult operating conditions again in the fourth quarter.
We expect demand for OCC to remain strong, with no cost relief even as generation gradually improves.
As a reminder, we consume about 4.5 million tons annually in the U.S. and nearly 0.5 million tons in EMEA.
Moving to Global Cellulose Fibers on slide seven.
The business delivered earnings of $96 million.
Third quarter segment earnings included $13 million from the Sylvamo subsidiary and the Kwidzyn mill, which are no longer part of our operations in the fourth quarter.
Looking at our sequential earnings, price and mix improved by $59 million.
Volume improved by $11 million sequentially.
Demand for fluff pulp, which represents about 75 of our -- 75% of our mix remained solid.
Our shipments continue to be negatively impacted by unprecedented port congestion and vessel delays.
Keep in mind that we export about 90% of our volume in this business.
The majority of this is fluff pulp that ships in containers which is where port congestion is especially challenging.
We have systems in place to manage through this environment.
However, vessel delays and higher supply chain costs are expected to continue for the foreseeable future.
Our mills performed well.
We also benefited from about $20 million of onetime items related to the sale of nitrogen credits and lower corporate costs in the quarter.
These benefits were largely offset by $50 million of higher supply chain costs for export operations.
Maintenance outage costs decreased sequentially, while input costs were a significant headwind in the third quarter, driven primarily by higher wood and chemical costs.
Turning to Printing Papers on slide eight.
The business delivered earnings of $106 million in the third quarter, with strong momentum ahead of the spinoff.
Third quarter results includes the Kwidzyn mill until the sale on August 6.
Performance in the third quarter was strong with continued demand recovery globally and price realization outpacing rising input costs.
Now that the spin-off is complete, the historical results of the business will be treated as a discontinued operation with a full recast of previous periods.
And going forward, activity pertaining to the Printing Papers offtake agreement for Riverdale and Georgetown will be included in our Packaging and Global Cellulose Fiber segment earnings.
Looking to the Ilim results on slide nine.
The joint venture delivered another quarter of strong performance with equity earnings of $95 million and an EBITDA margin of 44%.
Solid price realization for pulp and container board were partially offset by lower volume due to high planned maintenance outages in the quarter as expected.
Volume in the fourth quarter is expected to improve.
However, shipping capacity remains tight and supply chains to China are stretched.
So now we'll turn to the fourth quarter outlook on slide 10.
In Industrial Packaging, we expect price and mix to improve by $70 million, mostly on the realization of our August 2021 price increase.
That includes a negative mix impact as we start to recover some export backlogs.
Volume is expected to improve by $65 million sequentially on strong seasonal demand even as we cut down free shipping days.
Operations and costs are expected to improve by $5 million, with the North American system benefiting from improved containerboard inventory levels, partly offset by onetime benefits in the third quarter.
Staying with Industrial Packaging, maintenance outage expense is expected to increase by $3 million.
Input costs are expected to increase by $50 million, mostly on the flow-through of higher third quarter input costs for fiber and energy.
In Global Cellulose Fibers, we expect price and mix to be stable.
Volume is expected to decrease by $5 million.
Operations and costs are expected to decrease earnings by $25 million due to the non-repeat of onetime benefits in the third quarter.
Maintenance outage expense is expected to increase by $37 million.
And input costs are expected to increase by $15 million on higher wood and energy costs.
On our outlook slide, we include the sequential earnings adjustment associated with the Printing Papers' spin and Kwidzyn sale for a total of $134 million across the three segments.
With regard to cash flow, I would note that our cash from operations in the second half 2021 includes cash taxes of about $450 million associated with the various monetization transactions from earlier this year.
Remember that the proceeds for these transactions are not captured in our free cash flow.
However, the resulting cash taxes are included in free cash flow and the majority will be paid in the fourth quarter.
Turning to slide 11, I'll take a moment to update you on our capital allocation actions in the third quarter and what you can expect from International Paper following the recent paper spin.
We will maintain a strong balance sheet.
As we previously said, we're comfortable taking our leverage below the stated target of 2.5 times to 2.8 times debt-to-EBITDA on a Moody's basis.
In the third quarter, we reduced debt by $235 million, which brings our year-to-date debt reduction to $1.1 billion.
We will also complete an additional $800 million of debt repayment by the end of this month.
Taking a look at pension, we are very pleased with the performance of our plan this year.
Our qualified pension plan is fully funded, and we feel really good about the actions we've taken to improve performance and derisk the plan.
Returning cash to share owners is a meaningful part of our capital allocation framework.
In the third quarter, we returned $411 million to share owners through dividends and share repurchases.
Share repurchases were $212 million, which represented about 3.6 million shares at an average price of $59.13.
Also earlier this month, the Board of Directors approved an additional $2 billion share repurchase program, which raises our total available authorizations to $3.3 billion.
We will continue to execute on that authorization in a manner that maximizes value for share owners over time.
With regard to the dividend, our policy does not change.
We are committed to a competitive and sustainable dividend, with a payout of 40% to 50% of free cash flow, which we will continue to review annually as earnings and cash flow grow.
Earlier this month, we decreased our dividend by 9.8% to $1.85 per share annually, following the spin-off of the papers business.
This adjustment is well below the 15% to 20% proportion of cash previously generated by the papers business as we outlined when we announced the spin last year.
Investment excellence is essential to growing earnings and cash generation.
We expect Capex in 2021 to be around $600 million, which is less than our original plan, primarily due to the timing of equipment delivery and a more challenging contract labor environment.
We will continue to proactively manage Capex and have the ability to increase or pull back if circumstances warrant.
You can expect strategic capital to be deployed mostly to our packaging business to build up capability and capacity needs to drive profitable growth.
We will continue to assess disciplined and selective M&A opportunities to supplement our goal of accelerating profitable growth.
You can expect M&A to focus primarily on bolt-on opportunities in our packaging business in North America and Europe.
Any potential opportunity we pursue must be compelling value for our shareholders.
I'm on slide 12 now.
Let's talk about the future and how we're going to accelerate value creation for IP and our shareholders.
We are building a better IP.
With the recent spin-off of the papers business, IP is really a corrugated packaging-focused company.
We are significantly less complex with a much narrower geographic footprint.
In addition, we have strengthened the company's financial footing, as Tim has described, significantly over the past few years.
Our focused profile and financial strength will further enable us to make sustainable, profitable growth and accelerate value creation.
As I said earlier in the process, we've been actively working on multiple streams of earnings initiatives over the past year.
We established a dedicated team that's been working closely with our businesses and external partners over the past year to identify, develop and pilot a wide range of highly attractive opportunities which are now moving to scaled implementation.
We will deliver $200 million to $225 million of gross incremental earnings in 2022.
That represents more than 2 times the dis-synergies resulting from the spin-off.
Our value drivers ramp up in '23 and 2024, with net incremental earnings of $350 million to $400 million in 2024.
These include around $300 million in cost reduction initiatives and at least $50 million through commercial and investment initiatives.
Our earnings catalysts are front-loaded, with significant benefits coming in 2022 from streamlining and simplifying the company and scaling a wide range of process optimization initiatives.
Streamlining and simplifying is all about agility and effectiveness.
The organization is being designed to support a packaging-focused company with a more focused footprint.
We are aligning our talent to accelerate performance.
We've also examined our processes to increase efficiency and reduce costs.
We are implementing and scaling new approaches for areas such as sourcing, supply chain and operations by leveraging technology and data analytics.
Let me give you a few examples of these value drivers for 2022.
We redesigned our sourcing process for our 200 converting facilities.
We're using data analytics and third-party partners to deploy an automated catalog of sourcing options for operating and repair materials in our box plants.
This program will deliver meaningful value in 2022.
We're also using data analytics to unlock capacity in our converting facilities by improving our planning and order execution process.
This includes, for example, how we aggregate and plan smaller orders and how we can optimize our manufacturing mix in each plant and each network of plants.
We've also developed a new application to further optimize containerboard replenishment to our box plants.
The system anticipates potential roll inventory stock-ups, which have been a big issue for us this year, and recommends the lowest-cost replenishment option to reduce premium freight.
There are many initiatives that contribute to our value drivers and the savings.
We have really good line of sight on the expected benefits in 2022 and the ramp-up as we move forward.
Our 2022 value drivers not only deliver meaningful benefits in the near term, they are also setting the foundation for IP going forward to accelerate commercial and investment excellence to drive profitable growth. | q1 adjusted non-gaap operating earnings per share $0.76. | 0 |
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide some comments on our performance as well as an overview of the current operating environment.
Bernadette will then provide details on our second quarter results and updated fiscal 2022 outlook.
We're pleased with the improvement in our manufacturing and supply chain operations as well as the progress in our financial performance in the quarter and I'm proud of how Lamb Weston team has been able to navigate through this difficult macro environment.
We generated strong sales and solid demand across our food away-from-home channels drove volume growth and the initial benefits of our recent pricing actions began to offset inflationary pressures.
In addition, our efforts to stabilize our manufacturing operations are on track, including increasing staffing in our processing plants to improve production run rates and throughput.
Together, our sales and operating momentum drove sequential gross margin improvement in the quarter and have us well positioned to better manage the upcoming cost pressures from this year's exceptionally poor potato crop in the Pacific Northwest.
While our operations and financial results are not yet where we want them to be, we're on track to deliver our financial targets for the year and our investments in capacity and productivity will get us well positioned to deliver higher margins and sustainable growth over the long term.
Before Bernadette gets into some of the specifics of our second quarter results and outlook, let's briefly review the current operating environment, starting with demand.
In the U.S., overall fry demand and restaurant traffic in the quarter remained solid, especially at quick service restaurants where demand has continued to be strong and above pre-pandemic levels.
Traffic at full-service restaurants during the quarter was also solid but remained below pre-pandemic levels.
Restaurant traffic, though, has softened recently as the spread of COVID variants have tempered consumer demand for on-premise dining and as restaurants closed temporarily due to staff shortages.
While we expect that COVID wave will continue to temper demand for on-premise dining in the near term, we do not anticipate that it will have a meaningful effect on traffic or demand at QSRs.
Demand at noncommercial outlets also improved during the quarter but continued to be below pre-pandemic levels.
As with on-premise dining, we expect the spread of COVID variants will affect near-term demand.
The fry attachment rate in the U.S., which is the rate at which consumers order fries when visiting a restaurant or other food service outlets, continue to be above pre-pandemic levels.
This served to support our out-of-home fry demand in the quarter.
The increase in the fry attachment rate has been fairly consistent since the beginning of the pandemic and we do not see that changing in the near term.
Fry demand in U.S. retail channels in the quarter was up mid-teens from pre-pandemic levels and we anticipate it will remain strong in the near term as the pandemic continues to affect demand in out-of-home channels.
Now, outside the U.S., demand in Asia and Oceania has been solid, although the lack of shipping containers and disruptions to ocean freight networks continues to hinder our ability to fully serve our customers in these markets.
Demand in Europe, which is served by our Lamb Weston/Meijer joint venture, has also been solid, although consumer reaction and the effect of recently imposed government lockdowns may reverse some of the recovery in restaurant traffic and fry demand in the near term.
So overall, we're encouraged by the resiliency of demand and the long-term trends for the category but expect that there will be some near-term softness with another COVID wave in the U.S. and our key international markets.
With respect to pricing, we're making good progress in implementing recent pricing actions to manage input cost inflation.
In the second quarter, we began to see the initial benefits of the price increases that took effect in the summer in our foodservice and retail segments as well as in some of our international businesses.
We expect the benefit of these prices will continue to build as the year progresses.
In December, we began implementing another round of pricing actions in our foodservice and retail segments.
While these actions did not affect our second quarter results, we'll see a gradual benefit from them over the next six months.
In our global segment, we saw some benefit of pricing actions in the second quarter but expect to see a greater impact during the back half of the year.
This reflects price increases related to contract renewals as well as the benefit of price escalators for most of the global contracts that are not up for renewal this year.
We expect these price increases across our business segments will in aggregate mitigate much but not all of our cost inflation pressures.
We will continue to assess the pace and scope of further cost inflation and we may take further price actions as the year progresses.
With respect to costs, input cost inflation remains the primary driver to the increase in our cost per pound in the quarter.
Commodity and transportation costs were each up double digits and we expect that trend will continue through fiscal 2022, especially as our raw potato costs significantly increased in the second half of the year.
Outside of cost inflation, we're making good progress to stabilize our supply chain in order to improve cost, production run rates and throughput.
We've taken actions to simplify our manufacturing processes and drive savings through a series of productivity initiatives, eliminating underperforming SKUs and increasing potato utilization rates.
Importantly, after making changes to how we staff production crews, compensation and other incentives, we steadily reduced our staffing shortfall.
We're working to continue this positive trend but realize it's difficult in a very challenging labor environment.
The pending implementation of government-mandated COVID testing and vaccine regulations may also slow our progress and that of our suppliers in attracting and retaining workers in the near term.
Now, turning to the crop.
The yields and quality of the potato crops in our primary growing regions in the Columbia Basin, Idaho and Alberta are well below average due to the extreme heat over the summer.
Similar to prior years, we had contracted with farmers to purchase potatoes to meet our production needs, assuming an average crop year.
But because of the extreme heat, the contracted acres yielded fewer potatoes and the quality is also poor.
As a result, we're purchasing our remaining potato needs in the open market to meet our production forecast.
We were able to reduce the number of potatoes we'd otherwise have been required to purchase in the open market by successfully partnering with our customers to secure changes product specifications.
Given that raw potato supply is tight and that fry demand has largely recovered, we've been purchasing open potatoes at a premium to contracted potato prices.
When possible, we've been securing them from our nearby growing regions, but we have also transported potatoes from the Midwest and Eastern North America which results in increased transportation costs.
We included an estimate of these additional costs in our updated earnings outlook.
We'll begin to see more of the financial impact of this year's poor crop, including the high cost of open market potatoes in our third quarter results.
So in summary, we feel good about our financial and operating progress in the quarter.
The overall demand environment is solid but may soften in the near term due to another COVID wave and we're pulling the right pricing and operating levers to manage through this challenging environment.
As Tom discussed, we're pleased with our progress in the quarter.
We generated strong sales and solid demand across our restaurant and foodservice channels in North America, drove volume growth and we implemented pricing actions.
We believe our pricing and cost-mitigation actions have us positioned to navigate through this difficult operating environment and to support sustainable profitable growth over the long term.
Specifically, in the quarter, sales increased 12% to a little over $1 billion.
This is only the fourth time in Lamb Weston's history that we topped $1 billion of sales in a quarter.
Sales volumes were up 6%.
Volume growth was driven by our foodservice segment, which reflects the continued year-over-year recovery in on-premise dining and by strong shipments to our large chain restaurant customers in North America that is served by our global segment.
Sales volumes of branded products in our retail segment were also up in the quarter, but the segment's overall volume declined due primarily to lower shipments of private label products.
While our overall volume growth in the quarter was strong, it was tempered by industrywide upstream and downstream supply chain constraints, including delays in the availability of spare parts, edible oils and other key materials to our factories as well labor shortages, which impacted production run rates and throughput at our processing plant.
In our global segment, volume growth was also tempered by the limited availability of shipping containers and disruptions at ports and in ocean freight networks.
We expect these production and logistics challenges as well as the near-term impact of COVID variants to limit our volume growth through at least the end of fiscal 2022.
Price mix was up 6% as we realized benefits from our previously announced pricing actions in each of our four segments.
As a reminder, we began implementing product pricing actions in the first quarter as the primary lever to offset inflationary cost pressures and it generally takes a couple of quarters before these actions are fully realized in the marketplace.
We've also taken actions to more frequently change the freight rates that we charge to customers, so they better reflect market rates.
Historically, we only adjusted these rates once or twice a year.
Most of the increase in price mix in the quarter reflects these product and freight pricing actions with favorable mix providing only a modest benefit.
Gross profit in the quarter declined $18 million as the benefit of increased sales was more than offset by higher manufacturing and transportation costs on a per pound basis.
Double-digit inflation for commodities and transportation costs accounted for almost 90% of the increase in cost per pound.
Of the two, commodities played a bigger role and were again led by edible oils, including canola oil, which nearly doubled versus the prior-year quarter, ingredients such as wheat and starches used to make batter, and other coatings and containerboard and plastic film for packaging.
Freight costs rose, especially for ocean freight and trucking, as global logistics networks continued to struggle.
Our costs also increased due to an unfavorable mix of higher cost trucking versus rail in order to meet service obligations for certain customers.
As Tom mentioned, we also incurred higher cost per pound versus the prior year due to incremental costs and inefficiencies driven by lower production run rates and throughput at our factories which resulted in fewer pounds to cover fixed overhead.
Lost production days and unplanned downtimes were primarily due to labor shortages across our manufacturing network, including COVID-related absenteeism.
While the cost drivers in the first two quarters of the year have been largely consistent, in the second quarter, we began to realize the initial benefits of the pricing and cost-mitigation actions that we discussed during our last earnings call.
As a result of these efforts, gross margin increased sequentially versus the first quarter by 500 basis points to more than 20%.
While pricing actions provided the larger lift to the sequential improvement to gross margins, our production run rates and throughput improved sequentially, primarily due to our efforts to stabilize factory labor.
While still lower than average, labor retention rates improved modestly versus the first quarter and the number of new applicants has been steady.
With more stability, we in turn drove more factory throughput.
Finally, our actions to optimize our portfolio are also providing benefit.
We've eliminated underperforming SKUs to simplify our portfolio and increase throughput in our factories.
We've also successfully partnered with our large customers to secure changes to product specifications to mitigate a portion of the operating impact of the poor quality of this year's potato crop.
In short, while our run rate and cost structure are not yet where we want them to be, we look forward to building on the notable sequential progress that we made in quarter and believe that we've positioned ourselves to manage through this challenging near-term increased cost and poor potato crop environment.
Moving on from cost of sales.
Our SG&A increased $7 million in the quarter, largely due to a couple of factors.
First, it reflects higher labor and benefit costs and higher sales commissions associated with increased sales volumes.
Second, it includes a $2.5 million increase in advertising and promotional expenses as we stepped up support for our retail products.
While these expenses are up compared with the prior year, they are still below pre-pandemic levels.
The increase in SG&A was partially offset by a reduction in consulting expenses associated with improving our commercial and supply chain operations as those consulting projects ended as well fewer expenses in the current quarter related to the design of a new enterprise resource planning system.
We had approximately $2 million of ERP-related expenses in the quarter, which consisted primarily of consulting expenses.
That's down from about $5 million of similar-type expenses in the prior-year quarter.
We're resuming our efforts in the second half of fiscal 2022 to design the next phase of our new ERP system.
Diluted earnings per share in the quarter was $0.22, down $0.44.
About $0.28 of the decline was related to costs associated with the redemption and write-off of previously unamortized debt issuance costs related to the senior notes that were originally issued in connection with our spin-off from ConAgra in November 2016.
We identified these costs as items impacting comparability in our non-GAAP results.
Excluding the impact of these items, adjusted diluted earnings per share was $0.50, which is down $0.16 due to lower income from operations and equity method earnings.
Moving to our segments.
Sales for our global segment were up 9% in the quarter.
price mix was up 5%, reflecting a balance of higher prices charged for freight, pricing actions associated with customer contract renewals and inflation-driven price escalators.
Volume was up 4%.
Higher shipments to large chain restaurant customers in North America drove the volume increase, while logistics constraints temper our international shipments.
Overall, the global segment's total shipments continued to trend above pre-pandemic levels.
Global's product contribution margin, which is gross profit less A&P expenses, declined 13% to $81 million.
Higher manufacturing and distribution cost per pound more than offset the benefit of favorable price mix and higher sales volumes.
Moving to our foodservice segment.
Sales increased 30% with volume up 22% and price mix up 8%.
The ongoing recovery in demand from small and regional restaurant chains and independently owned restaurants as well as from noncommercial customers drove the increase in sales volumes.
The initial benefits of product and freight pricing actions that we began implementing earlier this fiscal year as well favorable mix drove the increase in price mix.
Foodservice's product contribution margin rose 19% to $104 million as favorable price mix and higher sales volumes more than offset higher manufacturing and distribution cost per pound.
Moving to our retail segment.
price mix increased 5%, reflecting the initial benefits of pricing actions in our branded portfolio, higher prices charged for freight and improved mix.
Sales volume declined 4% as an increase in branded product volume was more than offset by lower shipments of private label products, resulting from incremental losses of certain low-margin business.
Retail shipments in the quarter were also tempered by the industrywide supply chain constraints and production disruptions that I discussed earlier.
Retail's product contribution margin declined 29% to $21 million.
Higher manufacturing and distribution cost per pound, a $2 million increase in A&P expenses and lower sales volumes drove the decline.
Moving to our liquidity position and cash flow.
Our liquidity position remained strong.
We ended the first half of fiscal 2022 with almost $625 million of cash and $1 billion of availability on our undrawn revolver.
In the first half, we generated more than $205 million of cash from operations.
That's down about $110 million versus the first half of the prior year due primarily to lower earnings.
During the first half of the year, we spent nearly $150 million in capital expenditures as we continued construction of our chopped and formed expansion in American Falls, Idaho and our new processing lines in American Falls in China.
We continue to put significant effort into managing certain material equipment and labor availability issues to keep our capital projects on track.
In the first half of the year, we returned $145 million to shareholders, including nearly $70 million in dividends and $76 million of share repurchases.
This includes $50 million of share repurchases in the second quarter alone.
Last month, we announced a 4% increase in our quarterly dividend rate, which equates to approximately $144 million annually and a $250 million increase to our current share repurchase plan, reflecting our confidence in the long-term potential of our business.
As a result, we have about $344 million authorized for share repurchases under the updated plan.
As I referenced earlier, during the quarter, we redeemed and issued nearly $1.7 billion of senior notes.
In doing so, our average debt maturity increased from four years to more than seven years and we reduced our annual interest expense by approximately $8.5 million.
We remain committed to our capital allocation priorities.
First, to reinvest in our business both organically and with M&A.
And then to return free cash flow to shareholders through a combination of dividends and share repurchases over time.
Now, turning to our updated outlook.
We continue to expect our full year sales growth in fiscal 2022 to be above our long-term target of low to mid-single digits.
In the third quarter, we anticipate price mix will be up sequentially versus the 6% increase that we delivered in the second quarter as the benefit of previously announced product pricing actions in each of our core segments continues to build.
We expect volume growth in the third quarter will decelerate sequentially versus the 6% we delivered in second quarter as a result of the near-term impact of COVID variants on restaurant traffic and demand, the macro industry supply chain constraints and labor challenges that will continue to affect production run rates and throughput in our factories and global logistics disruptions and container shortages that affect both domestic and export shipments.
We expect further deceleration in the fourth quarter as we begin to lap some of the higher-volume comparisons from the prior year.
With respect to earnings, we continue to expect net income and adjusted EBITDA including joint ventures will be pressured through fiscal 2022 reflecting significantly higher potato costs in the second half of the year, resulting from the poor crop, double-digit inflation for key production inputs and freight and higher SG&A expenses.
For the full year, we expect our gross margin will be 600 to 700 basis points below our pre-pandemic margin rate of 25% to 26%, implying a target range of 18% to 20%.
That's a change from the 17% to 21% range that we provided in our previous outlook.
We narrowed the range for a number of reasons.
First, we're confident about the pace and execution of the product and freight price increases that we are implementing in the market.
Second, we expect to build upon the incremental progress that we made in the second quarter to stabilize our supply chain operations and drive savings behind our cost-mitigation initiatives.
However, we expect that the improvement in our run rate, throughput and costs will continue to be gradual, reflecting the broader macro challenges facing the labor market that will likely persist through fiscal 2022.
And third, we have greater clarity on the net cost impact from this year's exceptionally poor potato crop.
As a reminder, we'll begin to realize the full financial impact of this year's poor potato crop in the third quarter and will continue to realize its effect through most of the second quarter of fiscal 2023.
Below gross margin, we expect our SG&A expenses to step up $100 million to $110 million in the third and fourth quarters as we begin to design the second phase of our new ERP project.
Equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs, both in Europe and the U.S.
We expect our interest expense to be approximately $110 million, excluding the $53 million of costs associated with the redemption of the senior notes in the second quarter.
We previously estimated interest expense to be approximately $115 million.
Our estimates for total depreciation and amortization expense of approximately $190 million and effective tax rate of approximately 22% and capital expenditures of approximately $450 million remains unchanged.
So in sum, we're seeing the benefit of our pricing actions which drove the sequential improvement in our top line and gross margin in the quarter.
Along with our pricing actions, we're on track with our other cost-mitigation initiatives, positioning us to manage through the impact of the very poor crop.
And finally, for fiscal 2022, we continue to expect net sales growth will be above our long-term target of low to mid-single digits and we have enough clarity in our sales and cost outlook to narrow our previous target gross margin rate.
Now, here's Tom for some closing comments.
Let me just quickly reiterate our thoughts on the quarter by saying we are pleased with our progress in the quarter and we're taking the right steps on pricing actions and in our supply chain operations to navigate through this difficult operating environment.
We are on track to deliver on our targets for the year and we believe we're on a path to get back to pre-pandemic profit levels after we get past the impact of the poor crop in the first half of fiscal 2023 and remain committed to investing support growth and create value for our stakeholders over the long term. | q2 earnings per share $0.66.
q2 sales $896 million versus refinitiv ibes estimate of $876.8 million.
qtrly volume declined 14 percent.
north america and europe shipments will remain soft during remainder of quarter.
expect demand will remain soft in the coming months, especially at full-service restaurants.
lamb weston - believe restaurant traffic may approach pre-pandemic levels later this calendar year if vaccines and other measures are successful.
plan to resume share repurchase program in january 2021.
announced a 2% increase in quarterly dividend. | 0 |
I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo.
Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them.
We also will be discussing certain non-GAAP information.
As we look back on 2020, we recognize how hard a year it was for so many people.
The pandemic impacting every single person's life, and for so many, in devastating in tragic ways.
We honor the incredible work of healthcare workers and the frontline workers who have shown such brave resilience and dedication over these months.
While the difficult and practical implications of the pandemic have played out, a digital rumble began to shake across the economic landscape.
Cloud-based companies like Envestnet engaged from the first moment, leveraging our service and support infrastructure to help our clients navigate these disrupted times.
We also spent the year paving the way toward an exciting and accelerated digital future.
Last year, we took swift action to ensure the safety of our employees.
We met the extraordinary demands of the year managing historic account and trade volumes as we grew the company and improved the way we served our clients.
We added a net 1.5 million accounts last year, completed 15 million service tasks and executed an incredible 76 million individual trade orders.
This was executed by our team as we worked remotely and while our clients worked remotely.
We completed a significant and important initiative to streamline our organizational structure and add leadership talent, which positions us to operate more as one Envestnet, both internally and also for the marketplaces that we serve.
And despite the headwinds created by March market values, we grew impressively, delivering very solid financial results.
We reported just shy of $1 billion in revenue, which is 10% higher than a year ago, and adjusted EBITDA grew 26% compared to 2019.
And importantly, we chartered the course for advancing a tremendous opportunity for our industry to better serve its customers, further expanding our strategic purpose, developing a bold investment plan to capture the sizable opportunity before us as we make financial wellness a reality for everyone.
Over our history, Envestnet has been very successful in anticipating, investing in and driving the future.
We began 20 years ago as a TAMP, a turnkey asset management platform, a category we invented, and we continue to lead by a substantial margin.
Over time, our capabilities expanded.
We unbundled our own investment solutions from the core technology, enabling advisors in powerful new ways, opening access to the industry's largest marketplace of investment solutions and strategies.
We launched the first unified managed account, the UMA, bringing multiple investment strategies into one brokerage account, improving how advisors at optimize asset allocation and tax efficiency within client portfolios.
This powerful integration of technology with investment product made it far easier for advisors to deliver portfolio strategies while to help drive down the costs for end investors.
We forged an integrated future of data and planning-centric advice for advisors to deliver to their clients.
Our acquisitions of Yodlee in 2015 and MoneyGuide in 2019 were critical as we evolved into an industry-leading integrated wealth platform.
Impact investing, overlay solutions, direct indexing, integrated access to credit insurance, and just announced this week, trust services, the scope of what we are doing, the progress we are making in each of these areas and the growth potential they represent for us are very important to note.
The scale, capabilities and how we utilize data are significant competitive differentiators for us, and we plan to build on it.
Envestnet is proud to work with thousands of firms, including 17 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, over 500 of the largest RIAs and hundreds of fintech companies.
We are the industry leader in wealthtech, supporting more than 106,000 financial advisors, 13 million investor accounts and more than $4.5 trillion in assets.
We have the scale and infrastructure to grow from here.
Our consumer financial data aggregation capabilities are unmatched: 17,000 data sources, 470 million connected accounts, which grew by over 62 million last year, 35 million users, and also in the past year, nearly three million households that benefited from a financial planning experience using our award-winning software.
We and our customers, financial services firms and the advisors who work for them, are improving the financial lives of millions of people.
This has enabled us to become the financial wellness ecosystem powering the industry into the future.
We are using modern technology to create linkages and building out a network that becomes an evolving system, ever-adapting, ever-engaging, ever-improving connections that the consumer defines the batteries of and will call upon when, where and how they choose.
This is a bigger vision, one that will provide our customers the super power to engage in intelligent, holistic servicing of the consumer's financial life.
That's why we're accelerating our investments in the ecosystem.
These investments, which I've been referencing for the past few earnings calls, are in three areas.
First, we are making major enhancements to our already strong capabilities on behalf of our existing customers.
We're making it easier for them to work with us, easier for them to leverage all that we offer, eliminating friction from the process.
For instance, we're providing an integrated trading environment that will bring together the feature sets of investment, FolioDynamix and Tamarac into a singular tool.
Advisers will have the entire universe of investment strategies and solutions just a click away.
We're also digitizing and hyperpersonalizing more of the end consumer experience with more use of data, intelligence and insight.
The second area is data.
Data is embedded in all that we do.
We've been redefining the way data is used to create better intelligence, insight and guidance for advisors to help their clients.
Nobody else has a data engine quite like this.
Envestnet can connect the data from a person's daily financial transactions with our market-leading financial planning capability, which we've broken down into powerful, focused financial apps that tie into a financial strategy, and with a click, advisors can then execute on it.
We're using more and more of the intelligence in our data to drive recommended actions.
For example, our recently launched recommendations engine addresses the individual's needs against the backdrop of an extraordinary data set.
We are seeing promising evidence as firms use the data to grow faster and discover new opportunities within their existing customer base.
Digital experience is the third area of investment for us.
We are on the cusp of making this intelligent, connected financial life in reality with our innovative digital environment for end consumers, powerfully taking the parts of the financial life and bringing them together in an extraordinary and accessible experience.
We will empower advisors to offer this as the financial center for their clients in a powerful way that they have not experienced before.
This is just the start of the progress that we are making.
With investment at the center of the financial wellness ecosystem, we can engage with future partners in incredibly value-creating ways.
Our strategy opens a network of potential partnerships that expands far beyond our current marketplace beyond our walls, an existing network of investment managers, insurance companies, lenders, banks, custodians, broker-dealers and RIA firms.
An example could be in healthcare or even in personal wellness.
We'll also open our platform and inspire third-party developers who can create new apps, addressing emerging marketplace needs and/or utilizing our infrastructure to engage underserved parts of the financial services market.
In doing so, we gain access to millions of consumers.
We can improve their financial lives by deploying Envestnet solutions through a broader network of fintech companies and nontraditional outlets that are utilizing embedded finance as part of their strategy, while providing the essential bridge back to full-service advice within our advisor community.
As the orchestrator of this large and growing ecosystem, the revenue potential for us is significant.
While life changed over the course of the last year, in many ways, it also sped up.
We sped up as well.
Trends that have been emerging for years are accelerating at a faster pace, more digital, more intelligent, more consumer-driven.
Consumer expectations have grown so quickly, whether it's a grocery delivery, mortgage approval or the ability to open and fund a new investment account.
And we are leading our industry in helping our customers meet the expectations of consumers now and into the future.
I wrote about this in a white paper that we published earlier this week called, The Intelligent Financial Life.
Our supplemental deck includes a link.
I encourage you to read it and watch the related video.
In a nutshell, here's what it says.
Today, most people have two distinct financial lives, how they interact with their money each day and then how they plan for their money into the future.
Neither of these connects with each other, resulting in a complex challenge for the individual, oftentimes leading to extraordinary stress in their lives.
The white paper was a call to action for our industry, a playbook for more deeply engaging and impacting the financial lives of consumers while unlocking tremendous opportunities for companies that enable this.
What's required to empower this intelligent financial life is an interconnected ecosystem that brings it all together for the consumer.
We, Envestnet, are uniquely positioned to deliver on the intelligent financial life by leaning into our ecosystem, expanding the ability for Envestnet and other participants in our vast and growing network to deliver what the consumer is demanding and to capitalize on this large and quickly growing opportunity.
The outcome of this strategy is connecting people with their money and empowering more impactful decisions in ways financial consumers have not experienced before.
For Envestnet, it means a broader reach into the market, faster revenue growth as the model is utilized and more operating leverage from our increasingly scaled infrastructure, yielding a higher profitability in the long run.
The opportunity to create value for all participants in our ecosystem is massive and growing.
With Envestnet at the center of it, we can curate, connect and orchestrate everything that can impact the consumer's financial life, empowering advisors and firms to reach deeper into relationships, doing more, adding value, creating growth.
With our industry-leading footprint and capabilities, there is no better firm positioned to capitalize on this opportunity than Envestnet.
And the time to do this is now.
Today, I'm going to review our results for the fourth quarter and full year and provide context for our 2021 outlook and beyond.
Consistent with earlier in the year, our fourth quarter results were strong.
Adjusted revenue for the quarter was $264 million, above expectations, as we saw outperformance across all revenue lines.
Asset-based revenue benefited from favorable net flows and continued adoption of higher value fiduciary solutions.
Subscriptions-based revenue performed well, driven by higher-than-expected usage in the data and analytics segment.
Operating expenses came in consistent with our expectations for the quarter with a relatively low level of spending already factored into our forecast.
As a result, our adjusted EBITDA of $65 million was also ahead of expectations, as were our adjusted earnings per share of $0.69.
For the full year, adjusted revenue was $999 million, 10% higher than in 2019 despite the significant market pullback in the first quarter of 2020.
Adjusted EBITDA came in 26% higher than last year at $243 million.
Our adjusted EBITDA margin for the year was 24.3%, three percentage points above the prior year.
As we discussed in the November earnings call, this is not an appropriate starting point as we look forward into 2021 and beyond.
Expense management and pandemic-related circumstances lowered our 2020 expenses significantly and unsustainably for the long term.
Around $25 million to $30 million of operating expense favorability can be attributed solely to an operating environment that limited travel, caused delays in hiring and generally reduced spending activity.
This is important context as we consider our outlook for 2021.
As we built our spending plans for this year, we see three drivers of increase in our operating expenses compared to 2020.
First is what I would call normal expense growth to support the needs of the business today, including supporting additional customer activity as the business grows.
Normal expense growth typically is lower than our revenue growth as we've proven our ability to expand margin over time.
The total increase in this category is around $10 million or a little more than 2% above last year.
Second is what I would characterize as a partial restoration of normal spending levels that we experienced prior to the pandemic for certain items.
In this category, we've assumed a broad resumption of business activity over the course of 2021, but still at levels below where they were prior to the pandemic.
In the second category, we're expecting increases in our travel and entertainment expense and fully restoring our annual marketing spend.
This category also represents around $10 million of year-over-year increase in operating expense.
Depending on how circumstances unfold, some of this expense could be pushed further out if travel remains limited.
Third is the acceleration of investment spending to capitalize on the sizable opportunity Bill described earlier.
These investments will ramp up over the next couple of quarters as we add headcount and other resources in product engineering, marketing and go-to-market activities to accelerate revenue growth in the business longer term.
In 2021, these investments account for around $30 million of increased operating expense The spend in these three categories, combined with an increase in our asset-based cost of revenue, will result in our operating expenses growing faster than revenue in 2021 as we noted in November, effectively reversing the temporary margin lift we saw in 2020.
Specific guidance for the full year of 2021 includes the following: adjusted revenue growth of 10.5% to 12% compared to 2020.
That's approximately $1.10 to $1.12 billion.
By segment, this is driven by strong double-digit growth in our wealth business as we continue adding new firms, advisors and accounts to the platform and deploy additional solutions through our installed base.
We expect revenue growth in data and analytics to be in line with last year as we see ongoing momentum with financial institutions and fintech firms, while continuing to address pricing pressure in the analytics space.
By revenue line item, we expect asset-based revenue to be up nearly 20%, reflecting the strong fundamentals of the wealth business.
As usual, our guidance is market neutral to the end of the prior quarter, in this case, December 31.
Subscription revenue is expected to grow in the low to mid-single digits, and we're expecting a decline in professional services and other revenue as we continue to deemphasize such fees.
Adjusted EBITDA should be between $225 million and $235 million, slightly below 2020, as the increase in operating expenses will more than offset the contribution from higher revenues.
Adjusted earnings per share is expected to be between $1.95 and $2.08.
This is down from the $2.57 we delivered in 2020 due to the modest decline in adjusted EBITDA and an increase in depreciation expense.
Our guidance also includes the early adoption of a new accounting standard, impacting how we account for our convertible notes, which will lower earnings per share by $0.20.
Some additional color on our 2021 guidance and trends we expect to see during the year.
This is a big contributor to the EBITDA guidance for the quarter.
As we expect to restore spending to more normal levels and ramp up our investment activity, operating expenses should increase somewhat more meaningfully in the second quarter and the second half of the year.
Turning to the balance sheet.
We ended the year with $385 million in cash and a net leverage ratio of two times EBITDA, down from 2.1 at the end of September.
Similar to last quarter, our $500 million revolver remains entirely undrawn.
So we remain comfortable that we have the liquidity and flexibility to invest in growth opportunities, both organically and through strategic activities without increased risk to our operations.
As we support our customers' needs across the ecosystem and begin to benefit from the investments we're making now, we believe revenue growth can accelerate into the mid-teens within the next five years.
Over time, EBITDA margins should reach the mid- to upper 20s as we continue to benefit from our increasing scale.
The age of the intelligent connected financial life is coming, and our industry will need to deliver this to consumers: an interconnected experience that supports the consumer completely from today's spending to tomorrow's plans, fully linked, intelligent and accessible to help them make the best financial decisions when they need it, even when they aren't aware that they do need it.
Connecting the financial lives of millions of consumers is a massive opportunity.
It requires a financial wellness ecosystem, and that is what is emerging here at Envestnet.
We are building upon the significant capabilities we offer in the marketplace today.
We are positioned to become the core long-term essential provider that helps the industry connect people much more powerfully to their money.
With our expertise, data-driven intelligence, leading financial planning tools, integrated capabilities to execute trades, insurance policies, loans, trust and more and a consumer-friendly technology to view everything in one single place, Envestnet is the company that is best positioned to connect consumers' financial lives and make financial wellness a reality for everyone.
I could not be more excited about this future.
With that, Pete and I are happy to take any questions. | q3 revenue rose 20 percent to $303.1 million.
qtrly adjusted earnings per share $0.61.
sees adjusted net income per diluted share $0.49 for q4. | 0 |
I'm Patrick Burke, the company's head of investor relations.
We are pleased to be with you today to discuss our Q3 results, results that have exceeded our expectations, and strengthened our confidence in the future.
With recently announced plans to merge with Topgolf, we are naturally anticipating further questions on that subject as well.
Having said this, and turning to Page 6, let's now jump into our results.
We were pleased with our results in virtually all markets and business segments.
Our golf equipment segment has been experiencing unprecedented demand globally as interest in the sport and participation has surged.
We saw strong market conditions in all markets globally.
According to Golf Datatech, U.S. retail sales of golf equipment were up 42% during Q3, the highest Q3 on record.
U.S. rounds were up 25% in September, and are now showing full-year growth despite the shutdowns earlier this year.
We also believe there will be a long-term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport.
Golf retail, outside of resort locations, remains very strong at present and barring a shutdown situation has not been sensitive to the upticks in COVID cases.
Inventory at golf retail is at all-time lows and is likely these low inventory levels will continue into next year.
Callaway's global hard goods market shares remained strong during the quarter.
We estimate our U.S. market share is roughly flat year over year.
Our share in Japan is up slightly, and our share in Europe is down slightly.
On a global basis, I believe we remain the leading golf company in terms of market share and total revenues, and the No.
In the U.S., third-party research showed our brand to once again be the #1 club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions.
We have also started to show our 2021 product range to key customers and are receiving strong feedback.
Turning to our soft goods and apparel segment, with total revenue only down 3.4% year over year, the segment also experienced a rapid recovery in demand during the quarter.
The speed and magnitude of the recovery exceeded our expectations.
Like our golf equipment business, this segment appears to be well-positioned for both the months and years ahead, both during the pandemic and after.
Looking at individual businesses in this segment, both our TravisMathew and Callaway branded businesses experienced significant year-over-year growth during the quarter.
Jack Wolfskin was down year over year but only 16% on a revenue basis with improved trends continuing into October.
The hero of the soft goods and apparel segment is certainly e-com, a channel that was strengthened by investments we've made over the last several years.
As a result of these investments, we were able to deliver a 108% year-over-year growth in this channel during the quarter.
E-com is now a significant portion of the channel mix of this segment.
We believe our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward.
Long term, we continue to expect our apparel and soft goods segment to grow faster than our overall business, and with that growth to deliver operating leverage and enhance profitability.
And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15 million of synergies in this segment over the coming years.
During the quarter, we also made good progress on key initiatives, including the transition to our new 800,000 square-foot Superhub distribution center located just outside of Fort Worth, Texas.
We are now completely consolidated into this new facility.
We also made further progress in our Chicopee golf ball facility modernization with productivity rates in this plant ramping positively during the quarter.
The primary investment phase on both of these significant projects is behind us now.
Looking forward, we are in a strong financial position and are pleased with the pace of our recovery and the business trends we have seen.
With the resurgence in the virus, there clearly could be some volatility over the next few months.
Portions of Q4 are likely to be at least partially impacted by the increase in restrictions being put into place globally.
Fortunately, for us, either low impact months for our golf equipment business, and we currently expect to continue to benefit from increased year-over-year demand.
In our apparel and soft goods segment, the impact will be larger than our golf equipment business.
But these businesses, too, are fortunate to be well-positioned in this environment and also benefit from strong e-com capabilities, which should offset some portion of any potential negative impacts in markets where in-store shopping might be constrained.
We also benefit from global scale and diversity across all of our segments.
As demonstrated by our Q3 results, we are fortunate in that our principal business segments are well-positioned for consumer needs and trends, both during the pandemic and afterward.
In addition, we are confident that we have both brands, human capital, and financial strength necessary to not only weather this storm but to also perform well during it and to emerge stronger than when we entered the crisis.
In closing, while we are pleased with our recent results and outlook, the safety and health of the company's employees, customers, and partners continue to be paramount in our minds.
As we operate our businesses, we are careful to follow appropriate protocols for social distancing, in-office capacity management, personal protective equipment, and other safety precautions.
In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front line to protect, serve, and care for the rest of us.
Brian, over to you.
We are happy to report record net sales and earnings for the third quarter of 2020.
We feel fortunate that both our golf equipment and soft goods businesses are recovering faster than expected as both businesses support healthy, active outdoor lifestyles and activities that are compatible with social distancing.
This faster-than-expected recovery has placed us in a position of strength.
Our available liquidity, which includes cash on hand plus availability under our credit facilities increased to $630 million on September 30, 2020, compared to $340 million on September 30, 2019.
We are also excited about our prospective merger with Topgolf, which also provides a healthy, active, outdoor activity that is compatible with social distancing.
And Callaway Topgolf merger is a natural fit.
With the significant overlap in golf consumers, there should be significant advantages to both businesses through increased consumer engagement, marketing, and sales opportunities and faster growth than could be achieved on a stand-alone basis.
And the best part is that these synergies provide upside to the financial model we provided.
The financial returns of this transaction are so compelling, we did not need the synergies to justify the transaction.
Growing the Topgolf Venue and Toptracer businesses alone will create significant shareholder value.
We look forward to discussing the Topgolf business further during the virtual investor conference on Thursday.
In evaluating our results for the third quarter, you should keep in mind some specific factors that affect year-over-year comparisons.
First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred nonrecurring transaction and transition-related expenses in 2019.
Second, as a result of the OGIO, TravisMathew, and Jack Wolfskin acquisition, we incurred non-cash amortization in 2020 and 2019, including amortization of the Jack Wolfskin inventory step-up in the first quarter of 2019.
Third, we also incurred other nonrecurring charges including costs related to the transition to our new North American distribution center in Texas.
Implementation costs related to the new Jack Wolfskin IT system and severance costs related to our cost reduction initiatives.
Fourth, the $174 million non-cash impairment charge in the second quarter of 2020 is nonrecurring and did not affect 2019 results.
Fifth, we incurred and will continue to incur non-cash amortization of the debt discount on the notes issued during the second quarter of 2020.
We have provided in the tables to this release as scheduled breaking out the impact of these items on the third quarter and the first nine months' results, and these items are excluded from our non-GAAP results.
With those factors in mind, I will now provide some specific financial results.
Turning now to Slide 10.
Today, we are reporting record consolidated third quarter 2020 net sales of $476 million, compared to $426 million in 2019, an increase of $50 million or 12%.
This increase was driven by a 27% increase in the golf equipment segment, resulting from a faster-than-expected recovery and the strength of the company's product offerings across all skill levels.
The company's soft goods segment is also recovering faster than expected, with third-quarter 2020 sales decreasing only 3.4% versus the same period in 2019.
Changes in foreign currency rates had an $8 million favorable impact on third-quarter 2020 net sales.
Gross margin was 42.2% in the third quarter of 2020, compared to 44.9% in the third quarter of 2019, a decrease of 270 basis points.
On a non-GAAP basis, gross margin was 42.7% in the third quarter, compared to 44.9% in the third quarter of 2019, a decrease of 220 basis points.
This decrease is primarily attributable to a decline in gross margin in the soft goods segment due to the impact of COVID-19 on that business, including our proactive inventory reduction initiatives, partially offset by favorable changes in foreign currency exchange rates, an increase in e-commerce sales, and a slight increase in overall golf equipment gross margins.
Operating expenses were $137 million in the third quarter of 2020, which is a $14 million decrease, compared to $151 million in the third quarter of 2019.
Non-GAAP operating expenses for the third quarter were $135 million, a $12 million decrease compared to the third quarter of 2019.
This decrease is due to decreased travel and entertainment expenses and the actions we undertook to reduce costs in response to the COVID pandemic.
Other expense was $6 million in the third quarter of 2020, compared to other expense of $7 million in the same period of the prior year.
On a non-GAAP basis, other expense was $3 million in the third quarter of 2020, compared to $7 million for the comparable period in 2019.
The $4 million improvements were primarily related to a net increase in foreign currency-related gains period over period, partially offset by a $1 million increase in interest expense related to our convertible notes.
Pretax earnings were $58 million in the third quarter of 2020, compared to pre-tax earnings of $33 million for the same period in 2019.
Non-GAAP pre-tax income was $65 million in the third quarter of 2020, compared to non-GAAP pre-tax income of $37 million in the same period of 2019.
Diluted earnings per share were $0.54 on 96.6 million shares in the third quarter of 2020, compared to earnings per share of $0.32 on 96.3 million shares in the third quarter of 2019.
Non-GAAP fully diluted earnings per share were $0.60 in the third quarter of 2020, compared to fully diluted earnings per share of $0.36 for the third quarter of 2019.
Adjusted EBITDA was $87 million in the third quarter of 2020, compared to $57 million in the third quarter of 2019, a record for Callaway Golf.
Turning now to Slide 11.
The first nine months of 2020 net sales are $1.2 million, compared to $1.4 million in 2019, a decrease of $174 million or 13%.
The decrease was primarily driven by the COVID-19 pandemic, partially offset by an increase in our e-commerce business.
The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 7%, and our soft goods segment, which decreased 21%.
This decrease also reflects a decrease in all major regions and product categories period-over-period due to COVID-19.
Change in the foreign currency rates positively impacted first nine months 2020 net sales by $2 million.
Gross margin was 42.7% in the first nine months of 2010 compared to 45.8% in the first nine months of 2019, a decrease of 310 basis points.
Gross margins in 2020 were negatively impacted by the North America warehouse consolidation and in 2019 were negatively impacted by the nonrecurring purchase price step-up associated with the Jack Wolfskin acquisition.
On a non-GAAP basis, which excludes these recurring items -- excuse me, nonrecurring items, gross margin was 43.3% in the first nine months of 2020 compared to 46.6% in the first nine months of 2019, a decrease of 330 basis points.
The decrease in non-GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-19 pandemic, costs associated with idle facilities during the government-mandated shutdown, and the company's inventory reduction initiatives.
The decrease in gross margin during the first nine months was partially offset by an increase in the company's e-commerce business.
Operating expense was $592 million in the first nine months of 2020, which is a $111 million increase compared to $481 million in the first nine months of 2019.
This increase is due to the $174 million non-cash impairment charge related to the Jack Wolfskin goodwill and trade name.
Excluding the impairment charge and other items previously mentioned, non-GAAP operating expenses for the first nine months of 2020 were $410 million, a $58 million decrease, compared to $468 million in the first nine months of 2019.
This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses as well as a reduction in variable expenses due to lower sales.
Other expense was approximately $7 million in the first nine months of 2020, compared to other expense of $28 million in the same period in the prior year.
On a non-GAAP basis, other expense was $3 million for the first nine months of 2020, compared to $24 million for the same period of 2019.
The $21 million improvements is primarily related to a $22 million increase in foreign currency-related gains period over period, including the $11 million gain related to the settlement of the cross-currency swap arrangement.
Pretax loss was $80 million in the first nine months of 2020, compared to pre-tax income of $127 million for the same period in 2019.
Excluding the impairment charge and other items previously mentioned, non-GAAP pre-tax income was $113 million in the first nine months of 2020 compared to non-GAAP pre-tax income of $155 million in the same period of 2019.
Loss per share was $0.92 on $94.2 million in the first nine months of 2020, compared to earnings per share of $1.13 on 96.2 million shares in the first nine months of 2019.
Excluding the impairment charge and the items previously mentioned, non-GAAP fully diluted earnings per share was $0.98 in the first nine months of 2020, compared to fully diluted earnings per share of $1.35 for the first nine months of 2019.
Adjusted EBITDAS was $175 million in the first nine months of 2020, compared to $216 million in the first nine months of 2019.
Turning now to Slide 12.
I will now cover certain key balance sheet and cash flow items.
As of September 30, 2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand was $637 million compared to $340 million at the end of the third quarter of 2019.
This additional liquidity reflects improved liquidity from working capital management, our cost reductions, and proceeds from the convertible notes we issued during the second quarter.
We had a total net debt of $498 million, including $443 million of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin.
Our net accounts receivable was $240 million, an increase of 7%, compared to $223 million at the end of the third quarter of 2019, which is attributable to record sales in the quarter.
Day sales outstanding decreased slightly to 55 days as of September 30, 2020, compared to 56 days as of September 30, 2019.
We continue to remain very comfortable, if not pleasantly surprised with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by 5% to $325 million at the end of the third quarter of 2020.
This decrease was primarily due to the high demand we are experiencing in the golf equipment business, partially offset by higher soft goods inventory related to COVID-19.
Our teams have done an excellent job being proactive with regard to managing inventory as soon as COVID hit us.
They continue to be highly focused on inventory on hand as well as inventory in the field.
We are very pleased with our overall inventory position and the inventory at retail, particularly on the golf side of the business, which remains low at this time.
Capital expenditures for the first nine months of 2020 were $31 million, compared to $37 million for the first nine months of 2019.
We expect our capital expenditures in 2020 to be approximately $35 million to $40 million, up slightly from the estimate we provided in May but down substantially from our $55 million of planned capital expenditures at the beginning of the year due to our cost reduction actions.
Depreciation and amortization expense was $203 million for the first nine months of 2020.
On a non-GAAP basis, depreciation and amortization expense, excluding the $174 million impairment charge, was $29 million for the first nine months of 2020 and is estimated to be $35 million for the full year of 2020.
Depreciation and amortization expense was $25 million for the first nine months of 2019 and $35 million for full-year 2019.
I'm now on Slide 13.
As we previously reported, we are no longer providing other specific financial guidance at this time due to continued uncertainty surrounding the duration and impact of COVID-19.
Although we expect some level of continued volatility due to the ongoing pandemic, third-quarter trends have thus far continued into the fourth quarter.
Perhaps more importantly, all of our business segments as well as the Topgolf business support an outdoor, active, and healthy way of life that is compatible with the world of social distancing.
And we now appreciate even further that all of our businesses are likely to be favored in both the realities of the current environment as well as anticipated consumer trends post-pandemic.
These circumstances, along with our increased liquidity will allow us to weather the pandemic and emerge in a position of strength to the benefit of our businesses and the Topgolf business post-merger.
As Chip mentioned in his remarks, due to time constraints, the primary focus of the Q&A should be the Callaway business, and we have scheduled a virtual conference on Thursday to discuss the Topgolf business further.
Operator, over to you. | callaway golf q1 non-gaap earnings per share $0.62.
q1 non-gaap earnings per share $0.62.
q1 earnings per share $2.19.
not providing specific net revenue and earnings guidance ranges for 2021 at this time.
expects that revenue and adjusted ebitda for full year 2021 for legacy callaway business will exceed 2019 levels. | 0 |
We have just come from the historic opening of what I consider New York's most thrilling and unique destination, Summit One Vanderbilt, opened to the public earlier today.
At 11 a.m., we cut the ribbon in the transcendence room, high above One Vanderbilt with the most incredible and amplified views of New York City.
The room is aptly named because everything we've done with this building has been about transcending limits and pushing boundaries.
We're doing it again today, but this time, we're taking it to a much higher level literally.
At the ribbon-cutting ceremony, I spoke about how One Vanderbilt is representative of what the true 21st century office tower can be.
It redefines what it means to integrate excellence in design, efficiency, sustainability, amenity, health, wellness and commutability.
By putting it all together, we've established a new category of building, a new icon on the skyline and a new model for the workplace.
As a result, we are now more than 90% leased despite COVID, and despite every dire prediction of the city's demise.
Several months after we opened this building, we introduced Daniel Boulud's Le Pavillon to the Midtown restaurant scene, and that too was an important milestone for New York, marking the reopening of indoor dining.
Every available table has been booked every single night since its opening in May, and there were a lot of questions when we opened that restaurant about whether the New York had enough of a population here in Midtown to support this restaurant.
And the restaurant has hundreds and hundreds on waiting list every evening.
This time, we've done more than push the boundary, we've completely shattered it.
We spent years in design, taking the best elements of observation decks, cultural institutions, experiential art and immersive technology, and combined it all into Summit.
The result is an experience that has the potential to not only become one of the most sought-after destinations in New York City, but a true global phenomenon.
The energy in New York has been palpable this past month.
New York is back.
On certain days of the week, we are reaching nearly 40% physical occupancy in our portfolio, a substantial increase that's been building up over the past few weeks.
As a sense of normalcy returns to the city, ambitious projects, like One Vanderbilt, ensure that New York remains a top global destination.
People from around the world come here to shop, to be entertained, to enjoy great food, to see great architecture and visit world-class museums.
Summit now becomes an important addition to that lineup.
The primary drivers of this market, finance, technology, business services, media and healthcare, are all doing unbelievably well, and beginning to make space commitments that evidence net demand in our market that will stabilize the occupancy rate and hopefully turn into meaningful positive absorption toward the end of this year and 2022.
With over 450,000 square feet leased in the third quarter in our portfolio and nearly 1.4 million square feet leased in SL Green portfolio to date, we are tracking well ahead of our leasing goals for the year.
And we're doing that at rental levels that are ahead of expectations and almost flat with expiring escalated rents.
We carry this momentum into the fourth quarter with the announcement of the seismic Chelsea Piers lease.
It's a 56,000 square foot lease to one of the best operators of fitness, wellness and health in New York City.
It's only their second Manhattan location.
We've been negotiating with Chelsea for quite a while, and they've selected one Madison to be their East side home where they'll be making substantial investment to make a fitness destination that I think is going to be second to none.
It's going to be awesome.
And that really bodes well for one Madison, which otherwise is already about six to seven weeks ahead of schedule on construction and significantly under budget, even beyond the numbers that we discussed back in December of last year, the buyouts, which now stand at close to 92% of the total project, have resulted in over $12 million of additional contingency savings.
And that's above and beyond the savings we had already factored in to that deal through smart bidding, smart project management, and just given the overall state of the construction market right now, we're experiencing savings while the city and I think the nation at large is experiencing cost increase as a result of supply chain issues that are driving up price.
So we're managing that to the best we can, staying well within our budget, and one Madison with that new lease now done and more conversations underway, we feel very, very good about that development.
During the quarter, we also completed a couple of dispositions previously announced, but we closed them.
Most significantly, the consummation of the sale of about a 50% interest to institutional -- overseas institutional investor in the News Building.
And we have more transactions teed up that we think we'll be able to complete in the fourth quarter.
So we continue to have great success in monetizing our assets, our gains, and we see that continuing to Q4.
That, of course, enabled us to repurchase about an additional $80 million of stock in the fourth quarter, which brings us close, but not completely rounded out -- I'm sorry, in the third quarter, my mistake.
$80 million of stock in the third quarter.
And that brings us close, but not completely rounded out to our repurchase objectives for the year.
So as we sit here, end of October with a rigorous two month sprint to the finish line to get done, all we need to do to close out this year and then embark on what we feel is going to be a solid 2022 for this company, and more importantly, this city.
I think it's great to have the call on this day.
That is really a historic event for the company to open this wonderful experience.
It's truly -- it's fun, it's exhilarating, it's thrilling, and it's everything we set out for it to be.
With that, I think we'll open up to questions. | fourth-quarter revenue of $6.22 billion increased 6% sequentially and 13% year-on-year.
fourth-quarter gaap earnings per share of $0.42 increased 8% sequentially and 56% year-on-year.
fourth-quarter eps, excluding charges and credits, of $0.41 increased 14% sequentially and 86% year-on-year.
qtrly pretax segment operating margin of 15.8% versus 11.8% reported last year.
sequential q4 revenue growth was broad based across all geographies and divisions, led by digital & integration.
qtrly north america revenue of $1.28 billion increased 13% sequentially.
looking ahead into 2022, industry macro fundamentals are favorable, due to steady demand recovery, increasingly tight supply market.
schlumberger - capital investment (comprised of capex, multiclient, aps investments) for full-year 2022 expected to be between $1.9 billion and $2.0 billion.
schlumberger- absent any further covid-related disruption, oil demand expected to exceed prepandemic levels before end of year, further strengthen in 2023.
sees double-digit growth in international and north american markets for year ahead. | 0 |
We appreciate you participating in our conference call today to discuss Flowserve's third quarter 2021 financial results.
These statements are based upon forecasts, expectations and other information available to management as of October 28, 2021, and they involve risks and uncertainties, many of which are beyond the company's control.
There are two key messages that we want to cover today.
First, we are confident that Flowserve is on the path to growth after a dramatic pandemic-driven downturn.
We are optimistic about the future, the positive inflection we are seeing in the cycle and our opportunities through energy transition.
Second, we experienced a number of challenges in the third quarter with our supply chain, logistics and labor availability.
These problems had an impact on our revenue and profitability in the quarter, but we believe that we will work through the issues and restore our revenue to a more normal conversion rate in the quarters to come.
As I just indicated, the third quarter presented a number of challenges, which we continue to navigate, including supply chain, logistics and labor availability.
These issues were truly global in nature and have had an impact on Flowserve and other global industrials in the quarter.
Flowserve had been largely successful in mitigating these issues in the first half of the year, but the confluence of events and the combined impact of the challenges had an adverse effect on our third quarter results.
It is important to note that we remain encouraged by the healthy underlying demand that we see across many of our end markets and by the fact that many of the headwinds we experienced in the third quarter are primarily timing related.
We expect that our business will return to growth and that the Flowserve team will work diligently to resolve the issues that we faced in the quarter.
Let me now turn to our results.
Third quarter reported and adjusted earnings per share were $0.38 and $0.29, respectively.
The combination of supply chain, logistics and labor availability shifted approximately $60 million of expected revenue out of the quarter.
Our backlog remains secure, and we are confident in our ability to recognize the backlog at a more normal revenue conversion rate in the coming quarters.
Our third quarter bookings of $912 million represented a 13% increase over prior year, continuing this year's trend of strong year-over-year quarterly growth.
Aftermarket and MRO bookings during the quarter were consistent with first half levels, while larger award activity continues to remain below pre-pandemic levels.
Aftermarket orders of $495 million increased 16% and are at pre-COVID levels.
The aftermarket business is benefiting from the increased utilization rates of our customers' assets being driven by improved mobility and increasing GDP levels around the globe.
Original equipment bookings increased 9% year-over-year to $417 million.
Our project or original equipment business continues to lag in the recovery with less than a handful of larger projects awarded in the quarter with only two project orders in the $10 million to $20 million range.
Some of the same macro issues around logistics and supply chain are also impacting the progress of these global projects moving toward award.
We remain confident in our pipeline of opportunities, and we expect project work to increase from this point forward.
Each of our core end markets delivered year-over-year growth in the third quarter, with oil and gas up 33%, while chemical and power were both up 17%.
Water bookings were also particularly strong, up 46% and included a $10 million desalination award.
From a regional perspective, bookings growth was driven primarily from North America and the Middle East and Africa.
Some of these markets were up over 30%.
COVID continues to negatively impact Flowserve's and our customers' operations in Asia Pacific, which was the only region not returning to growth thus far in 2021.
We do expect our overall bookings to recover more toward our first half 2021 quarterly run rate of approximately $950 million in the fourth quarter.
We saw bookings growth in each of the three months during the third quarter, and we believe that September's exit rate can restore our bookings levels to those in the first half of the year.
Project timing will be the key variable for fourth quarter bookings levels.
We believe full year bookings will grow year-over-year in the 10% range.
This level of bookings growth positions Flowserve well for revenue growth and solid financial performance in 2022.
I would now like to return to the operational challenges that we faced in the third quarter.
Approximately $60 million of revenue and $20 million in gross profit that we had previously expected to recognize in the period was deferred from the third quarter due to supply chain issues, global logistics and labor availability.
We were largely successful in mitigating these types of items during the first half of the year, but as the quarter progressed, we faced significant issues on all three fronts.
Historically, challenges like these might affect a few locations in any given period, but in the third quarter, we saw a very large number of our global manufacturing facilities and QRCs impacted by the logistics supply chain labor issues.
On the supply chain front, we are facing disruption and inflation across the entire value chain.
We have done a good job managing our critical vendors for procured items such as castings, forgings, machining and large motors.
And we are seeing the benefits from the supplier consolidation and the quality work that was completed in the Flowserve 2.0 transformation.
However, the broad issues and extension of lead times across the central components like base materials, coatings, small motors, consumables and electronics have impacted our ability to deliver product to our customers.
We have now identified and are mitigating these extended lead times, but there is no immediate fix, and we expect further disruption in the coming quarters.
To address the accelerating inflation that we saw during the third quarter, we have now announced our fourth price increase of the year, which will go into effect at the end of this year to continue our efforts to offset the increased costs on purchase items and logistics in the marketplace.
We are in a difficult environment with inflation and cost pressures, but I feel that we have done a nice job balancing enhanced pricing and our pursuit of growth.
With logistics, we are getting impacted in three different ways.
First, our supply chain is predominantly out of Asia, and the ability to ship product from that region to Europe and the Americas is now more costly and less predictable than ever before.
Second, it is also difficult to reliably coordinate and schedule product shipments from our factories to our customers.
And third, in some cases, our customers are unwilling or unable to schedule pickup or delivery of our products, which impacts the timing of revenue recognition.
While we believe the situation with our customers is getting better, we are the most impacted in the latter weeks of the third quarter.
Finally, it is hard to maintain staffing and productivity levels in certain parts of the world in the current environment.
For example, in China, we're having to hire a significant number of new associates to keep up with demand and to satisfy the emerging local laws.
In Europe, labor is especially tight in certain areas.
While in the Americas, we saw a large COVID quarantine rate during Delta's rise, and it is also a very tight labor market.
We are pleased that the heightened COVID cases and related quarantines we saw in the third quarter across our business have consistently declined through October, and we are encouraged by this continuing downward trend.
We will, of course, continue to focus on the safety of our associates as we have been since the start of the pandemic.
We are actively working through each of these disruptions, and we expect it will take a few quarters for us to adjust to extended supplier lead times, the disruption in logistics and the issues with labor availability before we return to the more normal operating model.
Additionally, we have not seen, nor do we expect an increase in cancellations from our backlog.
So our revenues are there for us to deliver in the coming quarters.
Following our third quarter results and with the assumption that these issues will impact Flowserve in the fourth quarter and likely into 2022, we adjusted our 2021 full year guidance metrics yesterday.
Looking at Flowserve's third quarter financial results in greater detail.
Our reported earnings per share of $0.38 exceeded our adjusted earnings per share of $0.29 due to a $16.6 million discrete tax adjustment from the reversal of certain deferred tax liabilities.
Partially offsetting the $0.13 gain on taxes, our adjusted earnings per share also excludes $0.04 of items, including realignment expenses, below-the-line FX impact and certain costs incurred in our debt refinancing.
During the third quarter, we took advantage of the favorable debt markets to solidify our liquidity and financial flexibility for years ahead by prefunding upcoming debt maturities.
We amended and restated Flowserve's senior credit facility by extending the maturity of our revolving credit facility by two years and enhancing the financial flexibility we have under it as well as lowering the ongoing commitment fees and including sustainability-linked options to enable further cost reductions as we progress our ESG objectives.
In addition to the revolver, we also obtained a $300 million fully drawn term loan, which included participation from a minority-owned depository institution in addition to most of the syndicate banks in the revolver.
We sincerely appreciate the support of our historic and new banking partners in both facilities and look forward to working closely with them in the years ahead.
In September, we also accessed the debt capital markets and issued $500 million in new 2.8% 10-year senior notes.
We value the confidence of investors in this offering as well.
In October, we used all the proceeds from the term loan and senior notes in addition to some excess cash, together totaling $842 million, to fully redeem our senior notes with maturities in 2022 and 2023.
Now I'd like to return to our third quarter financial results.
As Scott mentioned, the third quarter was impacted by supply chain, logistics and labor headwinds that delayed roughly $60 million of expected revenue out of the quarter.
These issues primarily occurred late in the third quarter.
Revenue decreased 6.3% to $866 million, largely due to the deferred revenue I just mentioned.
All in, we had an 11% decline in original equipment, or OE, sales, driven by FPD's 20% decrease, but partially offset by FCD's 2% increase.
Beyond the challenges in the third quarter, FPD continues to be impacted by its 2021 beginning OE backlog, which was down roughly 25% versus the start of 2020.
Aftermarket sales remained relatively resilient in total, down roughly 1%, where FCD's 12% increase was offset by FPD's 3% decline.
Our third quarter adjusted gross margin decreased 190 basis points to 29.6%, primarily due to the OE sales decline and the related under-absorption particularly at our engineer-to-order sites in both segments, the other previously mentioned disruptive impacts as well as higher logistics costs, which increased 25% year-over-year.
These headwinds were partially offset by a 3% mix shift toward higher-margin aftermarket sales.
On a reported basis, the gross margin decreased 160 basis points to 29.3% was driven by the factors previously mentioned and were partially mitigated by the $3 million decrease in realignment charges versus prior year.
Third quarter adjusted SG&A increased $7.4 million to $200 million versus prior year, primarily due to a $3 million increase in expense related to our incurred but not reported potential reserves, increased R&D spending and the return from travel costs which were a temporary benefit in 2020 as well as headwinds from foreign exchange.
Reported SG&A was flat to the prior period, and these increases were offset by a $7 million decrease in adjusted items and disciplined cost control offset the return of some of last year's temporary cost benefits.
Third quarter adjusted operating margins of 7% decreased 390 basis points year-over-year as did FPD's adjusted operating margin, primarily due to increased under-absorption related to a 20% OE revenue decline.
FPD's adjusted operating margin decreased 170 basis points year-over-year to 10.5% due to sales mix and slightly higher SG&A as a percent of sales.
We expect that sales volume normalize, that margins will improve.
And to that point, had Flowserve not experienced the $60 million revenue deferral, our adjusted operating margins would have been flat to modestly up on a sequential basis.
Third quarter reported operating margin decreased 280 basis points year-over-year to 6.6%, where the previously discussed challenges more than offset the $10 million reduction of adjusted items.
Our third quarter adjusted tax rate of 15.2% was driven by our income mix globally and favorable resolution of certain foreign audits in the quarter.
The full year adjusted tax rate is expected to normalize in the 20% range.
Turning to cash and liquidity.
Our third quarter cash balance of $1.5 billion reflected the debt refinancing discussed earlier as well as solid cash flow performance in the quarter.
Our net debt position of $652 million at the end of the third quarter has declined by over $300 million in the last three years.
We believe a bright spot in our third quarter financial results is our continued progress on cash flow.
On a year-to-date basis through the third quarter, operating cash flow of $151 million is up nearly $37 million versus the prior year, while free cash flow of $117 million has increased 73% or $49 million over the prior year.
In the third quarter, we delivered $78 million or approximately 67% of our year-to-date free cash flow total.
This third quarter performance is up versus the comparable period in 2020 despite voluntary funding of a $20 million pension contribution during the quarter compared to no funding a year ago.
We are pleased with our improved cash flow performance year-to-date.
And with our typically seasonally strong fourth quarter ahead, we are confident in our ability to stay on pace to deliver a free cash flow conversion of over 100% of our adjusted net income once again in 2021.
Working capital was a cash source of $56 million in the third quarter and a $47 million increase versus last year.
Accrued liabilities, prepaid expense and continued improvements in our accounts receivable process were the major contributors this quarter.
As a percentage of sales, primary working capital saw a modest 40 basis point sequential increase to 29.8% due primarily to the market disruptions in the quarter.
Both DSO and inventory turns were roughly flat sequentially.
I would also like to highlight our disciplined inventory management.
For the third consecutive quarter, our combined balance of inventory and contract assets and liabilities decreased while backlog continued to increase and despite holding elevated work in process and finished goods inventory at quarter end due to the logistics challenges.
Since year-end 2020, backlog has increased $115 million, while inventory and contract assets and liabilities have declined $16 million.
Major uses in the third quarter include dividends and capex of $26 million and $11 million, respectively.
As I just mentioned, we also contributed $20 million to our U.S. cash balance pension plan to keep it largely fully funded.
In the fourth quarter, major uses expected include the completed retirement of the 2022 and 2023 senior notes, the $26 million October dividend and a higher level of capex spend.
Turning now to our outlook for the remainder of 2021.
Based on the supply chain and logistics challenges that arose and accelerated late in the quarter, its impact on our third quarter earnings and the expectations that these conditions will persist, Flowserve revised our full year 2021 revenue and earnings per share guidance ranges.
We now expect a full year revenue decline of 3.5% to 4.5% and reported an adjusted full year earnings per share of $1.05 to $1.10 and $1.40 to $1.45, respectively.
To briefly cover our thought process, we expect the revenues and income that were deferred out of the third quarter to be largely realized in the fourth quarter.
However, we expect the challenges of the third quarter to continue industrywide for the next few quarters.
So we are assuming the fourth quarter has a similar deferred revenue impact to what we just experienced.
This, coupled with the impact of the strengthening dollar on our non-U.S. denominated sales, particularly the euro, resulted in us lowering our expectations for full year 2021 revenue.
We do expect that the fourth quarter will have the traditional Flowserve fourth quarter seasonality with strong revenue conversion.
However, we do not expect that revenue and the associated profit will be fully caught up at year-end.
Our adjusted earnings per share range continues to exclude expected realignment expenses as well as below-the-line foreign currency effects and the impact of other potential discrete items which may occur during the year, such as the premium and fees incurred to retire the notes.
In terms of other guidance metrics, our net interest expense remains unchanged at $55 million to $60 million and we modestly lowered our full year adjusted tax rate guidance to approximately 20%.
From a bookings standpoint, we now expect full year 2021 bookings to increase in the 10% range year-over-year.
Additionally, we continue to expect the majority of this increase will come from our aftermarket and shorter-cycle MRO original equipment products.
The major categories of our full year cash usages include the October debt retirement, dividends and share repurchases of roughly $120 million, capital expenditures in the $65 million range, the third quarter's pension contribution and the funding of our now modest realignment programs.
In conclusion, while our third quarter was impacted by supply chain, logistics and labor headwinds, we view these primarily as transitory.
The backdrop for our traditional markets looks positive.
There is an increasing interest in our energy transition offerings, and we continue to build momentum in our operational and cash flow progress.
With a solid and growing backlog and expected progress by the broader industry in managing the supply chain and logistics headwinds, we believe that Flowserve is well positioned to deliver earnings growth in 2022.
Before addressing our outlook for the remainder of the year and some early thoughts on 2022, let me first provide an update on our strategic initiatives.
While current conditions are increasingly favorable for our traditional energy markets, we are taking steps to best position the company for the energy transition that is already underway and which presents a significant long-term opportunity for Flowserve, our shareholders and all stakeholders around the world.
To support our efforts, we have increased our strategic focus on three major themes: decarbonization, digitization and diversification to accelerate our growth in 2022 and beyond.
We continue to identify significant energy transition opportunities in applications where we have been supporting our customers for decades.
As we focus on lower carbon energy production, we are investing in technology to advance our customers' aspirations, including additional capabilities within carbon capture, hydrogen and energy storage.
We are still in the early innings of tapping into this growing market, and our third quarter bookings included over $25 million of energy transition work, including biodiesel conversions, solar power projects and energy efficiency upgrades.
Our project funnel for energy transition continues to grow, demonstrating we have the flow control products and expertise to support our customers today and through their energy transition journey.
I'd like to highlight a few examples of our third quarter bookings success stories.
Flowserve was selected to provide pumps and seals for a sustainable aviation fuel project in the Netherlands.
The facility will produce sustainable aviation fuel that when compared to fossil jet fuel has the potential to cut life cycle emissions from aviation by up to 80%.
Additionally, we will remain active on the facility for years to come, ensuring the lowest total cost of ownership with the inclusion of Flowserve's LifeCycle Advantage aftermarket solutions.
Our pumps and seals were also chosen recently for a biodiesel conversion project in the United States.
Flowserve helped compress the engineering and approval time from a normal 12-week -- 12-month cycle to seven months, supporting an earlier plant start-up and delivering a faster payback.
The project is expected to reduce CO2 emissions from diesel production by up to 600,000 tons per year.
In addition, our vacuum pump technology was selected to support a leading provider of thin-film technology for the production of solar power panels.
Flowserve will provide equipment for new facilities in the U.S. and in India, reducing the overall power consumption, maintenance downtime and the floor space required.
Finally, let me update you on the progress of RedRaven, our IoT offering launched earlier this year, which instruments pumps, valves and fuel systems to provide the capability to assist our customers with a data-driven approach on how to improve their operations, increase asset uptime and reduce associated energy emissions.
We continue to expand the RedRaven instrumentation across product portfolio in the quarter and further increased access for our customers while developing the distribution channel.
We are currently working with over 40 customers and have connected nearly 5,000 assets.
While we are still relatively early in the rollout, customer interest continues to increase.
Turning now to our outlook for the remainder of the year and our positioning as we think about 2022.
With bookings continued to improve in October, we are confident in the market outlook as we close out the fourth quarter and plan for 2022.
As I indicated earlier, we expect fourth quarter bookings to be roughly $950 million, depending on the level of project activity.
By achieving this level, our 2021 bookings would deliver a 10% year-over-year growth rate.
Based on current market conditions, we also expect year-over-year bookings growth to continue in 2022 based on our discussions with our customers, EPC backlogs and our project funnel.
We believe that the lessening impact of the pandemic, combined with increased energy demand, growing decarbonization and energy transition opportunities and global economic growth, create a compelling view of our markets.
Additionally, with increased utilization, coupled with energy prices that are well above pre-pandemic levels, we expect that our customers will continue their aftermarket and MRO spending as well as return to their capacity expansion plans across our served markets.
Our project funnel remains well above prior year levels, providing confidence that while the timing of the return of these larger projects remains uncertain, we expect that many will ultimately move forward in 2022.
All of this gives us increased confidence in the flow control markets, driving bookings growth throughout 2022.
Additionally, we believe that our added focus on decarbonization, digitization and diversification will only enhance our growth outlook.
Looking both near and longer term, energy transition investment will provide strong opportunities for Flowserve.
While we continue to support our customers' traditional applications, we believe we are well positioned to support our customers' energy transition initiatives.
Operationally, I'm confident that we have the team and the tools to work through the third quarter challenges.
Flowserve 2.0 has provided the visibility and business processes to address these issues, and our teams are currently working to resolve and mitigate the issues that arose in the third quarter.
Longer term, we expect the opportunities from our served end markets, combined with our improved operational execution and an embedded continuous improvement culture, will enable Flowserve to deliver on the longer-term targets we introduced during our last Analyst Day.
In closing, we believe that with the expected return to growth and continued execution improvements, Flowserve will be well positioned to deliver stronger incremental margins and overall financial results.
We believe in the company's long-term ability to achieve our original targets, including operating margins in the 15% to 17% range, ROIC of 15% to 20% and to continue free cash flow conversion in excess of 100%, which we've already demonstrated.
Our focus remains on supporting our customers, execution and capitalizing on improved markets to drive long-term value for our shareholders and our stakeholders. | flowserve corporation sees fy 2021 revenues down 3.5% to 4.5%.
q3 adjusted earnings per share $0.29.
q3 earnings per share $0.38.
revised full-year 2021 financial guidance metrics, including revenue and adjusted eps.
sees fy 2021 revenues down 3.5% to 4.5%.
sees fy 2021 reported earnings per share $1.05 - $1.10.
sees fy 2021 adjusted earnings per share $1.40 - $1.45. | 1 |
A copy of which is available on our website at www.
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin, and free cash flow.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
And I think Steve is muted.
It wouldn't be a COVID event if somebody wasn't muted.
So I'm glad to get that out of the way.
As we're saying all the time during COVID, I hope you and your loved ones continue to be safe.
But at least now, I'm hoping as well that you and they are beginning to see the light at the end of this tunnel and at the end of the scourge of COVID is within sight.
Ajay, of course, is going to give you the details of this quarter.
Now Ajay will be careful.
And he will stress that some of these earnings strength this quarter reflect one-time benefits, stuff you can't count on recurring, things like FX, some revenue deferrals being recognized, a lower tax rate, etc.
But even normalizing for all that, as far as I can tell, it is a great quarter.
And more important to me and I hope you, it's another in a large number of great quarters, which to me is not a confirmation of onetime things or transient things but of the fundamental strength of this company, what our people are doing every day to build this business in ways that allow us to help our clients navigate, not only their greatest challenges, but in many cases, their greatest opportunities.
It's a fabulous quarter.
I want to be clear, however, it is not that we've turned all of our businesses into businesses that go up in a straight line.
As we have talked about many times, each of our businesses and the company as a whole can have huge zigs and zags due to market conditions or the winning or losing of a big job.
We're jumping on an opportunity to invest, jumping on an opportunity to invest in a way that can hurt the P&L in the short term but supports future growth.
And even in this great quarter, we saw some of that.
If you look at our restructuring business, it continues to face widespread market slowdown around most of the world.
And although we benefited from some legacy cases during the quarter, that business is certainly off in a big way, in a big way from a year or so earlier.
Now I don't believe anybody thinks this restructuring market has gone away permanently.
So we're continuing to invest in that business, but that's the zag.
Similarly, in Tech, some of the fuel that ignited the incredible performance in the first half of the year, notably second request activity weakened this quarter.
We have enormous confidence in the multiyear trajectory of that business and more important, the people of that team that is driving that multiyear trajectory.
So we have, in the face of that slowdown, continued to hire.
We increased our head count in that business 12.4% year over year.
So even though the revenue went up, the adjusted EBITDA declined.
That's just an example of investing to support the business over the medium term, something that we have committed to do and we will continue to do.
And even in FLC, where we have great strength compared to last year, we've had pockets of weakness.
For example, Asia because borders remain closed and travel restrictions have been extended, which affected our ability to both deliver certain services and reach clients in the market.
Even if we do the right things, our business has zigs and zags, and some of them can be pretty bad zags.
But what I think we've said many times and what I now believe the data fully support is if we do the right things, although there are zigs and zags, over any extended period of time, each of our businesses are growth engines, not only growth engines, but vital and powerful growth engines.
They allow us to deliver on major assignments that make at least me proud and I think many of us proud.
They allow us to attract great people to build their brand.
And therefore, though there are zigs and zags, they become zigs and zags around an upward sloping line.
It doesn't mean you can't have all the zags come in the same quarter or even the same year, but it does mean that over any extended period of time, the zig zags are around an incredibly powerful upward sloping line.
Now that line, I assume, is important to you, our shareholders.
I believe it's equally important for the engine of the firm, our people.
It's that upward sloping line that gives us, and I hope to you, the confidence to invest in great people regardless of whether it's a good quarter or not a good quarter for a particular business.
It allows us to not do layoffs just because some businesses temporarily slow in a quarter.
The strength of conviction we drew on obviously last year and supported our people and is giving us real benefits this year.
It allows us to promote people when they're ready to get promoted versus when, oh, the numbers happen to be good.
It allows us to hire aggressively when the great talent is available versus when it feels convenient according to the P&L.
It allows us to invest in our people's development when they're eager to grow.
My experience is when you do that, you build a firm, you build -- take a powerful firm and you make it ever more powerful.
And you create businesses that are global and diverse and effective and vibrant for your clients and for your people.
My experience is also when you have great people doing great work who feel supported, you end up with fabulous individuals.
Fabulous individuals who are in an environment where they can develop even further.
And you end up with great people outside your firm who want to join you.
And through that, we create businesses.
Through the zigs and zags become sustainable, powerful, resilient, and exciting businesses, and exciting growth engines.
That's the journey we have been on.
It has been a lot of work.
It always is a lot of work.
There's always daily things to struggle with.
A lot of work.
It's also been incredibly rewarding.
That is a journey we look, this great team that I have the privilege of leading to stay on.
Beginning with our third quarter results.
Revenue grew 12.9% with every segment reporting growth.
And we continued making investments in headcount, adding 346 total billable professionals year over year, including 36 senior managing directors.
Earnings per share were also boosted by FX remeasurement gains and lower weighted average shares outstanding, or WASO, resulting in a 45% increase in GAAP earnings per share and a 31% increase in adjusted earnings per share compared to the prior-year quarter.
Overall, we are delighted with these results, which exceeded our expectations.
Revenues of $702.2 million increased $80 million, compared to revenues of $622.2 million in the prior-year quarter.
GAAP earnings per share of $1.96 in 3Q '21 compared to $1.35 in 3Q '20.
Adjusted earnings per share for the quarter were $2.02, which compared to $1.54 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in 3Q '21 reflects $2.4 million of noncash interest expense related to our convertible notes, which reduced GAAP earnings per share by $0.06 per share.
In 3Q of '20, we had a special charge of $7.1 million as well as noncash interest expense of $2.3 million, which reduced GAAP earnings per share by $0.14 per share and $0.05 per share, respectively.
Net income of $69.5 million, compared to $50.2 million in the prior-year quarter.
The increase in net income was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of a 6.9% increase in billable headcount and higher SG&A expenses.
FX remeasurement gains this quarter versus losses in the same quarter last year also boosted net income.
SG&A of $138.6 million or 19.7% of revenues.
This compares to SG&A of $122 million or 19.6% of revenues in the third quarter of 2020.
The increase in SG&A included higher compensation, outside services expenses, bad debt, software costs, and travel and entertainment expenses.
Third quarter 2021 adjusted EBITDA of $100.3 million or 14.3% of revenues, compared to $90.9 million or 14.6% of revenues in the prior-year quarter.
Our third quarter effective tax rate of 21.6% compared to 22.3% in the prior-year quarter.
Our tax rate for the quarter benefited from discrete tax adjustments related to the release of a valuation allowance on our Australian deferred tax assets because of sustained profitability.
Fully diluted WASO of 35.4 million shares in 3Q '21 compared to 37.1 million shares in 3Q '20.
Our convertible notes had a dilutive impact on earnings per share of approximately 842,000 shares, included in WASO, as our average share price of $138.83 this past quarter was above the $101.38 conversion threshold price.
As I mentioned, billable headcount increased by 346 professionals or 6.9% compared to the prior-year quarter.
Now I will share some insights at the segment level.
In Corporate Finance & Restructuring, revenues of $250.3 million increased 5.8% compared to the prior-year quarter.
The increase in revenues was due to higher demand and realization for our transactions and business transformation services, as well as the recognition of deferred revenue, which were partially offset by lower demand for restructuring services.
Adjusted segment EBITDA of $55.6 million or 22.2% of segment revenues compared to $56.2 million or 28 -- or 23.8% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to increased compensation, including the impact of a 6% increase in billable headcount and higher SG&A expenses.
In the third quarter, we continued to grow our transactions and business transformation practices globally.
Not only are we growing these practices, but also we are able especially at junior levels to leverage professionals across practices.
This quarter, once again, a number of our junior professionals, who typically would support restructuring assignments, worked on transactions-related engagements.
On a sequential basis, revenues increased $19.4 million or 8.4% as the segment benefited from continued growth in our business transformation and transactions businesses and recognition of prior deferred revenue.
Adjusted segment EBITDA for the third quarter increased $15.5 million.
Revenues of $145.3 million increased 22% relative to a weak quarter in the prior year.
The increase in revenues was primarily due to higher demand for our investigations, disputes, and health solutions services.
Adjusted segment EBITDA of $16.6 million or 11.4% of segment revenues compared to $13.6 million or 11.4% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes 7.7% growth in billable headcount as well as higher SG&A expenses compared to the prior-year quarter.
Sequentially, revenues decreased $5.5 million, primarily due to lower demand for investigations and health solutions services.
Adjusted segment EBITDA decreased $1.4 million.
Our Economic Consulting segment's revenues of $172.5 million increased 11.3% compared to the prior-year quarter.
The increase was primarily due to higher demand for non-M&A-related antitrust and financial economic services, which was partially offset by lower demand for our M&A-related antitrust services compared to the prior-year quarter.
Adjusted segment EBITDA of $29.9 million or 17.3% of segment revenues compared to $25.7 million or 16.6% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes the impact of 5.1% growth in billable headcount.
Sequentially, revenues decreased $10.8 million or 5.9%, which was driven by decreased demand for M&A-related antitrust services, primarily due to the conclusion of a large matter in the quarter.
In Technology, revenues of $64.7 million increased 10.4% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for litigation, investigation and information governance services, which was partially offset by lower demand for M&A-related second request services compared to the prior-year quarter.
Adjusted segment EBITDA of $7.8 million or 12.1% of segment revenues compared to $11.9 million or 20.4% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation, which includes the impact of a 12.4% increase in billable headcount, as our Technology segment continues to make investments in talent, particularly at the senior levels to bolster our capacity and expertise globally across data risk, compliance, privacy and information governance, as well as higher SG&A expenses.
Sequentially, revenues decreased $14 million or 17.8%, primarily due to decreased demand for M&A-related second request services.
Adjusted segment EBITDA declined $10.7 million sequentially.
Record revenues in the Strategic Communications segment of $69.4 million increased 31.1% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services.
Adjusted segment EBITDA of $15.5 million or 22.3% of segment revenues compared to $8.4 million or 15.9% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues.
Sequentially, revenues increased $1.6 million, primarily due to higher demand for financial communications and corporate reputation services.
Adjusted segment EBITDA increased $2 million sequentially.
Let me now discuss key cash flow and balance sheet items.
We generated net cash from operating activities of $196.9 million, which increased by $85.3 million compared to $111.6 million in the third quarter of 2020.
The year-over-year increase was largely due to an increase in cash collected resulting from higher revenues, which was partially offset by an increase in compensation-related costs and other operating expenses.
We generated free cash flow of $172.2 million in the quarter.
Total debt net of cash decreased $160.7 million sequentially from $159.4 million on June 30, 2021 to a negative net debt position of $1.3 million on September 30, 2021.
The sequential decrease was primarily due to an increase in cash and cash equivalents and repayment of borrowings under our senior secured bank revolving credit facility.
Turning to our guidance.
In light of our record financial performance during the first nine months of 2021, we are raising the low end of our previous full year 2021 guidance range for revenues of between $2.7 billion and $2.8 billion to expected revenues of between $2.75 billion and $2.8 billion.
We are raising our full year 2021 guidance ranges for GAAP earnings per share of between $5.89 and $6.39 and adjusted earnings per share of between $6 and $6.50 to GAAP earnings per share of between $6.39 and $6.64 and adjusted earnings per share of between $6.50 and $6.75.
The $0.11 per share variance between earnings per share and adjusted earnings per share guidance for full year 2021 includes the estimated impact of noncash interest expense of $0.20 per share related to our 2023 convertible notes and the second quarter 2021 $0.09 per share gain related to the fair value remeasurement of acquisition-related contingent consideration, which are not included in adjusted EPS.
Our updated guidance after our record year-to-date performance is shaped by four key considerations.
First, restructuring activity remains subdued.
As credit markets remain in an accommodative mode and the number of stressed and distressed issuances remains low, Standard & Poor's is now forecasting that the trailing 12-month U.S. speculative rate -- default rate -- corporate default rate will fall further in the first half of 2022, reaching 2.5% by June 2022, which compares to 3.8% in June 2021 and 6.6% in January 2021.
Second, global M&A activity, which drives demand in our Economic Consulting and Technology segments as well as our transactions business in Corporate Finance & Restructuring, has been at record levels year to date.
There is no certainty that M&A activity will continue at this pace.
Third, we are a large jobs firm.
And when large engagements end, they may not be immediately replaced.
As Steve and I have both mentioned today, we saw several large jobs end or significantly wind down in the last two quarters across our Economic Consulting, Technology, and Corporate Finance & Restructuring businesses.
Fourth, the fourth quarter is typically a weaker quarter for us because of a seasonal business slowdown at the end of the year.
Before I close, I want to reiterate four key themes that underscore the strength of our company.
First, our results show that while continuing to dominate our traditional areas of strength, we have demonstrably grown our adjacencies and footprint, which also have the added benefit of making us less susceptible to the business cycle.
Business transformation and transaction services, which represented 36% of total segment revenues in Corporate Finance in Q3 of last year, contributed 59% this quarter.
Non-M&A-related antitrust services have steadily grown to represent 32% of our Economic Consulting revenues this quarter, which compares to 23% in Q3 of last year.
Our Australian business has grown to 31 senior managing directors from 19 two years back.
And our Middle East business has grown to 16 senior managing directors from five two years back.
And EMEA represented 30% of revenues this quarter with us only recently ramping up in Germany and Spain.
Second, we count among our staff, arguably, some of the leading experts in the world in areas such as antitrust, financial arbitration and economic analysis, restructuring, technology and data analytics-based investigations, and corporate reputation and communications.
Third, in many industries around the world, the pace of change is accelerating.
And we have the surge capacity to help our clients when they face their greatest challenges and opportunities.
And finally, our strong balance sheet continues to give us the flexibility to make sustained investments toward growing our business globally. | compname reports q3 earnings per share of $1.96.
q3 adjusted earnings per share $2.02.
q3 earnings per share $1.96.
q3 revenue rose 13 percent to $702.2 million.
raises fy adjusted earnings per share view to $6.50 to $6.75.
raises fy earnings per share view to $6.39 to $6.64. | 1 |
I hope you, your families and your colleagues are doing well.
We are very pleased with our first quarter results.
We achieved record first quarter order growth and exceeded our guidance on nearly every metric as we continue to benefit from a market that is playing to our strengths.
Our business is performing at a very high level.
Pre-tax income rose 93% and earnings per share rose 85% in the quarter compared to one year ago.
We are increasing gross margin, leveraging SG&A with higher revenues and greater cost controls and improving our return on equity.
We are raising full fiscal year guidance across nearly all of our key metrics and expect to deliver the most homes in our history in fiscal 2021.
Demand for new homes remains incredibly strong, and we are enjoying pricing power in nearly all of our markets.
In our first quarter, net signed contracts rose 68% in dollars and 69% in units against a tough comparison in fiscal year 2020's first quarter when orders grew 31% over Q1 of fiscal 2019.
Three weeks into our second quarter, our non-binding reservation deposits are up approximately 34% overall and 38% same store over another difficult comp to last year and despite the cold and snowy weather impacting about one-third of our markets over the past few weeks.
Our backlog, which is up 37% in dollars and 38% in units, provides visibility into the significant gross margin expansion we project this year, especially in our third and fourth quarters as we deliver homes sold after last May.
As a reminder, most of our homes take nine to 12 months to deliver.
Based on this backlog and the current market dynamics where we continue to experience strong pricing power, we expect further gross margin expansion in the fiscal year 2022.
Our results reflect a robust housing market that continues to benefit from favorable demographic trends, a very tight supply for sale homes stemming from a decade of under production, low mortgage rates and a renewed appreciation for the importance of home.
Home the supply remains tight.
According to data released by the National Association of Realtors last week, there is just 1.9 month supply of homes on the market, a record low.
According to Redfin, nearly half of all retail loans on the market are placed under contract in less than two weeks with one-third of all resales selling above asking price.
Low mortgage rates continue to support the housing market and are driving affordability for more upscale homes and more upgrades.
Interest rates have remained low for an extended period of time.
The new administration and the Fed are both signaling a continuation of accommodative policy.
These trends clearly favor us for the following reasons.
Approximately three quarters of our buyers have a home to sell.
Rising home prices and limited supply means our buyers can sell their existing homes quickly and at appreciated values.
The limited supply of existing homes is also pushing buyers frustrated with the unpredictability and frantic pace of the resale market to the more systematic process of new home sales.
In addition, at Toll Brothers, our build-to-order model offers buyers the opportunity to design their homes from the ground up, allowing them to customize their homes to match their evolving lifestyle.
This is the number one Toll Brothers advantage, choice, and it has never been more important to our homebuyers.
Our customers increasingly want the ability to personalize their homes, and they have the means to do it.
They tend to enjoy greater job stability, have more flexibility to work from home and have wealth accumulated from rising home prices and the stock market.
This quarter, our buyers added on average $170,000 or approximately 26% of the base price in lot premiums, options and upgrades.
This is up from about 22% in the first quarter of fiscal year 2020 and our long time average of 21%.
Our customers are spending more as they customize their homes, which is generally accretive to our gross margin.
We are also seeing a positive impact from demographic and migration trend.
Over the past several years, we have expanded our geographic footprint and home offering.
We now operate in over 50 markets in 24 states and have communities in both high growth and a high barrier to entry markets where a tremendous brand and wide range of price points enables us to serve a broad spectrum of buyers.
As the 72 million millennials transition to homeownership, our growing affordable luxury product lines are designed to appeal to these buyers.
This quarter, approximately 25% of our customers were first time buyers.
While we are eagerly looking forward to the end of this pandemic, we believe it has cemented the value of homeownership in the minds of a large portion of the U.S. population.
The pandemic has made the consumer appreciate the home more and has made work from home a more widespread and permanent option, especially among our consumer base.
These trends combined with the significant under supply of homes for sale support long-term sustained growth in the new home market, and we are well positioned for this growth.
Our deep land position provides the foundation to grow our business.
At the end of our first fiscal year, we owned or controlled approximately 67,700 lots and were selling from 309 communities.
Even though we are selling out of communities faster than anticipated, we expect to grow community count to approximately 320 at the end of Q2 and 340 by fiscal year end, which is an 8% full year increase from the end of fiscal year 2020.
Based on the land we already own or control, we are confident that we can continue to grow community count at a similar pace in fiscal year 2022.
We continue to pursue profitable and sustainable growth, while remaining laser-focused on improving capital efficiency and return on equity.
Over the past year, we have completely revamped our land underwriting standards and are beginning to reap the benefits of this focus on capital-efficient returns.
We are structuring land acquisitions much more efficiently, laying out less cash upfront by negotiating deferred payment terms with sellers and using more third-party land banking, joint venture and option arrangements.
In short, we are controlling more land with fewer dollars, which we expect to lead to higher returns.
Our increased focus on more affordable luxury homes should also result in shorten building cycle times, improved inventory turns, lower building costs and higher margins over time.
Our expansion in the geographies and price points with lower upfront land cost should also benefit return on equity long-term.
We believe the combination of these positive market conditions and our relentless focus on return on equity and internal operational efficiencies will pay off in the short and long-term with sustainable improved results.
In summary, we expect fiscal year 2021 to be a tremendous year for Toll Brothers.
And we are laying the foundation for an even better 2022.
Our business is really firing on all cylinders.
Sales are strong and margins are expanding.
SG&A is well controlled and being leveraged.
We are generating significant cash flow.
And this quarter, we bought back stock, paid down debt and grew our land holdings.
And we are improving our return on equity.
It is our number one priority.
We expect to grow our return on beginning equity by approximately 425 basis points in fiscal year 2021 and we see further improvement in fiscal year 2022.
To improve our ROE, we are buying land more efficiently, expanding our affordable luxury offerings, controlling costs and driving toward higher gross margins.
We have streamlined and optimized much of our product offerings, which should allow us to reduce costs and cycle times without sacrificing the high quality customization process that distinguishes our homebuying experience.
Our efforts in this area continue as we seek to further refine and streamline our products and processes.
In addition to these operational initiatives to improve our capital efficiency, we are taking steps to improve our balance sheet and reduce interest expense.
In fiscal year 2020, we generated over $1 billion in net cash from operating activities, a record.
In fiscal 2021, we are forecasting approximately $750 million of operating cash flow.
Our strong cash generation in fiscal 2020 enabled us to balance land and builder acquisitions with returning cash to our stockholders, while prudently managing our debt.
That will continue in fiscal year 2021.
In our first quarter of fiscal year 2021, we repurchased $179.4 million of our stock or roughly 3% of outstanding shares at an average price of approximately $44.54 per share.
Since fiscal 2016, we have bought back nearly a third of our outstanding shares.
This quarter, we also repaid approximately $190 million of debt by paying down $150 million of our floating-rate bank term loan and reducing purchase money mortgages on some of our owned land by about $30 million, among some other things.
We also just announced the redemption of the $250 million of 5.625% notes that were due in 2024.
These notes will be retired in early March, and we expect to incur a charge for the early extinguishment of debt of approximately $33 million in our second fiscal quarter.
Please remember this charge as you model our second quarter.
As a result, we expect to have retired approximately $440 million of outstanding debt in our first two quarters of fiscal year 2021 and for our net debt to capital ratio to be in the mid-30% range at the end of the second quarter.
At fiscal year end, we expect this ratio to be in the mid-to-high 20% range.
Coupled with the planned retirement of our $410 million of 5.875% notes scheduled to mature in February 2022, we expect to reduce our capitalized interest incurred by approximately $40 million annually.
This should result in lower interest expense released to our income statement over time.
These adjustments and spend on our balance sheet have not impacted our ability to acquire land.
In fact, we took these steps, while simultaneously expanding our land position from approximately 63,200 lots at fiscal year end 2020 to approximately 67,700 at the end of our first quarter.
We are acquiring land through more capital-efficient structures.
As part of this focus, we have continued to shift more of our land buys to optioned versus owned.
Optioned land was up to 46% of the total land at the end of our first quarter versus 43% at fiscal year end and 40% one year ago.
Although this ratio may fluctuate from quarter-to-quarter, we are targeting a ratio of 50-50 in the near-term.
It is important to note that approximately 11,000 of our 36,400 owned lots as of January 31 were already contracted for and in our backlog or have model or unsold spec homes on them.
Taking this into account, our optioned land moves from 46% to 56% of total and our supply of owned land moves from 3.6 down on the 2.6 years.
As Doug mentioned, most of our homes take nine to 12 months to deliver.
So we have strong visibility into the first half of fiscal year 2022.
The pricing power we have experienced over the past six months is continuing.
Our backlog now stands at its highest ever in both units and dollars.
This adds to our confidence that we can significantly expand margins in the back half of fiscal year 2021 and into the first half of fiscal year 2022.
And that backlog is solid.
Our cancellation rate in the first quarter was 1.4% of backlog and 3.7% of this quarter's contracts.
The units in backlog are supported by an average non-refundable deposit of approximately $66,000.
As Doug mentioned, we are also increasing our guidance on nearly all of our key metrics for the full fiscal year.
We now expect full year deliveries of between 10,000 and 10,400 units, our highest total ever with approximately 2,175 in the second quarter.
Delivery guidance for the second quarter reflects the slower COVID-impacted sales environment of mid-March through May 2020.
This second quarter delivery guidance is consistent with guidance on our fourth quarter earnings call in December where we guided to 40% of deliveries in the first half of fiscal year '21 and 60% in the second half.
Our average delivered price for the full year is estimated to be between $790,000 and $810,000 per home.
Average delivered price for the second quarter is expected to be between $785,000 and $805,000.
We have increased our projected adjusted gross margin for the full fiscal year by 20 basis points to 24.3%.
We expect adjusted gross margin to be approximately 23.4% in the second quarter.
This implies a 25% gross margin in the second half of fiscal year 2021.
And we expect even higher gross margin in the first half of fiscal year 2022.
We expect full year interest in cost of sales to be approximately 2.4%.
It is also what we expect in the second quarter versus 2.5% in fiscal 2020.
As a result, of the debt reductions I discussed earlier, we expect this interest expense to continue to decline in fiscal 2022 and beyond.
We have improved our SG&A guidance as a percentage of revenue for the full year by 30 basis points to approximately 11.9%.
Our estimate for the second fiscal quarter is 13%.
We continue to look for ways to optimize our cost structure to achieve permanent cost savings, including more effective marketing spend, while increasing buyer engagement.
We have also reviewed our broker commission structure across all our markets and lowered overall cost.
In total, we are projecting our full year operating margin before impairments to improve by 60 basis points compared to prior guidance with further improvement expected in fiscal year 2022.
We expect community count to be 320 at the end of our second quarter and 340 at fiscal year end with similar growth in fiscal year 2022.
Turning to other sources of income and cash flow.
During the first quarter, we were able to close sales of a parking garage and two sets of retail shops associated with our Hoboken, New Jersey condo projects sooner than originally expected, which generated cash of $79 million and a pre-tax gain of approximately $38 million.
Our guidance a quarter ago anticipated one of these sales to close in Q1 and the others later in the year.
In addition, during the quarter, we generated $75 million of cash by selling land we owned into two newly formed Toll Brothers Apartment Living joint ventures, partnerships in which we retain 25% of the equity.
We have now seen the market for stabilized apartment strengthened.
And we expect we will be able to complete additional asset sales this year.
As a result, our full year guidance for other income, income from unconsolidated entities and land sales moves up $15 million to approximately $80 million for the full year with approximately $7 million projected for the second quarter.
Simply put, this is our time.
The actions we've taken to diversify our business over the past several years have positioned us to meet the incredible demand we are seeing in every segment of the market.
The growing importance of home and the desire for choice are clearly aligned with our strengths as a homebuilder.
And we are working hard to take additional actions to ensure continued growth for the future.
Before we open it up to questions. | backlog value was $7.47 billion at q1 end, up 37% compared to fy 2020's q1; homes in backlog were 8,888, up 38%.
sees q2 deliveries of about 2,175 homes with an average price of between $785,000 and $805,000.
sees fy 2021 deliveries of between 10,000 and 10,400 homes with an average price of between $790,000 and $810,000. | 1 |
If you did not receive a copy, these documents are available through the quarterly disclosures and supplemental SEC information links on the Investor Relations page of our website, cousins.com.
In particular, there are significant risks and uncertainties related to the severity and duration of the COVID-19 pandemic and the timing and strength of the recovery there from.
2020 was an extraordinary year.
The COVID-19 pandemic arrived swiftly and our lives changed almost overnight.
As I said in May of last year, crises don't build character, they reveal character.
At Cousins, we value our employees, our customers and our communities.
I've been so proud that our dedicated team has ably navigated the pandemic, while consistently providing our customers with the same excellent service they expect from us every day.
In addition, Cousins gave back to our communities as we committed $900,000 from our nonprofit foundation to support organizations focused on COVID-19 relief and important social justice causes.
Before addressing our long-term outlook, I want to provide a few highlights of our solid fourth quarter results.
On the operations front, the teams delivered $0.68 per share in FFO with second generation cash rents of 8.9%.
We leased 387,000 square feet and collected 99% of total rent, including 99% from our office customers.
In addition, we took advantage of economic uncertainty and made several investments in the South End of Charlotte, including our acquisition of the RailYard's for $201 million and two fabulous land sites, totaling 5.6 acres in aggregate.
These significant investments in Charlotte will provide a solid foundation for growth in that dynamic city for years to come.
Cousins was well-prepared to weather challenging times with a simple, yet compelling strategy that enabled us to operate effectively throughout the year.
Let me highlight the core principles of our strategy.
First, to build the premier urban Sunbelt office portfolio, second, to be disciplined about capital allocation and focus on new investments where our platform can add value, third and importantly, to have a best-in-class balance sheet, and finally to leverage our strong local operating platforms that take an entrepreneurial approach in our high growth markets.
We have made significant strides in progressing this strategy.
Today, we have the leading trophy portfolio in the best Sunbelt sub-markets of Atlanta, Austin, Charlotte, Dallas, Phoenix and Tampa.
Second, we have a terrific development pipeline of $449 million, that is 77% pre-leased and attractive land sites where we can build an additional 5 million square feet.
Our balance sheet is strong with net debt to EBITDA of 4.8 times and G&A as a percentage of total assets at 0.3%, both among the best in the entire office sector.
While the pandemic persists, we are starting to see early signs of hope with the promise that vaccines offer.
As we approach the other side of the health crisis, our conviction around our Sunbelt trophy office strategy has only grown.
Let me share why.
Our strategy has positioned Cousins at the intersection of two powerful trends driving the office sector, the migration to the Sunbelt and a flight to trophy properties.
While these trends were under way before COVID, they are likely to accelerate.
For example, the top five migration states from 2019 through 2020 were Texas, Florida, Arizona, North Carolina and Georgia, while the bottom five States were New York, Illinois, California, Michigan, and Pennsylvania.
We've also seen announcements of relocations and large expansions, including Oracle, CBRE and Amazon.
In fact, 2020 with a record year for corporate relocations and expansions in Austin with 39 companies that announced plans to add nearly 9,900 jobs in the Greater Austin area.
And in Atlanta just yesterday, Microsoft confirmed, it had purchased 90 acres in West Midtown with plans to build a major employment hub, which will include thousands of new office-using jobs.
We believe that we're only in the early stages at this geographic shift.
I am confident we will see additional large relocation and expansion announcements later this year.
We hope to directly benefit from some of these situations.
But regardless, these moves will further validate the importance of the office to companies in the power of our Sunbelt footprint.
And to be clear, innovative companies aren't relocating from California to Texas, Georgia and North Carolina, to work-from-home.
Looking forward to 2021, let me share some of our top priorities.
First, we are focused on creating value in our existing portfolio, including making leasing progress in our larger blocks of space.
Second, we will look for opportunities to upgrade the quality of our portfolio through strategic acquisitions, with properties that reflect the office of the future.
An example of this is our recent acquisition of The RailYard in Charlotte.
We will likely fund these with the sale of older, vintage, higher CapEx properties.
As I said last quarter, we will not always be able to time our buys and our sales concurrently, which could on occasion create short-term earnings fluctuations.
However, our creative deal-making is a differentiator and integral to driving long-term earnings and NAV growth.
Third, we will continue to prioritize and appropriately size land bank to meet customer demand for new experiential properties in the best locations.
Lastly, we will continue to identify new office and mixed use development opportunities with an eye toward pre-leasing.
However, we will also selectively consider development opportunities with speculative components in unique markets like The Domain in Austin, where fundamentals and in-migration are so strong.
2021 is a transition year for Cousins from an earnings perspective.
Our financial results will reflect several known move-outs from recent value add acquisitions like 3350 Peachtree, 1200 Peachtree in Atlanta, as well as the Bank of America Plaza building in Charlotte, which is now known as One South at the Plaza.
Clearly, the COVID-19 pandemic and associated lockdowns delayed our releasing efforts.
However, with the vaccine rolling out, we are seeing restrictions ease, and revived customer interests.
We are eager to begin executing our business plans to reposition these exciting projects.
Our strategy remains intact.
The properties are in the right markets and the trends are in our favour.
As we look to 2022 and beyond, these value-added investment opportunities are a terrific source of value creation.
Combined with our existing and future development pipeline, Cousins is uniquely positioned to deliver long-term growth for our shareholders.
Importantly, we have the right balance sheet with low leverage and ample liquidity to capitalize on the opportunities.
They always rise to the occasion, providing excellent service to our customers and applying their talents to make our Company stronger.
I'm proud to be part of Cousins.
We reported solid fourth quarter operating results, delivering a constructive close to a year that presented every one of us with truly historic challenges to overcome.
As I've done for the past couple of quarters, I will begin by updating you on general business conditions.
First, an update on customer utilization within our 20 million square foot operating portfolio.
Utilization continues to track at an average of approximately 20% across the company, squarely in line with our reported levels last October.
Given the widespread increase in COVID cases over the past couple of months, we've used steady utilization through this period as [Phonetic] encouraging.
Like last quarter, we sensed that utilization will not move materially higher until the second half of 2021, and should be highly dependent on vaccination efforts.
Rent collections were consistent and strong again this quarter.
We collected 98.8% of rent from all customers and 99.2% of rent from office customers in the fourth quarter.
Collections are running at comparable levels so far in 2021 as well.
We also continue to have very few ongoing rent deferrals, which are at this point largely limited to our retail customers.
In the fourth quarter, rent deferral agreements represented just 0.3% of annualized contractual rents.
And we're only 1.5% of contractual rents for all 2020.
Now let's turn to operating results.
Our total portfolio into the fourth quarter at 90.8% leased with our same property portfolio at a solid 92.7% leased.
Total portfolio weighted average occupancy held steady this quarter at 90.4% and the same-property portfolio moved up to 92.4%.
As Colin already referenced, we expect 2021 to be a transitional year for Cousins, including occupancy.
While only 8.5% of our annual contractual rents expire in 2021, our operating portfolio includes value-add investments with known 2021 pending vacancy, such as 1200 Peachtree and 3350 Peachtree in Atlanta and One South at the Plaza in Charlotte.
The final 169,000 square feet of Bank of America space at One South expired at the end of 2020, representing about 90 basis points of portfolio occupancy.
So, we will see a lower weighted average occupancy beginning in the first quarter of 2021.
I would also note that in late 2021, our occupancy will reflect the positive impact of some known commencements from new deliveries, most notably at the domain in Austin.
In short, occupancy will be lower in 2021 compared to 2020.
But as Colin said, we have a great opportunity to create long-term value as we lease up these blocks of space.
On top of that, we have only 8% or less of our annual contractual rents expiring in each year through 2024.
As expected, the pandemic once again impacted quarterly leasing volume with a new activity slower.
With that said, we saw an encouraging bounce in overall activity this quarter.
In all, we executed over 387,000 square feet of leases during the fourth quarter and over 1.4 million square feet of leasing for the year.
Notable leases in the fourth quarter included a renewal of NASCAR and NASCAR Plaza in Charlotte and the renewal and expansion of Amazon at Terminus in Atlanta.
After quarter end, we also signed a new lease at our 100 Mill new development in Tempe.
Our average lease term this quarter was a healthy 6.6 years, and it was seven years for the full year.
Our average lease term was fairly consistent between new and renewal activity and was not meaningfully different than our three-year pre-COVID run rate of 7.5 years.
Lease concessions defined as free rent and tenant improvements were $4.15 per square foot per year this quarter, below our rolling eight-quarter average.
Nonetheless, we continue to feel the most lease negotiating pressure around concessions.
Rent growth within our portfolio has remained strong, especially for operating in pandemic, with second generation net rents increasing 8.9% on a cash basis for the quarter and 13.1% on a cash basis for the year.
With solid rent growth and lower than normal concessions in this past quarter, our average net effective rents came in at $25.19 per square foot.
We have printed higher net effective rents in only three other quarters since the beginning of 2018.
As we look ahead, despite continued headwinds and overall vacancy and sublease availability, there are hopeful signs in each of our markets that meaningful economic recovery is possible as the year progresses.
Let me provide some examples.
There has been a clear ramp in major Sunbelt job and office relocation announcements.
Oracle's relocation to Austin, Microsoft sizable new East Coast hub in Atlanta, and Pfizer's growth commitment in Tampa to name just a few.
For CoStar, Uptown Charlotte and Tempe still have notably low Class A vacancy rates of 7.7% and 6.9% respectively.
These would be great launching off points emerging from a recession.
For JLL, there are currently over 5.4 million square feet of tenant requirements in the market in Austin.
40% of these requirements are focused on the CBD and Northwest domain.
Also for JLL, employees in Dallas have returned to the office faster than the rest of the country at almost 40% in December.
This compares to only 10% to 15% in the coastal markets.
Even more impressive, both Dallas and Austin are already back above pre-COVID-19 employment levels.
Across the board, it is becoming clear that physical office space will remain important as we emerge from the pandemic.
According to a recent PwC study, 70% of executives expect their real estate footprint to stay the same or grow over the next three years due to the rising headcounts and social -- due to rising head counts and social distancing.
In one example of this sentiment, Google CFO said during the company's most recent earnings call that when they look ahead, the company quote expects to return to a more normalized pace of ground-up construction and the fit out of office facilities.
It does not get any clearer than that.
Now, some color on our leasing pipeline.
While we had a pause during the fourth quarter with COVID and seasonal headwinds, early stage interests and inquiries have noticeably increased again since the beginning of the calendar year, signaling the companies now seem willing to begin the process of making longer-term real estate decisions.
The most noticeable upticks and inquiries in activity have been in Austin, Midtown, and Buckhead of Atlanta and Tampa.
Economic development teams in every one of our markets are still signaling high optimism, noting that they're as busy as they have ever been.
As I said last quarter though, keep in mind that early stage activity can often take multiple quarters to evolve.
In summary, we enter a transitional 2021 with a sense of renewed optimism albeit cautious for what lies ahead.
Before handing off to Gregg, I want to say how proud I am of all of my Cousins' teammates, who have responded to this pandemic with amazing confidence [Phonetic], resilience, and hard work.
I'll begin with my remarks by providing a brief overview of our quarterly financial results, including some detail on our same-property performance, our development pipeline and our transaction activity, followed by a quick discussion of our balance sheet and dividend before closing my remarks with information on our outlook for 2021.
Overall fourth quarter numbers were solid and it held up relatively well since the onset of the pandemic.
FFO was $0.68 per share for the quarter and $2.78 per share for all of 2020.
Same-property cash NOI growth remained positive during 2020 at 0.7%, and it was up a very solid 4.5%, when adjusting for COVID related rent deferrals and parking losses.
Most impressive as all as Richard said earlier, was that we increased cash rents on expiring leases by over 13% during 2020.
Focusing on our same-property performance, cash net operating income during the fourth quarter declined 3.3% compared to last year, driven by a 4% decline in revenues and a 5.2% decline in expenses.
Adjusting for COVID related rent deferrals and parking losses, same-property cash NOI actually increased 1.7% during the fourth quarter.
Before moving past same-property performance, I wanted to take a moment to highlight the outstanding work done by our property management teams with controlling expenses during the pandemic.
For all of 2020, same-property operating expenses were down 6%, compared to 2019, and excluding property taxes, expenses were down almost 10%.
These are terrific results during challenging times.
Turning to our development efforts, one asset Domain 12 in Austin was moved off our development pipeline schedule during the fourth quarter, as economic occupancy at that property exceeded 90%.
The remaining development pipeline represents a total Cousins investment of $450 million, across 1.5 million square feet in five assets.
Our remaining funding commitment for this pipeline is approximately $125 million, which is more than covered by our existing liquidity and future retained earnings.
On the transaction front, we closed three acquisitions during the fourth quarter, the purchase of The RailYard in Charlotte for $201 million, as well as the purchase of two land parcels in Charlotte for $47 million.
In addition, we sold our interest in two small non-core land parcels that the company acquired over 15 years ago, when the strategy was decidedly different than it is today, incurring a loss of approximately $750,000.
One parcel was a residential tract in Texas and the other was a golf course in Georgia.
With the completion of these sales, only one non-core parcel remains in our land inventory.
A tract in North Atlanta adjacent to a shopping center, we developed and subsequently sold over eight years ago.
Looking at the balance sheet, we entered this period of volatility without standing financial strength, among the very best of our office peers.
Not only do we have low leverage, our liquidity position is strong and our dividend remains well covered.
The only near-term debt maturity is a construction loan at our Carolina Square property in Chapel Hill.
We've selected a lender and anticipate closing a new five year floating rate loan on this asset in the next few weeks.
Before discussing 2021 earnings guidance, I wanted to highlight an asset that we have moved to the held for sale classification as of year end.
As we've previously discussed, our Burnett Plaza property in Fort Worth is a non-core holding for us.
It was acquired as part of the TIER REIT transaction in mid-2019.
We are actively pursuing a sale of this property, which will hopefully close during the first half of the year.
However, the completion and timing of the sale remain uncertain.
For GAAP, we have marked the value of Burnett Plaza down to reflect its current market valuation.
This impairment reflects approximately a 6% decline in value for the asset, which is not surprising considering the disruption to energy markets, since we closed the TIER transaction 1.5 years ago.
Looking forward, we're providing initial 2021 FFO guidance of between $2.76 and $2.86 per share.
No acquisitions, dispositions or development starts are included in this guidance.
If any transactions do take place, we will update our earnings guidance accordingly.
Please also note that our earnings guidance assumes physical occupancy will remain significantly below normalized levels until the second half of 2021.
As a result, quarterly earnings are anticipated to gradually increase as the year progresses.
Finally, don't forget that year-over-year comparisons on all performance metrics, including earnings won't be perfectly claimed during the first quarter of 2021.
It'll be a bit of an apples and oranges comparison to 2020 during the first quarter as the impact of COVID really didn't kick into our numbers until the second quarter of 2020. | cousins properties releases fourth quarter and full year 2020 results.
funds from operations was $0.68 per share for quarter.
collected 98.8% of rents, including 99.2% from office customers, during quarter.
sees 2021 ffo in the range of $2.76 to $2.86 per share.
guidance assumes physical occupancy remains significantly below normalized levels until the second half of 2021. | 1 |
These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
We hope that you are all staying safe and healthy.
I'd like to begin by welcoming Tom, who with almost 30-years of CFO experience and deep roots in brands and retail, has been a tremendous addition to our team as we drive the recovery in our business and the return to profitable growth.
We concluded an incredibly challenging year with a fourth quarter that exceeded our expectations across the board.
Our performance was driven by record digital revenue and superb all-around results at Journeys, highlighted by our stronger-than-anticipated store volume.
As it did throughout fiscal '21, our organization successfully navigated difficult operating conditions to serve our customers this time during the all-important holiday selling season.
I could not be more proud of how well our teams have also executed during the pandemic.
They have faced each new challenge in a very dynamic environment with tenacity and ingenuity while operating under protocols to ensure our highest priority, the health and safety of each other and our customers.
Before we get into a review of fourth-quarter performance, I'd like to highlight some of the major accomplishments from fiscal '21.
Starting with the significant and unfamiliar task of efficiently closing and then swiftly reopening our entire fleet of nearly 1,500 retail locations, some of them multiple times.
Capitalizing on the accelerated shift to online spending, achieving record digital revenue of $450 million, an increase of almost 75% year over year while also fueling record profitability for this channel, driving record conversion rates in stores, helping us to partially offset the impact from lower traffic levels and store closures.
Increasing market share in Journeys and Schuh, which represent a large majority of our revenue with their ability to retain sales in this face of the pandemic disruption.
Conserving capital and reducing operating expenses by 15% compared with fiscal '20, generating cash flow of over $130 million to ensure healthy liquidity.
And so finally, delivering sequential improvement every quarter.
In particular, bottom line results reflect the strong foundation we built for the digital channel prior to the pandemic.
Our online business generated double-digit operating margins before COVID-19 due to our focus on full price selling, disciplined marketing spend and shipping and return policies to reinforce profitability.
Our overall performance under difficult circumstances also reflects the strong competitive positions of our retail concepts prior to COVID-19 and our success capitalizing on opportunities to further strengthen the leadership positions of our teen and young adult footwear businesses.
In today's channel-less world, where our consumer can shop anywhere the consumer wants, Journeys and Schuh's results underscore the tremendous loyalty they've developed with their existing customers and compelling proposition they offer new customers.
So turning now to the fourth quarter.
The work we did to have the right assortments and right holiday campaigns helped deliver Q4 results then are ahead of expectations in spite of some store closures not anticipated in the U.K. and Canada and supply chain delays and disruption.
While we continue to face softer traffic levels than one year ago across our retail businesses, Journeys stores posted a nice improvement compared with the third quarter as more shoppers visited Journeys locations during the peak weeks leading up to Christmas.
Our store teams once again drove very strong levels of the customer conversion to help materially offset the headwinds from less traffic.
Meanwhile, our business online, especially mobile, experienced very strong gains in both traffic and conversion, with new customers, again, driving increased volumes.
New website visitors were up 40%, contributing an almost 50% growth in new customer purchases, and we delivered another strong quarter of this digital growth with comps up 55%.
The combination of these factors led to a total revenue decrease of 6% versus last year, with stores open about 90% of the possible days in the quarter.
This result was better than we expected due mainly to the stronger store sales at Journeys and that represents a meaningful improvement from last quarter's 11% decline in Q2's 20% decline.
While gross margins were down compared to last year, the gap narrowed for the third consecutive quarter and the sequential improvement was driven by an increase at Journeys due to the strong full price selling.
As a result of decisive cost containment actions, along with onetime benefits, including substantial rent abatements recognized in the quarter, we drove total expenses down twice as much as revenue on a percentage basis.
Inclusive of the rent abatements, operating income was up year over year.
By tightly managing inventory throughout the year, we had the flexibility and confidence to bring in new fresh product.
However, much lower year-end numbers that also reflect the disruption in the supply chain which caused delays, especially at Journeys and Schuh, where we would have liked to have received product earlier.
Turning now to discuss each business in more detail.
Let's start with Journeys and begin by congratulating our team on its impressive results across the board.
Journeys delivered record operating profit in the biggest quarter of the year in the midst of a pandemic.
Fourth-quarter top line results matched last year's levels as the merchant team skillfully interpreted trends making the right product calls and its store and digital teams delivered an exceptional customer experience.
When our stores were open this year, Journeys that customers were enthusiastic to shop our physical locations and engage with our people.
And over the holidays, we were pleased by the strong appetite to shop our stores.
With replenishment orders for many key styles arriving post holiday, combined with the first wave of these checks from the December stimulus program delivered early in the new year, the business accelerated as January progressed, leading to a strong finish to the quarter.
Comfort reigns as the fashion choice of the pandemic and Journeys' offering of casual product continued to resonate strongly with consumers.
While teens always have a big complement of fashion athletic footwear in the closets when fashion swings toward non-athletic or what we call casual footwear, Journeys' is especially well positioned among its competition to deliver this assortment.
This Fall and winter, our consumers' appetite for the Boots began early and our boot business was good.
And our casual business was even better, especially in women's and kids.
Following a good back-to-school season, Schuh came into the fourth quarter with this positive momentum and a strong assortment of high demand brands and styles.
with Schuh stores closed for about two-thirds of the possible days in the quarter.
Fortunately, with best-in-class digital abilities, Schuh was able to capture a significant portion of lost store volume through its digital channel, and total sales were down only 13%, capping off a year in which Schuh, like Journeys, gained market share.
As with Journeys, Schuh's casual assortment gained ground over its fashion-athletic assortment with the boots and casual strong throughout the quarter and women's leading the way.
Meanwhile, Johnston & Murphy's casual footwear offering and apparel categories were, again, the bright spots for the brand in what still remained a very tough environment due to the work-from-home trend and significantly fewer social gatherings during the pandemic.
The plan going forward is to accelerate the work started years ago to evolve J&M into a footwear first lifestyle brand, with a range of footwear and apparel from dressier to more casual.
Despite the challenging year, and there were some solid proof points that this strategy continues to gain traction including the success in the innovative XC4 collection through the relaunch of golf.
For the upcoming year, J&M has focused 90% of new product development on our expansion of its casual offering to include casual athletic, leisure, rugged, outdoor and performance.
We brought in a new Head of Product Development, who brings a successful track record developing casual brands to aid in these efforts.
And so as our customer returns to work and socializing, which we hope will be sooner than later, J&M's assortment will be ready for the post-pandemic lifestyle and further void by J&M core customers increased level of savings during the pandemic.
So turning now to the current quarter.
Early February extended January's positive momentum until we hit the offset of income tax refunds, which were delayed by a few weeks this year.
Nevertheless, February sales came in, and in line with our expectations, and in March, we have seen an uptick as refunds began to catch up.
Looking ahead, while great progress is being made on this front, we expect the environment to remain fluid in the near-term until the vaccine is more fully rolled out.
In terms of how this shapes our results, it means the first half will show an improvement to last year, given easier comparisons due to the COVID shutdowns, but we will still be under pressure from store closures especially in the U.K., which is expected to be shut down until shortly after Easter.
We anticipate store traffic will also continue to be affected across all geographies this spring.
These dynamics will further pressure our results in these low volume months, when in normal times, fixed operating expenses makes it challenging to breakeven.
Stimulus will help, we will see how much, and we are also optimistic about a greater recovery in the back half.
But what we're most excited about is we see opportunities to solidify the digital gains we've made and capitalize on the ongoing industry consolidation to further expand our market share.
As many challenges as COVID-19 has now created for our company, it has also provided us the real opportunity to transform our business at a faster pace.
We've learned a lot and will work hard to accelerate the initiatives and investments we plan to also achieve these goals and exceed the expectations of the consumer whose needs have advanced.
We were pleased with our performance in Q4 as we handily exceeded our expectations in all facets of operating results.
Building upon our strong return to profitability in the Q3, sequential improvements compared to the prior quarters in revenue, gross margin and SG&A due to some help from rent abatements, drove higher operating income than last year.
A higher tax rate offset the higher operating income, resulting in adjusted earnings per share of $2.76, compared to $3.09 last year.
Turning to the specifics for the quarter.
While comps were up 1%, consolidated revenue was $637 million, down 6% compared to last year, driven by continued pressure at J&M and the impact from store closures during the quarter.
A robust e-commerce comp of 55% was really offset by a decline in-store revenue of 19%, driven by a comp decline of 10%.
While our stores were closed for 10% of the possible operating days during the quarter.
Digital sales increased to 27% of our retail business from 17% last year.
Consolidated gross margin was 45.8%, down 110 basis points from last year.
As we have experienced all year, increased shipping to fulfill direct sales that pressured the gross margin rate in all our businesses totaling 80 basis points of the overall decline.
Notably, Journeys' gross margin increased 210 basis points driven by lower markdowns.
Schuh's gross margin decreased 410 basis points due to the increased e-comm shipping expense.
J&M's gross margin decrease of 1,690 basis points was due to more closeouts at wholesale, higher markdowns at retail and incremental inventory reserves.
So, finally, the combination of lower revenue at J&M, typically the highest gross margin rate of our businesses and the revenue growth of licensed brands typically our lowest gross margin rate negatively impacted the overall mix by 50 basis points.
The largest year-over-year savings came from the occupancy costs, driven in large part by the execution of about $18 million of rent abatements with our landlord partners who provided support for the time stores were closed and savings from the U.K. government program, which provides property tax relief.
The next largest areas of savings came from the reduction in-store salaries -- store selling salaries, driven by our effective use of workforce management tools and from lower bonus expense.
These savings were partially offset by increased marketing expenses needed to drive traffic in both stores and online.
We took the most significant cost actions at J&M evident by the 29% reduction in SG&A in the Q4 and our 25% reduction for the full year.
In addition to the rent abatement savings, our organization has been intently focused on a multiyear effort centered around occupancy cost, and we have achieved even greater traction with the pandemic.
We negotiated 123 renewals this year and achieved a 23% reduction in cash rent or 22% on a straight-line basis in North America.
This was on top of an 11% of cash rent reduction or 8% on a straight-line basis for 160 renewals last year.
These renewals are for an even shorter-term averaging approximately one and a half years compared to the three-year average that we saw last year, with almost one-third of our fleet coming up for renewal in the next 24 months, this will remain a key priority for us going forward.
In summary, the fourth quarter's adjusted operating income was $64.7 million versus last year's $59.3 million.
Our adjusted non-GAAP tax rate for the fourth quarter was 37.5%.
Tax initiatives under the CARES Act and then other provisions generated a onetime $65 million permanent income tax benefit for Fiscal year-end '21.
This permanent benefit is excluded for non GAAP reporting.
Turning now to the balance sheet.
Q4 total inventory was down 20% on sales that were down 6%.
The levels of Journeys and Schuh are also lower than we would like given the delays in the supply chain.
For the fourth quarter, our ending net cash position was $182 million, $100 million higher than the third quarter's level, driven by strong cash generation from operations.
The year-end cash balance that benefited from both the lower inventory levels as well as rent payables that will be trued up once remaining COVID related deals are fully completed and executed.
Capital expenditures were $6 million as our spend remains focused on digital and omnichannel and depreciation and amortization was $11 million.
We closed 16 stores and opened none during the fourth quarter, capping off the full year in which we closed 33 stores and opened 13.
Now looking forward to fiscal '22, given the uncertainty remaining within this pandemic, we are not providing specific guidance for Q1 or the full fiscal year.
That said, I do want to share some high-level thoughts on how we are thinking about our business.
To do this, we think it's best to use the pre-pandemic fiscal '20 as the reference point as there is simply too much noise in our fiscal '21 results, for drawing informative comparisons for future expectations.
Thinking about Q1 revenue, although we expect a nice recovery compared to fiscal '21, we will be below fiscal '20 levels.
This is mainly due to Schuh with major store closures expected through the most of Q1 and continued pressure on J&M.
Directionally, the overall sales decline for Q1 compared to fiscal-year end '20 could be in the neighborhood of the 11% decline we experienced in the past third quarter.
We will have more stores closed than in the fourth quarter.
Our view does not really contemplate additional store closures or restrictions beyond what we know today.
In addition, we have not included any stimulus from the most recent bill in our forward-thinking, which historically is a tailwind.
Gross margin rates for Q1 will be below fiscal '20 levels, more than that 210 basis point decline we experienced this past third quarter.
The increase in closed stores will drive higher e-commerce penetration and the higher shipping costs that come with it.
Additionally, we anticipate the negative headwind from J&M to continue into Q1.
Now we expect SG&A dollars in Q1 to be below FY '20 Q1 levels, inclusive of some onetime benefits.
However, there will be some deleveraging due to the sales volume likely in the neighborhood of 100 basis points.
This is driven by closed stores and lower store volumes as the fixed store occupancy expense causes deleverage.
In summary, it will be really difficult to turn a profit in Q1 as is typical during our lower volume quarters of the year.
Combined with the seasonality of our business, we are expecting more than 100% of our full year earnings to also come from the third and fourth quarters.
Even though we are expecting an overall loss in Q1 since that loss is generated in foreign jurisdictions for which there is no-tax benefit, we expect a tax expense related to a small amount of U.S. earnings in Q1.
The annual tax rate is expected to be approximately 32%.
For fiscal '22, capital expenditures will be between $35 million and $40 million and centered on digital and omnichannel investments, which comprised about 75% of this amount.
Mimi will talk further about the initiatives for the coming year.
This does not include another $16 million net of tenant allowance related to the move to a new headquarters location, which were delayed because of the pandemic.
But which was precipitated by the landlord's plan to demolish our current building.
We estimate depreciation and amortization at $48 million.
We currently plan to open up to 15 new stores, mainly at Journeys.
New store leases will be designed to minimize our risk by including landlord support on the build out costs variable rent and kick out opportunities.
We currently plan on closing about 35 stores, but discount could go up or down based on our ability to obtain short-term lease deals at attractive rents.
Our strong year-end cash position enables us to invest in our business.
We had now moderated capital expenditures with the onset of the pandemic and expect to catch up with some of our initiatives.
In addition we plan to increase our inventory levels to drive increased back half sales.
These investments will be funded by our earnings and a net inflow of cash from our tax planning initiatives.
Also, we anticipate this year's numbers will include bonus expense.
As a reminder, our EVA program pays for year-over-year improvement and we paid no bonus in the year we just finished.
For this year, we are assuming an average of 14.6 million shares outstanding this assumes no stock buybacks under our current $100 million Board authorization, of which $90 million is remaining.
And now turning to discuss in general, our cost structure.
Given the accelerated shift of our business from stores to digital and impact from the pandemic, we must reshape our cost structure.
Initially, we believe we can reduce operating expenses by as much as around $25 million to $30 million, approximately 3% on an annualized basis.
This is a good start to a multiyear profit improvement plan to rebound from the pandemic and to enable investments in growth, while also at the same time, improving operating margins and return on invested capital.
We will provide more detail as the year progresses.
I have been extremely impressed with the talent and drive of the team since I arrived.
I'm confident that we have the right people who are focused on the right priorities to drive the organization forward as we move into the next fiscal year.
As I said, COVID-19, and has provided us the opportunity to transform our business at a faster pace as we emerge from the pandemic and to build our company into an even stronger position.
With online behavior advancing by several years, we need to accelerate these many of our digital and omnichannel initiatives in our pipeline.
The investments we have made paid huge dividends this year, importantly, as a footwear-focused company, digital provides the platform to drive profitable growth across all our concepts.
The pandemic also drove or hastened a number of our consumer trends that play into the sweet spots of our two largest businesses, Journeys and Schuh, such as an increased emphasis on comfort and greater casualization.
While this was already the direction Johnston & Murphy was headed, we're accelerating progress here as well.
A year ago, I have described the outcome of our five-year planning process and the six strategic growth pillars around which we aligned our business.
While the past year only reinforce that we are focused on the right areas, we reevaluated our initiatives to take further advantage of the significant changes that are under way in our industry.
I'll walk you through the pillars and briefly highlight select initiatives for fiscal '22.
The first pillar is build deeper consumer insights to strengthen customer relationships and brand equity.
Data-driven consumer insights and the more robust CRM capabilities are key to driving our next big wave of growth.
Not only do we have robust information for our online customers.
But in North America, 70-plus percent of store customers trust us enough to give us their data as well, providing a very strong foundation on which we continue to build.
We also implemented a completely new CRM system in fiscal '21 at Schuh, aimed at increasing frequency of shopping and average order value.
Our new campaigns delivered results that exceeded our expectations.
This new CRM system will create the basis for the launch in fiscal '22 of the loyalty program that incentivizes customers to consolidate their purchases across brands at Schuh, through recognition and rewards.
Likewise, over at Journeys, we just finished an evaluation of how to take Journeys' CRM capabilities to the next level and enable us to introduce a loyalty program for Journeys in the future.
The second pillar is intensify product innovation and trend insight efforts.
I've talked about J&M's product innovation, which then uses proprietary technology to differentiate the brand from competitors as it fast tracks development of a broader casual offering.
Additionally, we're excited to reap the benefits of last year's Togast acquisition, which advanced our strategy of growing the branded side of Genesco.
Beyond acquiring new talent and additional sourcing these capabilities, we secured the rights to the Levi's footwear license for men's, women's and kids in the U.S.
We are leaning in not only to the gender, but also the category opportunities in areas like slippers, flip flops and slides.
Levi's is one of the most recognized consumer brands with our heritage dating back almost 170 years.
The Levi's brand halo and casual aesthetic are a perfect fit with pandemic fashion preferences and we are very optimistic about the growth prospects here as demand in the channels for this product returns.
Next, I'll discuss the third and fourth pillars together.
Accelerate digital to grow direct-to-consumer and maximize the relationship between what's physical and digital, with a series of initiatives we have under way.
While we doubled e-commerce in the five years leading up to the pandemic, we aim to double the business again in a much shorter period by leveraging the 75% comp increase we achieved last year.
And to do this, in North American stores, we're launching the initial rollout of BOPUS, an offering we've had in the U.K. that drives around 20% of Schuh's online purchases and steers customer traffic to its stores.
As the lines between physical and digital further blur, we're tackling last mile innovation by also rolling out this capability, along with buy online, ship to store and ultimately, offerings important to our customers like curbside pickup.
The foundational project for this effort was last fall's upgrade of our inventory, locating and order brokering system which provides the requisite improved inventory accuracy.
Building on this, we will install new store point-of-sale software and hardware to accelerate the digitization of our stores and provide a platform for new capabilities, including mobile checkout, line busting and features to make non selling tasks more efficient.
These projects plus the completion of another bespoke e-commerce picking module at the Journeys distribution center comprise the greater part of our capital spend in fiscal '22 and which Tom highlighted as being significantly more concentrated in the digital and supply chain.
The fifth pillar is reshape the cost base to reinvest for future growth.
So, as our business transforms, we require a cost structure that supports an omnichannel business, while our stores remain a critical strategic asset in this omnichannel world, we've been working to evolve historical rent and selling salary models.
Tom just took you through our cost initiatives, and I want to reinforce that working with our landlord partners to find a solution that rightsizes rent to match traffic levels is a big part of this endeavor.
Finally, the sixth pillar pursue synergistic acquisitions that add growth and create shareholder value, we are also pursuing reactively rather than proactively until we recover further from the pandemic.
So now to conclude, as I reflect on my first year as CEO, I have been truly amazed by these executional excellence and resilience of our entire organization as we navigated a year like none other.
Genesco's success can be traced directly back to you who have stepped up in so many ways right from the very beginning of the pandemic. | q3 non-gaap earnings per share $2.36 from continuing operations.
q3 sales rose 25 percent to $601 million.
sees fy adjusted earnings per share $6.40 to $6.90 from continuing operations.
qtrly same store sales increased 25% over last year.
sees fy22 sales to be up 9% to 11%, compared to fiscal 2020. | 0 |
I'm Christine Marchuska, Vice-President of Investor Relations for Diebold Nixdorf.
Additional information on these factors can be found in the company's periodic and annual filings with the SEC.
Participants should be mindful that subsequent events may render this information to be out of date.
And now I'll hand the call over to Gerrard.
I am pleased to say that customer demand for our solutions remained robust in Q3 despite supply chain constraints, logistics and inflationary headwinds.
I'm encouraged by the support of our customers and the innovative spirit of our workforce as we navigate on-going supply chain challenges.
Most of all, I'm encouraged by how our company is positioned to offer solutions and growth opportunities for our customers who aren't who are addressing rapidly changing consumer demands, and difficult competitive landscapes.
More than ever, consumers are not only embracing, but expecting self service solutions.
Whether it's at a bank, grocery store, or retailer, and more than ever, we are committed to helping our customers deliver more digital, flexible, and effective customer consumer journeys.
In banking, consumer practices are shifting away from the traditional teller window toward ATMs with more omni channel functionality.
At the same time, banks are looking for more self-service options to meet consumer needs, the fewer tellers and fewer branch locations.
There is on-going steps toward reducing the branch footprints, and optimizing the real estate is crucial.
And our ATMs are helping our banking customers to continue providing the same level of customer service, including customer outreach through marketing, while at the same time, making better use of their available space.
In retail, the pandemic resulted in more focused shopping experiences and growth in e-commerce, while at the same time, as cited by recent studies, 75% or more of consumer purchases broadly, are still happening in the physical store.
It's important to understand, however, that while our consumers prefer physical shopping, they also prefer lower touch options during the purchase process.
Our self-checkout offerings create a safe, convenient and lower friction shopping experience, providing self-protection, produce scanning, the market leading camera technology to assist in age restricted purchases.
In short, what we're seeing is that consumers and retailers alike are embracing self-checkouts.
According to RBR, the self-checkout installed base will reach nearly 1.6 million terminals by 2026, almost tripling the global install base as of the end of 2020.
Indeed, we believe automation provides much needed cost efficiencies for the retailer and a more efficient shopping experience for the consumer at the last mile of the store.
We believe the accelerating demand for self service and automation signaled a structural change to the way business will be done going forward and gives us a long runway of opportunity.
I like to now provide remarks around our third quarter performance.
Although demand remain strong in Q3, fulfilment of product orders shifted from Q3 to Q4, and from Q4 to 2022 as we continue to work through supply constraints and logistics challenges.
Our entry continues to exceed our original models, and our backlog increased approximately 19% versus the same period last year.
Revenue for the quarter was down 4% as a portion of revenue has shifted out to future quarters due to the temporary supply constraints and logistics challenges we're currently facing.
Our retail segments continue to perform well, with growth and revenue of 10% as compared to the third quarter of 2020.
Moving on to our business highlights starting with banking.
Momentum for DN Series ATMs continued in Q3 as a great percentage of our total orders for these next generation devices.
And we see this trend continuing based on our orders for Q4 and early 2022.
Additionally, the DN Series is now live and fully certified in over 60 countries globally, contributing to our market expansion in the space.
I like to highlight some notable DN Series wins for the third quarter.
We secured a contract for over $12 million with Banco Azteca in Mexico, including our DN Series cash recyclers, a new service contract and software licenses expanding across 500 branches.
With this win, over 75% of Banco Azteca's fleet is not composed of DN devices.
In Greece, we displace the competitor and doubled our presence at Piraeus Bank.
Approximately 200 branches and 40 off-premise locations will be equipped with a modern technology including our DN Series cash recyclers.
Introduction of cash free cycling is a significant change for this market, which had not previously had recycling capabilities by branching DN's.
We earned this win based on the higher mechanical reliability of our hardware, the higher capacity of our ATMs and on cleaner, more environmentally sustainable profile.
This win also includes a five year maintenance coverage contract.
Lastly, we built a competitive win with Standard Chartered Bank Malaysia, upgrading all of their legacy vices to our DN Series, increasing our fleet to consist of 100% DN Series ATMs. We continue to see growth in demand for our AllConnect Data Engine with a number of connected ATMs, increasing approximately 23% sequentially in Q3 2021.
This is a significant milestone for us as more than 100,000 banking self-service devices are connected to this solution, which leverages real time Internet-of-Things connections from our deployed devices, and has consistently reduced customer downtime, by as much as 50%, resulting in greater than 99% uptime.
This drives multiple business benefits, such as higher end user satisfaction, lower total cost of ownership that increased operational efficiencies.
I'm proud to share that we also were awarded technology and service industry association's 2021 Star Award for best practices in the delivery of field services for our AllConnect Data Engine.
We believe that demand for differentiated market leading solutions that meet the needs of today's consumer will remain solid.
This is especially evident in our robust pipeline, our healthy backlog, the bank successes of our sales team in Q3 and the growth in our AllConnect Data Engine.
Moving on to our retail business, we continue to see strong demand for our self-checkout products as retailers look to be bought next door for comprehensive solutions that provide favorable consumer experiences and cost efficiency as they face staffing challenges and tough performance comparisons.
We secured a competitive takeaway with an Italian retailer to replace their competitor's advices with our DN Series, self-checkout solutions, along with our full self-checkout suite and other offerings from our retailer solution portfolio.
We also expanded an important customer relationship with a large multi country retailer in Europe, which included a competitive takeaway with SCO devices.
This win secures a strategic rollout of self-checkout devices, beginning with two stores before expanding to 300 stores in 13 countries and our eventual full rollout of 2500 stores in 15 countries over the span of two or three years.
Additionally, this retailer signed a three year services and maintenance contract.
We are well positioned for growth in retail services.
In the third quarter, we won a contract renewal with a large global petrol convenience store for the Malaysia sites.
This was a significant renewal totalling over $16 million for our systems and services, including point of sale, helpdesk support, software, and other solutions.
Overall, we feel confidence and the strength of our retail business as our large global retail customers reconfirmed their commitments to their store formats.
While some retailers are considering fewer locations, they all remain focused on increasing the level of automation and technology investment per store.
Additionally, in 2021, we're seeing growth in the absolute number of our self-checkout devices on a year-on-year basis.
And we anticipate that our retail business blend the year above our pre-pandemic levels witnessed in 2019.
Our core portfolio continues to benefit from the industry trends I discussed earlier.
Around consumers' desire for more self-service options and banking retail, resulting in our customer's needs for more automation and greater cost efficiencies.
It also lends itself to layering on additional offerings with large addressable markets, such as managed services, software, our dynamic payments platform and other adjacencies that provided trajectory for sustainable growth for the future of our business.
We are particularly proud of the progress we've made with our retail and banking customers.
We recently received the results from our annual customer satisfaction survey.
And I'm delighted that our customers are awarding us some of the highest levels of net promoter scores we've seen reinforcing what is now been a multi-year trend of improving results.
Turning now to our growth initiatives.
In managed services, we continue to move forward on securing more new business and remain in productive discussions with multiple financial institutions.
We also see a promising pipeline for managed services in 2022.
In Q3 in North America, we were awarded a large managed services agreement with a tier one financial institution, including a large order of DN Series ATMs. We continue to scale our debit and credit platforms, with our Vynamic Payments offering at a top 10 global bank cross more than 17,000 ATMs. As we continue to implement and scale our existing customers for our Payments Platform, our go-to-market team is growing a strong fire fighter [Phonetic] sales pipeline for 2022.
Additionally, I'm pleased to announce our entry into new horizontal electric vehicle charging stations.
This is a natural fit for our services business.
With our global network of 8000 experienced service technicians, and the similarities between ATMs and EV charging stations.
There are an estimated 1.5 to 2 million public charging stations even in the United States and Europe by 2025.
And this is an approximately an increase of over 200% from roughly 500,000 charging stations today split between about 300,000 in Europe, and 200,000 in the U.S.
We are currently in discussions with the top EV charging station private companies that have already secured contracts for our solution with some of the key players in this space.
This is a promising and rapidly growing market.
And we look forward to hearing more on this new offering in future quarters.
Now turning to another important area of our business sustainability.
Not only do we focus on attaining sustainable growth for our shareholders, we also focus on environmental sustainability of our facilities, practices and processes.
I'm proud to say that we were recently awarded Germany's best energy scouts 2021.
The German government initiative that encourages energy saving opportunities.
We installed a green roof, constructed a regional brasses [Phonetic] to improve energy savings at our Paderborn facility.
Additionally, we included a solar panel system and out of 36 charging ports, for cars and e-bikes in parking areas.
We consistently are working on initiatives that drive sustainable programs, with the goal to have no adverse effects or public health for the communities where we operate.
We look to operate our other facilities around the globe in sustainable greenways as part of our focus around environmental, social, and governance commitments.
Looking ahead to Q4, we remain confident in our market leadership, and ability to close out the year strong on a year-over-year basis.
As of today, our owners are 100% confirmed with customers committed to our products.
We see negligible risk of loss sales, with strong strength and demand for America's banking and retail business segments.
Additionally, in Q4 for our banking segments, we are starting this quarter with a backlog of approximately $205 million higher than the beginning of Q4 2020.
Specifically for America's banking, we're seeing over a 50% increase in our backlog as we enter the fourth quarter 2021 as compared to the same time last year.
We're working with all of our customers on a continuous basis to fulfill the high level of orders we're receiving on a timely basis.
As far as focus, we're taking steps to increase our stock of key components as well as pre-booked vessels further advance to accelerate revenue conversion from our backlog.
Furthermore, on a year-over-year basis, our outlook remains robust, as I confirmed orders for the first half of 2022, or above the levels for the first half of 2021 as of this same time last year.
While we continue to see significant opportunity in the markets, and in our ability to meet our customer's needs, we like many global companies for navigating inflationary pressures, and supply chain logistics that continue to impact our business.
As I discussed earlier, delays in delivering or in delivery of our products will cause some revenue to shift to future quarters.
Thus, we are revising our guidance for year-end 2021.
However, I believe it is important to note that we see Q3 broadly, as a peak inflection point in supply chain disruptions.
Our visibility into semiconductor chip markets has increased meaningfully, providing us with a line of sight to many of the two providers through the first half of 2022.
Additionally, they've deployed other strategic tactics internally, such as shifting our production capacity which leaves some of the dependencies we've previously had on logistics and shipping.
I'm extremely proud of the work of our DN team to mitigate these issues.
We are squarely positioned to meet the needs of our customers and expand our base of banks and retailers as consumers continue to demand more access, more convenience, and more innovation through automation and self-service.
Although supply chain challenges have led to a temporary pullback in performance, it's important to understand that we are doing everything possible to mitigate these challenges, and delivering for our customers remains a top priority.
My further remarks will include references to certain non-GAAP metrics such as gross profit, gross margin, and adjusted EBITDA.
Total revenue for the third quarter2021 was $958 million, a decrease over third quarter 2020 of approximately 4% as reported, a decrease of 5% excluding foreign currency benefit of $16 million and an $8 million impact from domestic businesses.
Adjusted for foreign currency and divestitures, product revenue decreased 3%, services revenue decreased 6% and software revenue increased 3% compared to Q3 2020.
During the quarter, approximately $90 million of revenue was delayed due to extended transport times and inbound technology component delays.
This primarily impacted the U.S., Latin America and certain APAC countries and reduced total revenue by approximately 900 basis points.
On a sequential basis, total revenue increased approximately 2%.
Non-GAAP gross profit for the third quarter was $263 million, or a decrease of approximately $22 million versus the prior year period on lower gross margins of 27.4%.
The deferral of revenue and non-billable inflation resulted in a reduction to third quarter gross margin of approximately $33 million.
Service margins increased 40 basis points versus the prior period and more in line with our expectations.
Product gross margins were down approximately 180 basis points versus the prior year period, primarily due to $10 million as a result of inflationary pressures and supply chain logistics, partially offset by a favorable DN Series versus legacy ATM and geographic customer mix.
Software gross margins declined 500 basis points versus the prior year period excluding the impact of a prior year prayer cost benefit of approximately $5 million that did not recur in 2021.
Software gross margins were down approximately 40 basis points due to unfavorable mix.
Operating expense of $182 million for the quarter decreased approximately $14 million versus the prior period, period and decreased $17 million sequentially.
Compared with prior year key variances include reductions in variable compensation, partially offset by unfavorable effects and investment and growth projects.
When compared with our second quarter operating expense decreased due to reductions in variable compensation.
The net result was an operating profit of $81 million and operating margin of 8.5% in the quarter, the same trends drove adjusted EBITDA of $103 million and adjusted EBITDA margin of 10.7% in the quarter.
Now I will discuss our segment highlights.
Eurasia group banking revenue of $323 million decreased approximately 11% versus the prior period and 12% after adjusting for foreign currency benefit of $7 million and a $3 million impact of divestitures.
Lower revenue was primarily due to supply chain delays affecting timing of deliveries and installations of product with collateral impact of services and software and revenue plus the termination of expired service contracts.
As expected, following a strong order entry in Q2 and several non-recurring liabilities in the prior year, segment product order growth decreased 35%.
We are forecasting a strong order entry end of Q4.
Gross profit for the segment decreased to $98 million year-over-year included favorable foreign currency balances of $4 million and an unfavorable divestiture impact of $1 million.
Gross margin at 30.3% was down 50 basis points, the decrease was primarily due to inflationary pressures, offset by our focus on cost management.
Americas banking revenue decreased $22 million, or approximately 6% to $347 million, primarily due to declines in software and services revenue due to the negative collateral impact of unfavorable geographic mix of installations from North America to Latin American.
Americas banking continues to be disproportionately affected due to the location of our customers and our primary manufacturing facilities for DN Series ATMs, which are located in Europe and Asia.
Segment gross profit of $86 million was down $17 million due to lower revenues.
Gross margin percentage declined due to the impact of supply chain inflation and unfavorable geographic mix as previously noted.
Our retail segment had another quarter of strong performance.
Retail revenue of $288 million increased 10% year-over-year as we reported an 8% after adjusting for $6 million currency benefit and investor headwind of $2 million.
Demand for our point-of-sale checkout -- self-checkout continued to increase versus the prior year period with proprietary growth of approximately 23%.
Retail gross profit increased 15% at $79 million driven by revenue growth, gross margin expanded by 110 basis points directly attributable to growth in self-checkout revenue.
As we continue, continue to work to optimize our portfolio and focus our core business segments, we made the decision to enter the share purchase agreement to sell our reverse expanding business with an approximate deal close date targeted for year end.
This business is less than 2% of our total annual retail revenues in order was a strategic fit for the second going forward.
Turning to our capital structure metrics.
Unlevered free cash flow used in the quarter increase $121 million versus the prior year primarily due to increases in inventory, which are necessary to support both Q4 production and delivery targets as well as increases in critical components for 2022 orders.
Company ended the quarter with $325 million of total liquidity, including $230 of cash and short term investments.
The company's cash balance as of September 30th reflects increased inventory levels and interest payments made during the quarter.
At the end of the quarter, the company's leverage ratio was 5.4 times, which continues to be below our covenant maximum of six times.
Turning to our updated outlook for 2021.
We are revising our revenue range to $3.9 million to $3.95 billion, which reflects approximately $140 million in revenue deferral from 2021 to 2022 due to the current supply chain challenges.
Accordingly, we are revising our adjusted EBITDA outlook by approximately $40 million to a range of $415 million to $435 million taking into account the gross margin associated with the aforementioned revenue deferral and an incremental $20 million for supply chain related inflation over previous estimates.
The total estimated impact on supply chain related inflation is now approximately $45 million.
Our free cash flow outlook is now $80 million to $100 million, reflecting our revised EBITDA outlook and the net incremental working capital timing impact of the revenue deferred.
I will now hand the call back to the operator for the Q&A session. | diebold nixdorf inc - qtrly net loss $2 million versus $100.9 million.
diebold nixdorf inc - sees fy 2021 total revenue in the range of $3.90 billion to $3.95 billion.
diebold nixdorf inc - sees fy 2021 adjusted ebitda in the range of $415 million to $435 million. | 1 |
Before we begin, I have an important reminder.
We appreciate your participation today and if I should visit Lincoln's website www.
After their prepared comments, we will move to the question and answer portion of the call.
Lincoln had an excellent second quarter with record adjusted operating earnings per share and operating revenues and earnings growth in all four businesses.
The impact of pandemic related claims on earnings continues to decline and was more than offset by another quarter of strong returns from our alternative investment portfolio.
Driving these results is the execution of our reprice, shift and add new product strategy, expense management and improving customer experience from digital and virtual enhancements and a strong balance sheet, providing room for increased share repurchases; touching on each of these.
First, our product introductions are adding new consumer value propositions, which open new market segments to us, further broadens our sales opportunities up an already strong base of products and increases our long-term sales growth potential.
Our expanding shelf space and ongoing improvements in distribution productivity are effectively getting these new products into the hands of consumers and we are achieving attractive new business returns on capital deployed.
Second, we have a successful track record of increasing the expense efficiency of our product manufacturing, back office operations and distribution functions while enhancing the customer and partner experience.
This quarter we reported lower expense ratios companywide and in most of our businesses.
As we've talked about recently we are about to start on another program that will further improve efficiency and the customer experience and enable us to achieve meaningful savings.
We are excited to provide you with more details next quarter.
Third, our high quality investment portfolio higher statutory capital in RBC ratios along with cash at the holding company and contingent capital all provide capital deployment flexibility.
Now, turning to the business segments; starting with Annuities.
We have long been a leader in annuities with a diversified product portfolio that provides a broad range of customer value propositions.
Total annuity sales this quarter were again strong as we grew 14% sequentially with growth across all product categories for the second quarter in a row and a good mix of product sales.
Last year, we established ourselves as a leader in indexed variable annuities.
This year we are seeing growth in both index variable annuities and traditional VAs without living benefits.
We also see ongoing market demand for with guaranteed living benefits at attractive economics to Lincoln has protected income solutions continue to resonate with customers.
We had projected total annuity sales to begin the year at a similar pace to what we saw in the fourth quarter then build over the course of the year, benefiting from shelf space, we added last year and are adding this year, which is driving indexed variable annuity growth opportunities.
We are pleased to see sales year-to-date ahead of our expectations.
Looking forward near-term sales may be impacted by typical summer seasonality, but we are confident that full year sales we remain ahead of our earlier expectations.
Turning to flows VA net flows were positive and while we reported negative net fixed annuity flows this is a direct result of past management actions taken to maintain rigorous return standards and allow us to direct capital to its highest and best use.
We expect Annuities earnings to continue to benefit from new sales growing fees on AUM from the strong stock market and our diversified high quality in-force book.
In Retirement Plan Services we once again reported excellent results and remain well positioned with scale in our target markets of small and mid-case 401(k) healthcare, government and not-for-profit; a broad suite of products, a competitive cost structure and award winning digital technology.
Total deposits were up 21% and included double-digit growth in both first-year sales and recurring deposits.
Sales continue to benefit from the success of YourPath our target date fund alternative.
We have continued to innovate introducing Pathbuilder income, which includes an income solution as part of a target date like investment option.
This type of innovation will serve as a catalyst for future growth.
Finally, we once again reported positive net flows and while flows can be lumpy we expect this positive momentum to persist.
It was another outstanding quarter for the retirement business.
We continue to excel in our target market segments as we benefit from our attractive competitive position continued investments in the plan sponsor and plan participant experience and our expanding set of solutions aimed at helping people secure their retirement.
Within the Life Insurance business, we continue to execute our product strategy that increases consumer value propositions, while further diversifying our product risk profile.
Our investment in new products for the broadens our portfolio and supports shelf space expansion with new distribution partners, including in the P&C space.
Complementing this expansion has been our continued focus on simplifying the client and advisor experience.
Nearly all of our business is E-submitted an e-delivered and our recently expanded online interview capabilities are resulting in higher placement rates at a lower cost per policy; this makes it easier for customers to do business with us and generates cost savings.
Our strategies have taken hold and are driving double-digit sequential sales growth.
By product category, Individual Life sales were up sequentially with growth seen in term life as well as across our expanded UL will variable UL and MoneyGuard solutions.
In addition, our Executive Benefits sales remained strong through the first half of the year and we expect momentum to continue into the second half.
I'm confident the actions we have taken will result in sequential sales growth accelerating in the second half of the year as our new product offerings continue to garner additional shelf space supported by our industry-leading distribution.
Lastly, on Group Protection, where we have been driving toward our target margin range 5% to 7%.
Our selective price increases as well as our successful efforts to raise persistency led to a 2% increase in premiums over the prior year period.
Although sales and what is a seasonally smaller quarter were down versus the strong prior-year quarter we continue to have success expanding into higher margin employee paid products, which represented 56% of second-quarter sales.
Included within our employee paid products is supplemental health insurance where we will be adding a hospital indemnity solution another example of Lincoln, expanding our already broad portfolio of high quality offerings.
As we have communicated, we continue to take action to increase group Protection's underlying operating margins excluding pandemic related claims and excess alternative investment income we are in the middle of our target range and expect further expansion over time as we drive premium growth continue to invest in our claims organization and diligently manage expenses.
A few words on one of our key competitive advantages; our industry leading distribution.
As the industry evolves the strength of our distribution franchise remains the constant.
We are known in the marketplace for our consistent distribution presence with broad reach across channels as demonstrated by our recent Life insurance shelf expansion with a large P&C insurer.
Nearly 100,000 active producers, wholesalers, Group represented consultants and other distribution professionals sell our products and through strategic investments in technology and training we have positioned ourselves to influence where and how we engage with our active producers leading with a virtual first model for the long term.
We already see this as a distribution team is begin meeting with their clients in person again while still leveraging virtual tools both to improve service we deliver and tightly manage our expenses.
Our distribution team's productivity metrics are up and our efforts are being recognized as we received two industry awards this quarter for innovation in virtual training and digital marketing.
Briefly, on investment results, credit quality remains excellent.
Our general account portfolio is predominantly comprised of fixed income investments of which approximately 97% are investment grade and within that 59% are rated single A, single A equivalent or better examples of the underlying asset classes includes corporates, commercial mortgage loans and structured securities.
The commercial mortgage loan portfolio is high quality, well diversified and continues to perform well with nearly 100% of the loans and the two highest CML rating categories and within that 85% in the highest rating category and virtually no credit losses or loan modifications.
Additionally, the structured securities are predominantly rated double-A, and higher with nearly no exposure to below investment grade securities.
During the quarter we invested new money at an average yield of 2.7% with approximately 50% in shorter duration assets reflecting our shorter duration product sales.
60% of our purchases were in investments other than public corporates providing diversification and good relative value and adding approximately 100 basis points of yield over comparably rated public corporates.
Lastly, our alternative performance was once again strong, driven by portfolio construction that has emphasized buyout and growth equity strategies with a 10% return in the quarter, significantly exceeding our long-term target quarterly return of 2.5%.
In summary, our product strategy is helping sales momentum build at attractive returns, driven by new product introductions expanding shelf space and overall distribution strength.
Group Protection margins are recovering.
Expense savings initiatives will continue to contribute to earnings growth and our strong balance sheet and free cash flow generation and potential block sale transactions all put Lincoln in an excellent position to fund sales growth while increasing our capital deployment.
In short, we are very confident in our ability to continue to generate good earnings growth for shareholders.
As we've mentioned before, low rates affect us in three principal ways.
First; is product pricing and design and their impact on consumer demand.
Second; is spread compression.
Third; is the impact of cash flow testing on reserve requirements.
Second our focus on expenses, including the meaningful cost saving program.
I mentioned earlier, is expected to replace all earnings loss to spread compression over the next few years.
Third and finally, we have no significant cash flow testing reserve implications.
In some low rates have already been with us for some time and going forward, we expect to continue to meet or surpass our 8% 10% long-term earnings per share growth target.
Last night we reported second quarter adjusted operating income of $608 million or $3.17 per share.
Both record highs for Lincoln.
There were no notable items in the current or prior year quarter.
Additionally, this quarter's result was impacted by pandemic related claims, which reduced earnings by $43 million or $0.22 per share.
While results benefited from strong performance in the alternatives investment portfolio boosting earnings by $113 million or $0.59 per share above target.
It was an extremely strong quarter that highlights our underlying earnings power.
Net income totaled $642 million or $3.34 per share, boosted by gains in the investment portfolio an excellent performance from the variable annuity hedge program.
This quarter's record bottom line result was driven by strong top line performance with adjusted operating revenue up 16% from the prior year which included growth in each of the four businesses.
And the solid expense management as our expense ratio came down 130 basis points.
Consistent with the record earnings key financial metrics were excellent as adjusted operating return on equity came in at 78.3% and book value per share excluding AOCI grew 9% and stands at $75.45, an all-time high.
Now, turning to segment results; starting with Annuities.
Operating income for the quarter was $323 million compared to $237 million in the prior year quarter.
The quarter's earnings were driven by record average account values of $166 billion, up 24% over the past year and $12 million of favorable alternative investment income.
Base spreads excluding variable investment income decreased 7 basis points sequentially.
Looking forward, we'd expect spreads to be in this range turning up modestly over time.
Expense ratio improved to 110 basis points compared to the prior year period as our focus on expenses continues to benefit the bottom line.
Return metrics remained solid with return on assets coming in at 78 basis points and return on equity at 25%.
Risk metrics on the VA book once again demonstrate the quality of our in-force with the net amount at risk at 47 basis points of account values for living benefits and at 33 basis points for death benefits.
Growing account values, the high quality and high return book of business, and ongoing expense discipline are all indicators of strong future performance from the Annuities business.
Retirement Plan Services reported operating income of $62 million compared to $30 million in the prior year quarter.
This quarter's results were driven by higher fees on account values and included $7 million of favorable alternative investment results.
Total deposits of $2.8 billion helped drive $0.5 billion of net flows in the quarter.
Over the trailing 12 months net flows of $1.6 billion combined with favorable equity markets drove average account values up 28% to $94 billion.
The expense ratio improved 240 basis points over the prior year quarter a strong revenue growth combined with diligent expense management led to an increase in profitability.
Base spreads excluding variable investment income compressed 8 basis points versus the prior year quarter, better than our stated 10 to 15 basis point range as credit in rate actions continue to take hold.
Strong net flow performance and great expense management position our retirement business nicely moving forward.
Turning to Life Insurance; we reported operating income of $255 million versus a loss of $37 million in the prior year quarter.
This quarter's earnings included $83 million of favorable alternative investment experience and a return to pre-pandemic levels of mortality as pandemic related claims of $15 million were largely offset by favorable underlying mortality.
Earnings drivers, continue to grow with average account values up 12% and average life insurance in force of 7% over the prior year.
Base spreads excluding variable investment income declined 7 basis points compared to the prior year quarter, in line with our 5 to 10 basis point expectation.
Expense ratio improved 90 basis points over the prior year quarter as our efficiency efforts continue to benefit margins.
The combination of accelerating sales, expense discipline and the timing impact from pandemic mortality positions us well for a strong second half of the year.
Group Protection reported operating income of $46 million compared to $39 million in the prior year quarter.
This quarter's earnings included $8 million of favorable alternative investment results.
Compared to the first quarter operating income rose from a loss of $26 million driven primarily by improved pandemic related claims of $28 million, down from $90 million sequentially.
As that just noted, excluding pandemic claims and favorable alternative investment income, the Group margin of 6.1% was in the middle of a 5% to 7% range, an improvement from the first quarter.
The loss ratio was 79% in the quarter, a 750 basis point sequential improvement.
Excluding pandemic related claims from both periods loss ratio improved 50 basis points to 76.1% due to better mortality results.
Group's expense ratio rose 30 basis points year-over-year as we make ongoing investments in our claims organization to address elevated claim volume due to the pandemic.
We expect the expense ratio to improve when the pandemic subsides and we execute our ongoing expense savings initiatives.
Growing operating revenues coupled with improving underlying margin performance as what the Group business on much firmer footing looking forward.
Turning to capital and capital management; we ended the quarter with $11.2 billion of statutory surplus and estimate our RBC ratio at 483%.
As a reminder our RBC ratio includes 26 percentage points from non-economic goodwill associated with the Liberty acquisition that we expect will go away by year-end.
We estimate C1 factor changes being implemented by the NAIC will negatively impact our year-end RBC ratio by approximately 15 percentage points.
We are supportive of this factor changes and would note that they have no impact on our view of credit nor do we expect them to change our capital deployment strategy.
Cash at the holding company stands at $762 million above our $450 million target as we have pre-funded our $300 million 2022 debt maturity.
We deployed $150 million toward buybacks in the second quarter, in line with our goal communicated last quarter to return to pre-pandemic quarterly buyback levels.
Supported by the strength of our balance sheet we intend to repurchase up to $200 million of stock in the third quarter.
This will position us to have full year buybacks in line with pre-pandemic levels.
To conclude, we delivered excellent results with record earnings, book value excluding AOCI, and adjusted operating ROE.
For all the reasons we discussed today, we feel great about continuing our excellent performance looking forward.
We will now begin the question-and-answer portion of the call.
As a reminder, we ask that you please limit yourself to one question and one follow-up and then requeue if you have additional questions. | compname reports q2 earnings per share $3.34.
q2 adjusted operating earnings per share $3.17.
q2 earnings per share $3.34. | 1 |
Due to the material impact of COVID-19 on our business in fiscal 2020, we will also include comparisons to fiscal 2019 results.
We are extremely pleased to be reporting an incredibly strong start to fiscal 2021.
We took decisive actions at the start of the pandemic to protect our people, our brands and our liquidity.
This combined with our focus over the past year on delivering happiness to our customers and investing in enhanced digital, marketing and store capabilities, as well as in our bars and restaurants, have strengthened our foundation for profitable growth.
As consumers have become increasingly more comfortable returning to physical shopping, our overall engagement levels have greatly accelerated, leading to strong momentum across our entire portfolio of brands.
Given conditions last year, it is not surprising that we were able to post strong sales gains across all brands and all channels of distribution during the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020.
What's much more impressive about our first quarter 2021 performance is how it compares to the first quarter of 2019.
We believe that the comparison to 2019 is much more informative for most purposes than comparing to 2020.
Accordingly, during our discussion today, we will focus on the positive traction we have made toward returning to and even exceeding our 2019 levels of performance.
First quarter sales came in at $266 million compared to $282 million in fiscal 2019 and versus our guidance range of $220 million to $240 million.
It is worth noting that $14 million of the $16 million sales decrease from the first quarter of fiscal 2019 is due to lower sales in Lanier Apparel, which, as you know, we are in the process of exiting.
On an adjusted basis, earnings per share increased to a $1.89 compared to our earnings of a $1.30 in the first quarter of fiscal 2019.
Scott will provide more detail in a few minutes, but these results were driven by very strong performance in our e-commerce businesses and outstanding gross margins.
Our bar and restaurant business also performed very nicely during the quarter.
In our bricks and mortar stores, we generally saw a sequential improvement in traffic and sales in the quarter with regions in Florida, the Southeast and Texas showing the most strength while the Mid-Atlantic, the Northeast and the Midwest are recovering at a somewhat slower pace.
There is no question that we are benefiting from some pent-up demand so far this spring and summer and the alignment of our brands' focus on products related to travel, vacation and social occasions with the consumers' desire to travel and reengage socially.
We expect this to continue as more regions of the country begin to normalize.
That said, we believe that the results we have seen thus far this year and that we are projecting for the balance of the year also demonstrate the value of staying true to our brands during the challenges that we faced last year.
Our commitment to the happy, upbeat and optimistic messages of our brands and delivering those messages to our consumers through our products and services is paying off handsomely as the world reengages.
In addition, we are seeing positive returns on the investments we have made and continue to make in enhancing our brands' creative content in improving our omni-channel customer service and continuing to hone our digital marketing capabilities, and in our stores, bars and restaurants.
In our biggest brand, Tommy Bahama, we are anchored in the relaxed island lifestyle.
We deliver this lifestyle to our guests through our amazing products, our wonderful stores and e-commerce website, and very importantly through our bars and restaurants.
By staying true to our Live the Island Life brand message and making the types of investments outlined above, we were able to deliver outstanding first quarter results.
Sales overall came close to 2019 levels, driven by healthy gains in e-commerce and restaurants while stores in the wholesale continued to improve sequentially.
Very importantly, increased full-price selling and stronger initial IMUs, coupled with excellent expense control, helped contribute to a marked improvement in gross margin, operating margin and a 36% increase in operating income over first quarter of 2019.
We are delighted with the margins we achieved for the quarter.
Finally, we were pleased to see that while performance in our men's business was strong, our women's business at Tommy Bahama was even stronger.
We are honored to have the dedicated cadre of true Tommy Bahama fans that comprise our very loyal customer base.
That said, we believe there is room on the island to delight even more customers.
Through the investments we are making and the priorities we have established, we are intent on expanding our customer reach while continuing to serve our loyal guests.
Staying anchored to its resort chic lifestyle and as we say being the sunshine served Lilly Pulitzer very well during the first quarter.
Lilly's product priority for spring '21 was feel-good fashion with a focus on the happy color and print, easy chic comfortable pieces and a resort state of mind.
This focus together with the investments that we have made in enhancing our brand creative and enhancing our store and digital capabilities paid off in strong first quarter results.
We continue to see strong growth from e-commerce while our stores in the wholesale business continue to improve as consumers feel increasingly comfortable engaging in the physical world.
In total, first quarter '21 sales exceeded first quarter 2019 sales, and operating margin came in at an impressive 27% as compared to 21% in 2019.
Our Luxletic and lounge product continued to drive growth and we saw a healthy rebound in our dress business as for social calendar begins to fill up.
At the same time, our golf and tennis collections have also been bright spots and the consumer is showing strong renewed interest in swim as she thinks about travel and vacation this summer.
Our recent results demonstrate that we have the product she wants and our brand message is resonating with her.
We look forward to continuing to drive a strong business through the balance of the year.
Our smaller brands, Southern Tide, The Beaufort Bonnet Company and Duck Head, also had a great first quarter, all posting meaningful sales gains above first quarter 2019 levels.
All three are poised to contribute to our profitability this year.
We are very pleased with our first quarter results and are excited about the balance of the year.
Scott will provide more details in our guidance momentarily, but I will say that we do expect to have a strong year, particularly in terms of profitability.
Our enthusiasm is based on both external factors as well as the internal priorities that we have been focusing on for the last year.
I'll start with the external factors.
As the summer progresses, we expect some of the regions that have been slower to recover for us, namely the Mid-Atlantic, the Northeast and the Midwest, to pick up momentum.
We also believe that consumers will continue to have a high degree of interest in travel, vacation and social events through the year.
Finally, after a long pandemic, consumers appreciate the highly differentiated happy, colorful, upbeat nature of our brands and products more than ever.
All of these external factors portend a strong 2021.
We are also excited about the benefits we are seeing as the result of our internal priorities.
There are many, but I will highlight five here.
First, in our brand message, we are taking care to ensure that our messages are both true to our core brand values and relevant for today's consumer and marketplace.
Second, we have realigned our creative teams and are enhancing our creative content to make sure it is delivering the full impact of our powerful brand messages.
Third, as part of our effort to enhance our digital capabilities, we are improving our ability to capture and analyze customer data in a way that respects her privacy but also puts us in position to serve her in a better and more personalized way.
It also helps us identify and reach new audiences of potential customers.
Fourth, we are honing our skills in measuring the effectiveness of and optimizing the various channels, many of them digital media that we used to reach both existing and potential new customers.
Fifth, we continue to enhance our store order fulfillment capabilities.
This allows us to use inventory located anywhere in our footprint to satisfy demand from anywhere.
The implications for inventory efficiency sell-through rates and ultimately gross margin are huge.
We believe the combination of the positive external factors as well as the benefits from our work on our internal priorities gives us ample reason to be bullish on 2021.
In closing, please allow me to express my sincere appreciation for our wonderful and loyal customers and for our world-class employees, an incredible group of women and men who worked harder than ever over the last year and a half to deliver happiness to those customers.
As Tom just mentioned, fiscal 2021 is off to a great start with record earnings in the first quarter.
I'll walk you through how we got there.
Sales were stronger than expected, and excluding the impact of the exit of the Lanier Apparel business were comparable to 2019 levels.
Our full-price e-commerce channel was 55% higher than in 2019, with significant growth over 2019 in all of our branded businesses.
Our retail store performance reflects the significant regional differences in the pace of recovery.
We saw real strength in the Southeast and Southwest, particularly in Florida, where retail sales achieved 2019 levels.
However, we are experiencing a much slower recovery in other parts of the country where sales levels in the Northeast, Mid-Atlantic and Midwest while improving versus Q4, were still over 30% lower than in 2019.
Overall, our retail sales were 16% lower than in 2019.
We continue to see improvement so far in the second quarter and expect that improvement to continue as restrictions lift and as summer arrives in these areas.
Our restaurants benefited from the addition of five Marlin Bars and the strong recovery in certain regions with a sales increase of 7% compared to 2019.
All restaurants are now open except for New York, which we plan to reopen this fall.
We are particularly proud of the work we have done to improve our gross margin, which on an adjusted basis expanded 520 basis points over 2019 to 64%.
As demand remained high, more of our sales in the first quarter were at full price than in the first quarter of 2019.
Gross margin also benefited from our focus and investments in our direct-to-consumer businesses and lower sales in Lanier Apparel, which has resulted in a meaningful shift in our sales mix to these higher margin channels of distribution.
In the first quarter of 2021, our direct business was 72% of revenue compared to 64% in the first quarter of 2019.
We have also increased our IMUs by reducing product cost and selectively increasing prices.
SG&A modest -- decreased modestly from 2019 levels with lower employment costs, occupancy costs, variable expenses and travel costs, partially offset by increased performance-based incentive compensation.
Putting it altogether, in the first quarter, our consolidated adjusted operating margin expanded 410 basis points over 2019 to 15%, with operating margin expansion in all operating groups.
Our business is supported by our strong balance sheet and cash flow from operations.
Here are some highlights.
On a FIFO basis, inventory decreased 29% compared to the end of the first quarter of 2020.
Excluding Lanier Apparel, which we are exiting, FIFO inventory decreased 22% compared to the end of the first quarter of 2020.
Tommy Bahama, Lilly Pulitzer and Southern Tide each decreased inventory levels significantly year-over-year with conservative purchases of seasonal inventory and higher-than-expected first quarter sales.
Ongoing enhancements to enterprise order management systems are also contributing to a more efficient use of inventory.
On a LIFO basis, inventory decreased 36% compared to the end of the first quarter of 2020.
Supply chain challenges, including higher transit cost and production and transit delays, are ongoing.
However, our emphasis on direct-to-consumer channels gives us more flexibility on product release dates.
Our liquidity position is strong with $92 million of cash and no debt at the end of the first quarter.
In the first quarter of 2021, cash provided by operating activities was $41 million compared to cash used in operating activities of $46 million in the first quarter of 2020.
Turning to our outlook.
The positive momentum we experienced in the first quarter has continued, and we expect to deliver strong revenue and earnings in the second quarter.
Sales in the second quarter expected to be in a range of $300 million to $310 million compared to $302 million in the second quarter of 2019.
Impacting sales in the second quarter is the wind down of our Lanier Apparel business.
We estimate Lanier Apparel revenue to decline to approximately $5 million in the second quarter of fiscal 2021 compared to $20 million in the second quarter of fiscal 2019.
Strong full-price sales, a shift of our sales mix toward our brands and our direct-to-consumer channels, and higher IMUs in the second quarter are expected to contribute to a meaningful increase in consolidated gross margin over 2019.
On an adjusted basis, earnings per share for the second quarter of 2021 are expected to be in a range of $2.15 to $2.35 compared to $1.84 per share in the second quarter of 2019.
Our third quarter is historically our smallest sales and earnings quarter due to the seasonality of our brands.
We also cleared end-of-season inventory in both the third and fourth quarters with the highly profitable Lilly Pulitzer after party sales as the most notable of our events.
High sell-throughs in the first quarter and elevated sales plan -- levels planned in the second quarter are expected to reduce the availability of excess inventory for these clearance events.
As a result of lower planned revenue from clearance events in the third quarter and the impact of the Lanier Apparel exit, we are projecting an adjusted loss in the quarter in a range of $0.20 per share to $0.35 per share compared to adjusted earnings of $0.10 per share in the third quarter of 2019.
With our better-than-expected first quarter results, combined with our projection for a strong finish to the year driven by continued strength planned in our full-price e-commerce channel, retail and restaurant channels of distribution, we are raising our previously issued guidance for 2021.
We now expect sales in the range of $1.015 billion to $1.05 billion compared to net sales of $1.12 billion in 2019.
For the full year, Lanier Apparel sales are expected to be approximately $20 million or $75 million lower than 2019, with no Lanier comparable sales planned in the fourth quarter.
Adjusted earnings per share for 2021 are expected to exceed 2019 levels, benefiting from meaningful gross margin expansion.
SG&A for the full year is expected to be comparable with 2019, with lower employment cost, occupancy cost and travel cost partially offset by increased performance-based incentive compensation and investments in marketing, including top-of-the-funnel expenditures.
We now expect adjusted earnings in a range of $4.85 per share to $5.15 per share compared to $4.32 per share in 2019.
We plan to continue investing in our growth opportunities, primarily in information technology initiatives such as the redesign and relaunch of the Lilly Pulitzer mobile app and additional development of digital marketing and customer service enhancements.
We also plan to open new retail stores and a new Marlin Bar at Town Square in Las Vegas, which will replace our full service restaurant in the center.
In 2021, capital expenditures for the full year is expected to be approximately $35 million comparable to 2019 levels. | oxford industries - q1 e-commerce sales grew 12% over q1 last year & positive momentum has continued into q2.
oxford industries - expect to have almost all locations open by end of june.
oxford industries - confident it has ample liquidity to satisfy ongoing cash requirements in fiscal 2020 & for foreseeable future.
qtrly inventory increased 8% to $169 million compared to $157 million in prior year period.
oxford industries - not providing financial outlook for fiscal 2020. | 0 |
This is Jim Koch, Founder and Chairman.
And I'm pleased to kick off the 2020 second quarter earnings call for The Boston Beer Company.
Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.
And then hand over to Dave who will provide an overview of our business.
As our world continues to grapple with this COVID-19 pandemic, a primary focus at Boston Beer Company continues to be on operating our breweries and our overall business safely and supporting our partners in the beer industry.
Supporting the communities in which we work and live is one of our core values.
And we're very happy that our Samuel Adams Restaurants Strong Fund has raised over $5.4 million so far to support bar and restaurant workers who are experiencing hardship in the wake of COVID-19.
Working with the Greg Hill Foundation, this fund is committed to distributing 100% of its proceeds to grants to bar and restaurant workers across the country.
While doing this, we also achieved depletions growth of 46% in the second quarter of which 42% is from Boston Beer legacy brands and 4% is from the addition of the Dogfish Head brands.
Our business in the second quarter was strong, but uncertainties due to COVID-19 do remain.
These uncertainties include our ability to continue to operate our breweries at a level of safety that meets our standards, the continued ability to distribute to off-premise retail locations and the timing of the reopening of on-premise retail locations.
We will continue to work hard through the COVID-19 pandemic and prioritize safety above all else.
I'm proud of the passion, creativity, and commitment to community that our company and coworkers have demonstrated during this pandemic.
We remain positive about the future growth of our brands and are happy that our diversified brand portfolio continues to fuel double-digit growth.
I will now pass over to Dave for a more detailed overview of our business.
Before I review our business results, I'll start with the usual disclaimer.
Now let me share a deeper look at our business performance.
Our depletions growth in the second quarter was a result of increases in our Truly Hard Seltzer and Twisted Tea brands and the addition of the Dogfish Head brands that were only partially offset by decreases in our Samuel Adams and Angry Orchard brands.
The growth of the Truly brand led by Truly Hard Lemonade has accelerated and continues to grow beyond our expectations.
Since early January, Truly has significantly grown its velocity and has sequentially grown its market share while many other hard seltzer brands have entered the category.
Truly is the only hard seltzer not introduced earlier this year to grow its share during 2020.
We'll continue to invest heavily in the Truly brand and further improve our position in the hard seltzer category as competition continues to increase.
We're excited about our new Truly advertising campaign that showcases coverage variety enjoy to hard seltzer drinkers through four different ads.
Because we delayed the premiere of this campaign to June given the consumer environments surrounding COVID-19, it's too early to know if it will resonate with drinkers.
Twisted Tea continues to generate double-digit volume growth rates that are well above full year 2019 trends.
We expect to increase our brand investments in the second half compared to the first half and see significant distribution in volume growth opportunities for our Truly, Twisted Tea and Dogfish Head brands.
Samuel Adams and Angry Orchard's volumes continue to decline as they are more deeply impacted by the effect of COVID-19 on on-premise retailers.
We're encouraged however that Samuel Adams Boston Lager and Angry Orchard Crisp Apple both have experienced double-digit growth in the measured off-premise channels during the quarter.
We continue to work on returning these brands to growth, but don't expect them to grow during 2020 because of on-premise closures.
I am pleased that our overall business has shown great momentum and depletion improvements during the first half of the year.
Given our trends for the first half and our current view of the remainder of the year, we've adjusted our expectations for higher 2020 full-year earnings, depletions and shipment growth, which is primarily driven by the strong performance of our Truly and Twisted Tea brands.
We've adjusted our business to the COVID-19 environment and continue to work to control what we can control, with our primary focus being the safety of our coworkers, distributors, retailers and drinkers.
We've deployed many safety protocols across our business and at our breweries, including entrance screening and temperature checks, face mask requirements, reorganized work spacing to increase physical distancing between and among shifts, and adding more cleaning and sanitation time to each shift.
We're slowly reopening our hospitality locations, which were closed since March, with a focus on outdoor service and takeout.
Our accelerated depletions growth has been challenging operationally.
We've been experiencing out of stocks and we expect wholesaler inventories to remain very tight for the rest of the summer.
We've been operating at capacity for many months and have further increased our usage of third-party breweries in response to the growth.
In particular, the additional Truly volumes have come at a higher incremental cost, due to an increased usage of third-party breweries, which is negatively impacting our gross margin expectation for the year.
We're investing significantly in our supply chain but do not expect these pressures to be relieved in the second half of the year.
We'll continue to invest to increase capacity as appropriate to meet the needs of our business and take full advantage of the fast-growing hard seltzer category.
We're a very competitive business, but we're optimistic for continued growth of our current brand portfolio.
We remain prepared to forsake short-term earnings, as we invest to sustain long-term profitable growth in line with the opportunities that we see.
Based on information in hand, year-to-date depletions reported to the company through the 28 weeks ended July 11, 2020, are estimated to have increased approximately 42% from the comparable weeks in 2019.
Excluding the Dogfish Head impact, depletions increased 37%.
Now, I'm going to hand it over to Frank who will provide the financial details.
For the second quarter, we reported net income of $60.1 million, an increase of $32.3 million or 116% from the second quarter of 2019.
Earnings per diluted share were $4.88, an increase of $2.52 per diluted share from the second quarter of 2019.
This increase was primarily due to increased revenue driven by shipment growth of 39.8% partly offset by lower gross margins and higher operating expenses.
We began seeing the impact of COVID-19 pandemic in our business in early March.
To-date, the direct financial impact of the pandemic has primarily shown in significantly reduced keg demand from the on-premise channel and higher labor and safety related cost at our breweries.
In the first half of 2020, we reported COVID-19 pre-tax-related reductions in net revenue and increases in other costs totally $14.1 million, of which $10 million was recorded in the first quarter and $4.1 million was recorded in the second quarter.
The total amount consists of a $5.8 million reduction in net revenue for our estimated keg returns from distributors and retailers, and $8.3 million of other COVID-19 related direct costs, of which $5.6 million are recorded in cost of goods sold and $2.7 million are recorded in operating expenses.
In addition to these direct financial impacts, COVID-19 related safety measures resulted in a reduction of brewery productivity.
This has shifted more volume to third-party breweries, which increased production costs and negatively impacted gross margins.
In April 2020, we withdrew full year fiscal 2020 financial guidance due to uncertainties around COVID-19.
Despite the continued uncertainties related to the COVID-19 pandemic, we feel our business outlook has stabilized and that it is now appropriate to give full year fiscal 2020 financial guidance.
Shipment volume was approximately 1.9 million barrels, a 39.8% increase from the second quarter of 2019.
Excluding the addition of the Dogfish Head brand beginning July 3, 2019, shipments increased 35.3%.
We believe distributor inventory as of June 27, 2020 averaged approximately 2.5 weeks on hand and was lower than prior year levels due the supply chain capacity constraints.
We expect wholesale inventory levels in terms of weeks on hand to remain lower than prior year levels for the remainder of the year.
Our second quarter 2020 gross margin of 46.4% decreased from the 49.9% margin realized in the second quarter of 2019 primarily as a result of higher processing cost due to increased production in third-party breweries, partially offset by price increases and cost-saving initiatives at company-owned breweries.
Second quarter advertising, promotional and selling expenses increased by $6.3 million in the second quarter of 2019 primarily due to increases in salaries and benefits cost, increased brand investments in media and production, the addition of Dogfish Head brand related expenses beginning July 3, 2019, and increased freight to distributors due to higher volumes partially offset by decreased investments in local marketing and national promotions due to timing of these costs compared to the prior year.
General and administrative expenses increased by $2.9 million in the second quarter of 2019, primarily due to increases in salaries and benefits cost and the addition of Dogfish Head general and administrative expenses beginning July 3, 2019, partially offset by the non-recurrence of $1.5 million in Dogfish Head transaction-related fees incurred in the second quarter of 2019.
Based on information which we're currently aware, we are now targeting full year 2020 earnings per diluted share of between $11.70 and $12.70.
However, actual results could vary significantly from this target.
This projection excludes the impact of ASU 2016-09.
Full year 2020 depletions growth including Dogfish Head is now estimated to be between 27% and 35% of which between 1% and 2% are due to the addition of the Dogfish Head brand.
We project increases in revenue per barrel of between 1% and 2%.
Full year 2020 gross margins are expected to be between 46% and 48%.
We plan to increase investments in advertising, promotional and selling expenses of between $70 million and $80 million for the full year 2020.
This does not include any increases in freight cost for the shipment of products to our distributors.
We estimate our full year 2020 non-GAAP effective tax rate to be approximately 26%, which excludes the impact of ASU 2016-09.
We are continuing to evaluate 2020 capital expenditures and currently estimate investments of between $180 million and $200 million.
The capital will be spent mostly on continued investments in our breweries and could be higher if deemed necessary to meet future growth.
We expect that our cash balance of $86.7 million as of June 27, 2020 along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirement.
Before we do that though, I would like to remind everybody that we are still in different locations due to COVID-19. | compname reports q1 earnings per share $5.26.
q1 earnings per share $5.26. | 0 |
I'm Ian Hudson, the company's Chief Financial Officer.
Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer.
These documents are available on our website.
In addition, we will file our Form 10-K later today.
Jennifer is going to start today with her perspective on our performance, and then I will provide some more detail on our fourth quarter and full year financial results.
Jennifer will then go over our outlook for 2021 before we open the line up for any questions.
I'm immensely proud of how our teams have managed through these challenging times.
It's hard to believe that it's been a little over a year since the first COVID-19 patient was reported in the U.S. Since the outbreak of the pandemic, the health and safety of our employees has been our highest priority, and we worked quickly to implement a host of measures to establish a safe work environment for our employees.
These steps have included adjusting our office spaces and production processes at our facilities to comply with safe distancing guidelines.
During 2020, we invested in temperature screening capabilities at most of our facilities, issued a mandatory face mask policy, provided our employees with additional paid time off and made at-home test kits available for free to our employees and their family members.
As the national COVID-19 vaccine distribution has gotten under way, it is clear to me that vaccinating our workforce is the single most effective tool at our disposal to protect our employees and customers and keep our businesses operating efficiently.
In a nutshell, putting this pandemic behind us is critical to our long-term success.
So with that in mind, we recently kicked off a companywide effort to raise awareness about COVID-19 vaccines, assist eligible employees in gaining access to available vaccines and encourage participation levels.
Through the pandemic, our businesses have worked closely with local health departments.
In Illinois, where we have three of our largest manufacturing facilities, many of our employees are now eligible to receive vaccine as essential workers.
In partnership with the local health department, we have organized an on-site vaccination event in March for all eligible employees at that site.
I'm extremely appreciative to everyone that helped make this happen and hope that we can host similar events at our facilities in other states when our employees become eligible.
In addition to protecting our employees, one of our objectives in launching this initiative is to provide comfort to the customers and suppliers with whom we frequently interact in-person that our high percentage of our customer-facing employees have received a vaccine.
We also want to provide a mechanism to encourage eligible employees to feel more comfortable traveling to support our customers.
Sharing the same sentiment as others, we are anxious to move beyond COVID.
During the fourth quarter, with the resurgence in cases across much of the country, many of our businesses experienced COVID-related disruptions.
The fact that we are able to navigate through these issues and deliver strong results was a real testament to our teams.
There is no doubt that these remain tumultuous and uncertain times.
However, this experience has confirmed my strong belief that our workforce is unparalleled in its passion, commitment and grit.
And while we may have some challenging days or periods, I am confident that we will ban together and work through these challenges as we have many others.
Overall, our performance in the fourth quarter represented a strong finish to 2020, a year in which we delivered the second highest adjusted earnings per share in the company's history, surpassed only by the $1.79 per share reported in 2019.
The despite the impact of the pandemic on our top line, I was pleased with how our teams responded quickly, taking actions to control costs, which not only preserved our EBITDA margin but improved it by 40 basis points on a year-over-year basis.
In fact, both of our groups exceeded the upper end of their current target EBITDA margin ranges in 2020.
While many companies can serve capital in 2020, we were proactive in taking a number of actions to position the company well for 2021 and beyond as we continue to focus on our long-term growth objectives by funding strategic investments to support the future growth of the company in three critical areas.
First, we have made significant investments in our existing plants to add additional capacity to support our long-term growth and to gain operational efficiencies through the use of newer machinery and equipment.
We recently completed our plant expansion at Vactor, and are making progress on expansions of our manufacturing facilities in Rugby, North Dakota and Lake Crystal, Minnesota.
Earlier in the year, we also completed the expansion of our MRL facility in Billings, Montana.
Second, we continue to invest in new product development, and we are seeing the benefits from these efforts with an estimated $200 million of revenue in 2020 being generated from the sales of products introduced in the last three years.
Among those products was the 2100 I full-size tower cleaner, which we launched in 2018.
The 2100 I sewer cleaner introduced intelligent controls on the truck and was entirely designed around our customers' needs for ease of use and operability.
two years following the launch, we continue to see strong results from that product line and positive customer feedback on the design.
During 2020 and on the back of our success with the 2100 I, we launched a smaller sewer cleaner and a truck jetter machine that incorporates the same intelligent controls as the 2100 I. The initial response to these products has been very positive.
TBEI, our dump bodies business was also successful in bringing several new products to market in 2020, addressing specific customer needs or improving our competitive positioning.
A few examples, I would note, are the launch of the J Craft Apex dump body, which features smooth sides with no seems in a tough dump body that results in a significantly better flow of materials for the end user and the DuraTuff, which is a heavy-duty abrasion resistant dump body with a simplified design that allows us to manufacture and fulfill the needs of our customers within a lead time of approximately six weeks which is much shorter than manufacturers of competitor products.
Overall, revenues from these new products accounted for nearly 10% of TBIS overall revenues during a year in which TBI delivered the highest EBITDA margin under our ownership.
Within SSG, we've increased our recurring revenue streams through Commander one, a product that leverages our existing installed base of outdoor warning siren and provides a unique differentiator for Federal Signal siren control equipment.
Of our total R&D spend in 2020, approximately 20% was invested in electrification projects, and we are pleased to report that during the fourth quarter, we received our first orders for our hybrid electric street sleeper.
Electrification will continue to be an important initiative for the company moving forward.
Third, we reacted quickly to introduce several new digital marketing tools to enhance the customer experience of our customers under reclaiming Tomorrow Together initiative.
These tools, which include virtual equipment demonstrations and digital training academies allow us to reach our customers in a new way.
We also launched our e-commerce site in the fourth quarter, which initially focuses on certain product lines within our safety and security Systems group.
Our strong cash flow generation supports not only these organic growth initiatives but also ongoing debt repayment, cash returns to shareholders and acquisitions.
In June of 2020, we completed the acquisition of PWE.
And last week, we completed the acquisition of OSW equipment and repair.
In October of 2020, we issued our inaugural long-form sustainability report.
I'm incredibly proud of the progress we've made on our environmental, social and governance initiatives and thrilled to share are many accomplishments through the issuance of this report.
With our commitment to continuous innovation, strong governance, and reduced resource consumption, we continue to build and deliver equipment that has beneficial impacts to both the environment and human safety.
We are proud to be a company whose products have inherent environmental and social importance, and we hope that our pride is evident upon reading the report.
Let me now spend a minute on our recent acquisition, OSW.
OSW is a leading manufacturer of dump truck bodies and a custom upfitter of truck equipment and trailers and is headquartered in Snohomish, Washington with an upfitting location in Tempe, Arizona, and a service center in Edmonton, Alberta.
Since acquiring TBEI in 2017, the geographic expansion of our existing platform of market-leading dump bodies and trailers has been an important strategic initiative.
The acquisition of OSW represents a highly strategic transaction, adding three premier brands that serve attractive infrastructure, construction and other industrial end markets on the West Coast, Arizona and in parts of Canada.
We have previously noted that our dump truck businesses have a general correlation with new housing starts.
The region in which OSW operates along the West Coast, have been the fastest-growing areas in the country in the last five years.
To capitalize on that growth potential and expand its reach, OSW completed two acquisitions in recent years and represents a good anchor tenant for future growth on the West Coast.
With its main operations located in Washington state where the coronavirus pandemic first hit in the U.S., OSW's financial performance was adversely impacted in 2020.
However, it is a company with strong brands, several long-term contracts with municipalities and a reputation for making quality products.
The acquisition will also extend our current product offerings by filling in several gaps in the TBEI's existing trailer portfolio.
Although we expect this acquisition to be neutral to our 2021 earnings, the acquisition provides considerable opportunity for long-term value creation through the application of our 80/20 improvement principles, organic growth initiatives and additional bolt-on acquisitions.
Overall, our fourth quarter results represent a strong finish to the year.
Before I talk about the fourth quarter, let me highlight some of our full year results.
Consolidated net sales for the year were approximately $1.13 billion, down about 7% compared to the prior year.
Operating income for the year was $131.4 million compared to $147.1 million in the prior year.
Consolidated adjusted EBITDA for the year was $182.2 million compared to $191.3 million in the prior year.
That translates to a margin of 16.1% for the year, up 40 basis points from the prior year and above the high end of our target range.
GAAP earnings for the year equated to $1.56 per share compared to $1.76 per share in 2019.
On an adjusted basis, we reported full year earnings of $1.67 per share compared to $1.79 per share in the prior year.
For the rest of my comments, I will focus mostly on comparisons of the fourth quarter of 2020 to the fourth quarter of 2019.
Consolidated net sales for the quarter were $295 million compared to $314 million in the prior year.
Consolidated operating income for the quarter was $33.8 million compared to $36.4 million in the prior year.
On an adjusted basis, consolidated operating margin was 12%, up 10 basis points from the prior year.
Consolidated adjusted EBITDA for the quarter was $47 million compared to $48.5 million in the prior year.
That translates to a margin of 15.9% for the quarter, an improvement of 50 basis points over the prior year.
Income from continuing operations for the quarter was $26 million compared to $29.7 million in the prior year.
That equates to GAAP earnings per share of $0.42 per share for the quarter compared to $0.48 per share in the prior year.
On an adjusted basis, earnings per share for the quarter was $0.44 per share, which compares to $0.48 per share in the prior year.
Orders for the quarter were $276 million, down from record levels in the prior year quarter, but up $10 million or 4% from the third quarter of 2020.
That momentum continued into 2021, with strong order intake in January, contributing to a backlog of $330 million at the end of last month.
That represents an increase from $304 million at the end of 2020.
In terms of our fourth quarter group results, ESG sales were $238 million compared to $252 million in the prior year.
ESG's adjusted EBITDA for the quarter was $44.2 million, up 1% from the prior year.
That translates to an adjusted EBITDA margin for the quarter of 18.6%, above our target range and up 120 basis points from the prior year.
Our aftermarket revenues for the quarter were up about 11% year-over-year, again contributing to the strong margin performance.
Overall, our aftermarket revenues represented roughly 25% of ESG's revenues for the quarter, which is up from 21% in the prior year period.
SSG sales for the quarter were $57 million compared to $62 million in the prior year.
SSG's adjusted EBITDA for the quarter was $11.2 million compared to $12.6 million in the prior year, and its adjusted EBITDA margin for the quarter was 19.6% compared to 20.3% in the prior year.
Corporate operating expenses for the quarter were $9.8 million compared to $8.4 million in the prior year with the increase primarily related to unfavorable fair value adjustments of certain post-retirement reserves, which represented a headwind of about $0.02 in the quarter and higher M&A expenses.
Turning now to the consolidated income statement, where the decrease in sales contributed to a $5.6 million reduction in gross profit.
Consolidated gross margin for the quarter was 25.7% compared to 25.9% in the prior year.
As a percentage of sales, our selling, engineering, general and administrative expenses for the quarter were down 40 basis points from the prior year.
Other items affecting the quarterly results include a $700,000 increase in acquisition-related expenses, a $1.1 million increase in other income and a $600,000 reduction in interest expense.
Compared to the prior year, tax expense for the quarter increased by $2.8 million, largely due to the recognition of fewer discrete tax benefits than in the prior year quarter.
Although it was up on a year-over-year basis, our effective tax rate for the quarter was lower than we expected at around 23%, primarily due to the recognition of benefits associated with stock compensation activity and other discrete items, which collectively added about $0.03 to our fourth quarter EPS.
For 2021, we currently expect a tax rate of approximately 24%.
That rate includes an estimate of tax benefits associated with stock compensation activity, similar to those recognized in recent years.
On an overall GAAP basis, we, therefore, earned $0.42 per share in the quarter compared with $0.48 per share in the prior year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items.
During the fourth quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses, pension-related items, coronavirus-related expenses and purchase accounting expense effects.
On this basis, our adjusted earnings for the quarter were $0.44 per share compared with $0.48 per share in the prior year.
Looking now at cash flow, where we generated $57 million of cash from operations in the quarter, bringing the total amount of operating cash generation for the year to $136 million.
That represents a year-over-year improvement of $33 million or 32%.
The improved cash flow facilitated a $30 million debt reduction in the quarter as well as continued strategic investments in new machinery and equipment and other organic growth initiatives like the expansion of several of our manufacturing facilities.
In 2021, we are currently anticipating that our capex, including investments associated with ongoing plant expansions will be lower than in 2020 and in the range of between $20 million and $25 million.
We ended the year with $128 million of net debt and availability of $280 million under our credit facility.
As a reminder, we executed a new five year $500 million credit facility in July of 2019.
We also have the option to trigger an increase in our borrowing capacity by an additional $250 million for acquisitions.
Our net debt leverage remains low even after factoring in the OSW acquisition that we completed last week.
We remain committed to our long-term capital allocation priorities of investing in organic growth initiatives, pursuing strategic acquisitions and funding cash returns to shareholders.
On that note, we paid a dividend of $0.08 per share during the fourth quarter, amounting to $4.9 million, and we recently announced that we are increasing the dividend by 13% to $0.09 per share in the first quarter.
That concludes my comments.
And now I would now like to turn back the call to Jennifer for our outlook for 2021.
Looking forward, we remain focused on delivering strong results while continuing to execute on our long-term strategy.
Our strong balance sheet provides opportunities for us to drive both our organic growth initiatives and pursue additional strategic acquisitions like OSW.
Over the last several years, we have transformed our end market exposure and implemented a revenue-diversification strategy that has enabled us to adjust as needed to market conditions.
Our aftermarket business has grown to represent about 1/4 of ESG's revenues, and we see additional opportunities to grow that business.
For example, late in 2020, we accelerated an initiative at one of our FS solution centers to expand our parts offerings by in-sourcing manufacturing of certain parts that we had previously procured from third parties.
We have also worked to develop strong contingency planning protocols, continue our journey of 80/20 and invest for growth.
We are closely monitoring the potential actions that the new administration may take to boost the economy, including potential federal stimulus packages that may be provided at the state or local level to aid municipalities whose budgets have been impacted by the pandemic and a potential infrastructure bill.
While there's still uncertainty as to the magnitude and timing of any federal stimulus package, I would like to provide a framework of what we know and what we believe the potential benefit to Federal Signal could be.
The initial proposal under the American Rescue Plan, COVID relief package call for approximately $1.9 trillion of economic stimulus with initial projections of approximately $350 billion going to state, local and territorial governments with the goal of keeping frontline workers employed, distributing the vaccine, increasing testing, reopening schools and maintaining essential services.
As the provider of equipment used for these essential services like sewer cleaning and street sweeping, Federal Signal is well positioned to benefit from additional aid that may be provided to state and local sources for these purposes.
We have recently completed our annual market planning process with our dealer partners, and they remain cautiously optimistic about market conditions in 2021, noting that both corporate and sales tax collections appeared to have held up better than originally anticipated, which should add stability to their revenue sources.
Although the dollar amounts that have been cited in the potential infrastructure bill are uncertain, it is clear that the U.S. is in desperate need of renewed investment in its infrastructure.
An estimated 47,000 bridges and 40% of our highways are in need of replacement, whereas entire sewer systems have exceeded their useful life cycles.
We expect that a long-term infrastructure bill will provide visibility for project planning, I could see capital equipment demand increase in such areas as roads, bridges, broadband, clean energy and public transportation build-outs.
We anticipate that this would provide benefits for the majority of our product offerings, including equipment sales and rentals of dump truck and trailers, safe digging trucks, road marking equipment, sewer cleaners and street sweepers.
Within our industrial markets, we continue to be bullish about our prospects with respect to our safe digging initiative and are monitoring further developments on the regulatory front.
We are also optimistic that the recent increase in oil prices could generate increased demand for the sale and rental of our industrial products.
We have positioned Federal Signal in a manner in which we fully participate in the post-pandemic recovery by increasing capacity within our facilities, reducing lead times to a level where we can better respond to customer needs, investing in new product development and gaining market share.
On the flip side, we are anticipating that some of the cost savings that resulted from actions taken in 2020 are expected to return in 2021, representing an estimated year-over-year expense headwind of approximately $8 million.
Like many companies, we have noted an increase in material costs over the last several weeks, and we are responding accordingly.
We are also monitoring the availability of chassis at certain locations linked to a nationwide shortage in semiconductors and expect to be proactive where appropriate, so that any supply chain disruption is minimized.
This could have more of an impact on TBEI.
As we get more visibility into the year, including the timing of widely available vaccine, we are committed to increasing our target EBITDA margin range.
On the M&A front, our deal pipeline remains active and some of the logistical challenges that were experienced in 2020 have started to ease a little.
We continue to believe that M&A will be an important part of our future growth.
Now turning to our outlook.
We are encouraged by conditions in our end markets and the ongoing execution against our strategic initiatives and are monitoring the potential for additional tailwinds.
As a reminder, seasonal effects typically result in our first quarter earnings being lower than subsequent quarters.
Mainly due to the pandemic, 2020 was a bit of anomaly in that regard.
We started off 2020 with record production levels during the first quarter at our largest facility and minimal impact from the pandemic, which did not meaningfully impact our operations until the last few weeks in March.
In the first quarter of 2020, we also recognized a benefit of approximately $0.02 per share associated with fair value adjustments to certain reserves.
As a result, in 2020, our first quarter represented a higher share of our full year earnings than we typically would expect.
While we are very encouraged with recent order trends, including the sequential quarterly order improvements that we experienced since the second quarter of 2020, our operations are still being impacted by disruptions associated with the pandemic.
These factors range from operational inefficiencies related to employee absenteeism, to the impact of the recent lockdown measures that have been put in place across much of Canada, most notably in Ontario.
In addition, several of our businesses have been impacted by the adverse weather conditions that much of the U.S. has been experiencing in recent weeks.
For example, our three facilities in the Houston area and our dunk truck facilities in Alabama and Mississippi had to be closed for several days due to the harsh weather conditions.
Fortunately, we did not experience any significant damage to our operations, but we did lose several days of production.
Considering the factors impacting the first quarter, we currently anticipate the second half of 2021 to be stronger than the first half.
There still remains uncertainties surrounding COVID, commodity costs and chassis availability.
Yet despite this, we are expecting a strong year in 2021 with top line growth, double-digit improvement in pre-tax earnings and adjusted earnings per share of between $1.73 and $1.85. | compname reports q3 adjusted earnings per share $0.48.
compname reports third quarter results including 32% increase in orders and record backlog; signs definitive agreement to acquire deist industries, inc..
q3 adjusted earnings per share $0.48.
q3 gaap earnings per share $0.47.
q3 sales rose 7 percent to $298 million.
sees fy adjusted earnings per share $1.68 to $1.78. | 0 |
Joining me on the call from PPG are Michael McGarry, Chairman and Chief Executive Officer; and Vince Morales, Senior Vice President and Chief Financial Officer.
Our comments relate to the financial information released after US equity markets closed on Wednesday, October 20, 2021.
Following management's perspective on the company's results for the quarter, we will move to a Q&A session.
Now let me introduce PPG Chairman and CEO, Michael McGarry.
I will provide some results to supplement the detailed financial results we released last evening.
For the third quarter, we achieved record net sales of nearly $4.4 billion and our adjusted earnings per diluted share from continuing operations were $1.69.
As we communicated in early September, our sales and adjusted earnings per share were significantly impacted by worsening supply chain disruptions and increasing raw material cost inflation.
Our raw material costs in the quarter inflated by about 25% year-over-year.
For context, this is about 3 times higher than any previous coatings raw material inflation peak in recent history.
We're also experiencing elevated logistics costs and are incurring increased manufacturing costs due to the sporadic nature of these outages.
Commercially, we have taken significant mitigation efforts due to the high level inflation through rapid implementation of structural selling price increases.
In aggregate, our selling price realization is about 6%, with more than 6% price realization in our Industrial reporting segment.
Our price capture pace is much faster than previous inflationary cycles and we have further pricing initiatives underway.
Coming into the quarter, we expect that the supply chain and customer production disruptions would impact our sales by about $150 million.
However, this actual impact was more than $350 million.
Additionally, this prevented us from completely fulfilling our strong order books and further depleted retail inventory in many of our end-use markets.
We expect much of this demand will be deferred into 2022.
And in particular, these current conditions will elongate the global automotive OEM recovery.
To put the automotive OEM situation in perspective, US dealer inventories had record historic lows in the mid-20-day range.
And in 2021, global production in this industry is expected to be about 20% below prior peak levels.
Despite the current challenges, several of our businesses, including our Automotive Refinish, Protective & Marine, and Packaging Coatings delivered strong above market performance, driven by our strong service capabilities and advantaged technology.
Our PPG-Comex business achieved record third quarter sales with year-over-year organic sales growth of more than 10%.
In addition, our US Architectural Coatings business delivered about 10% same-store sales growth as we continue to expand our customer base with many new wins and increase our digital sales as a percentage of our total sales base.
More generally, we continue to experience improving trade painter demand globally and architectural DIY coatings sales returned closer to 2019 levels after notable growth last year driven by the stay-at-home impacts.
We remain focused on cost management, which is evidenced by our SG&A as a percent of sales being 100 basis points lower than the third quarter 2020.
This is being supported by our ongoing execution on our structural cost savings programs as we delivered an incremental $35 million of savings in the third quarter.
We continue to target and on track for a full year 2021 savings of about $135 million.
In the quarter, we also continued to make good progress integrating our five recent acquisitions contributing to our overall earnings for the quarter.
Our two larger acquisitions, Tikkurila and Ennis-Flint delivered good top line results despite the challenging supply constraints.
We continue to expect them to deliver an aggregate of $25 million of synergies for the full year of 2021.
We once again delivered strong operating cash flow during the quarter and had about $1.3 billion of cash and cash equivalents at the quarter end, including sequential reduction of our net debt by about $400 million.
This was supported by a continuing strong working capital management as we maintain our positive step change improvement achieved last year and are at multiyear lows on a percentage of sales basis.
While we will continue to evaluate accretive deals in our M&A pipeline, we are initiating stock repurchases in the fourth quarter and will continue to focus on debt reduction.
As a reminder, based on the seasonality of our businesses, the fourth quarter is typically our strongest cash generation quarter of the year.
Also during the quarter, in support of further enhancing our ESG program, we were happy to announce an agreement with Constellation Energy to power our Carrollton, Texas manufacturing facility with 100% renewable solar energy.
We are also working on our very first ever diversity report and developing science-based climate targets, both of which we will communicate in 2022.
Equally important is PPG's market-leading sustainable products continue to enable our customers to meet their respective sustainability goals.
We will continue to provide updates on these initiatives on subsequent quarters.
In addition, I'm extremely pleased to announce that yesterday, PPG earned three R&D 100 awards for 2021.
The R&D World Magazine honors the 100 most innovative technologies and services over the past year with the R&D 100 awards.
Even more importantly, two of the three innovations that we were recognized are growth initiatives in electric vehicles, including BFP SC battery fire protection coating, which protects the vehicle occupants from fire and mitigates thermal runaway events plus Envirocron Extreme Protection thermally conductive dielectric powder for battery packs, providing dielectric protection and thermal conductivity.
Our dielectric powder has already been commercialized by a leading EV maker and our battery fire protection product will launch in 2022 by one of the world's largest car makers.
Moving to our outlook.
We are continuing to evidence solid demand in aggregate.
Many of our customers continue to indicate that their order books are at high levels and have lower than normal inventory levels.
In the near term, we anticipate only modest improvements to the supply disruptions that we've been experiencing.
Our estimate is that our sales are expected to be unfavorably impacted by about $250 million to $300 million in the fourth quarter, both for the semiconductor chip shortage issue and chronic supplier operational capabilities.
Recent production curtailments in China may add incremental pressures to availability and inflation, and we expect our inflation to approach 30% compared to the fourth quarter of 2020.
As a result, all our businesses are securing additional selling price increases, and now we expect to fully offset raw material cost inflation in the early part of 2022.
We continue to strongly believe there is sufficient capacity available in our supply chain as operating conditions continue to normalize.
Absent any further disruption, we expect supply chains to operate more normally by year's end, supported by normal seasonality trends.
To provide further assistance and assurance of more consistent supply going forward, we are rapidly qualifying additional regional and global commodity suppliers across a variety of our key raw material procurement groupings.
We expect these increases in product availability, coupled with continued improvement in the existing supply chain, will provide ample supply beginning early in 2022.
While the current environment remains difficult to predict, I remain very optimistic about our specific growth catalysts for 2022.
Specifically, we expect continued recovery in automotive refinish, OEM and aerospace coatings, which collectively account for about 40% of our pre-pandemic sales where we have broad global businesses supported by advantaged technology.
We expect a measurable rebuild of inventories in many of our end-use markets.
Specific to PPG is year-over-year earnings growth in 2022 due to further synergy capture from our recent acquisitions.
Their dedication and commitment to making it happen are reasons why our customers, our communities and our many stakeholders can count on us and protect and beautify the world. | sees fy adjusted earnings per share $7.40 to $7.60.
record q2 net sales of nearly $4.4 billion, about 45% higher than prior year.
qtrly adjusted earnings per share of $1.94.
expect that aggregate input and logistics costs will be sequentially higher in q3, compared to q2.
expect strong sales growth later this year and into next year. | 0 |
I'm joined on the call today by our Chairman and Chief Executive Officer, Ron Kruszewski; our Co-Presidents, Victor Nesi and Jim Zemlyak; and our Chief Financial Officer, Jim Marischen.
This audiocast is copyrighted material of Stifel Financial Corp.
and may not be duplicated, reproduced or rebroadcast without the consent of Stifel Financial.
Our value as a company is and always will be our people.
So let me give some highlights of our quarter, have Jim Marischen review our balance sheet and expenses, and I will wrap up with our outlook before Q&A.
As you can see on Slide one, the first quarter of 2021 was another record for Stifel as we continue to benefit from our ongoing investment in our firm as well as the strength of the operating environment.
Our revenue in the first quarter was a record of nearly $1.14 billion, an increase of 24% and surpassed last quarter's record by more than $75 million, driven by record revenue in both our Global Wealth Management and Institutional Groups.
The growth in revenue and our focus on expense management resulted in non-GAAP earnings per share of $1.50, which was up 88% year-on-year and represented the second highest quarterly earnings per share in our history.
The investments that we've made in our business have enabled us to participate to a far greater magnitude than we would have had we not invested in the business.
Our record results were driven by our past recruiting success to growth in our balance sheet and robust capital markets.
Other highlights for the quarter.
Pretax margins of more than 21%, annualized return on tangible common equity of over 28% and tangible book value, which increased 32%.
Turning to the next slide.
As I stated, our first quarter net revenue increased 24% to a record surpassing $1.1 billion.
Compensation as a percentage of net revenue came in at 60.9%, which was just above the high end of our annual range, yet is consistent with our policy of accruing for compensation conservatively early in the year.
Our operating expense ratio was about 18%.
But excluding credit provision and investment banking gross-ups, our operating expense ratio totaled approximately 16%.
This came in below our full year guidance due to the strength of our revenue and strong expense management.
As the economic outlook improves, we, like other banks, have updated our economic models.
This, coupled with strong credit performance in our loan portfolio, resulted in a relief of $5 million of our credit provisions during the quarter.
As you recall, our provision expense last year was driven by the adoption of CECL, and more specifically, the negative economic outlook that was a key input into the calculation.
So neutralizing the impact of credit provisions, Stifel's pre-tax pre-provision income totaled $238 million, which increased 61% from the first quarter of 2020.
Moving on to our segment results and starting with Global Wealth Management.
First quarter revenue totaled a record $631 million, up 8% year-on-year.
While this increase is impressive, I believe it understates the strength of our business as it includes a nearly $24 million decline in net interest income at our bank subsidiary.
Excluding the impact of lower bank NII, our private client business improved 13%, driven by the strength in asset management as well as growth in brokerage revenue, as we benefited from enhanced client activity levels and continued success in recruiting.
We again finished the quarter with record client asset levels.
Total assets under administration of nearly $380 billion increased $21 billion from the prior quarter.
Additionally, fee-based assets of $138 billion rose 7% sequentially, which should drive further growth in the asset management and service fees line item in the second quarter of this year.
The next slide highlights the strength of our recruiting and the growth drivers of our platform.
We had a solid quarter in terms of advisor additions as we added 15 advisors with total trailing 12-month production of $13 million.
While this was fewer advisors than we've typically recruited in recent quarters, I'd remind you that recruiting is cyclical and is best examined over a longer time frame.
Since the beginning of 2019, we've added 300 financial advisors with cumulative production of approximately $233 million.
As I look at the remainder of the year, our recruiting pipelines remain at robust levels and I anticipate another strong year.
In the first quarter, we announced that we were rebranding Century Securities, which we've operated since 1990 as Stifel Independent Advisors.
Given the growth in this industry channel and the fact that we already have the legal and supervised restructure in place plus an outstanding platform, we believe that our overall recruiting efforts will be enhanced by our renewed focus on this market channel.
Moving on to our Institutional Group.
This quarter represented our second consecutive record quarter for Institutional Group.
Net revenue totaled $506 million, which was up 52% from the prior year and surpassed last quarter's record by approximately $15 million.
Our performance was strong across all of our major revenue lines as our business continues to benefit from strong market activity, the recent investments in our business and contributions from both Canada and Europe.
We generated a 23% pre-tax operating margin, which was up more than 1,000 basis points from the same period a year ago.
Looking at the revenue components of our institutional business, I would note that our equities business totaled $226 million, up 74%; while fixed income totaled $146 million, which increased 10% from the comparable first quarter of 2020.
With respect to our trading businesses, we generated record equity brokerage revenue in the first quarter, surpassing our prior record set a year ago by 13% as strong activity levels continued and trading gains increased.
Additionally, I'd note that our electronic brokerage businesses, which include our ATS and algo products are now fully launched, and we would expect to see increased contributions from these products as the year progresses.
Fixed income brokerage revenue in the quarter was up 12% sequentially and represented our third highest quarterly revenue, trailing only the first and second quarter of last year.
Similar to my comments last quarter, our fixed income trading continues to be driven by increased activity across the board as well as non-CUSIP businesses.
On Slide seven, investment banking revenue of $339 million was our second consecutive quarterly record, surpassing last quarter's record by a few million dollars, driven primarily by record capital raising revenue.
Equity underwriting revenue was standout in the quarter, coming in at $160 million and surpassing the record we set last quarter by nearly $50 million.
This is a good example of how, by investing in our business over the last several years, we've become a more significant player as we were a book runner on more than 50% of the IPOs we participated in the quarter.
Our strongest verticals were healthcare, technology, financials and consumers.
As widely reported, there was an incredible amount of SPAC-related activity within our industry during the first quarter.
However, SPACs accounted for a little more than 15% of our equity underwriting revenue in the quarter.
So whether the recent slowdown in SPAC activity represents a pause or a saturation point, we are confident about the strength of our more traditional pipeline.
While our equity business was quite robust, we also recorded great results in fixed income.
Our fixed income underwriting revenue of $49 million was a record for the first quarter and was up 43% year-on-year.
Our municipal finance business rebounded from challenging market conditions in the first quarter of 2020 as we lead manage 236 municipal issues, which represented an increase of 42%.
While we are off to a strong start for the year, we believe that if Congress were to pass an infrastructure bill, we would see additional tailwinds to our public finance business.
We also continue to see solid contributions from our growing corporate debt issuance business.
Regarding our advisory business, revenue of $130 million represented our third highest quarterly revenue and a record by almost 25% for any first quarter.
In terms of verticals, we benefited from the expected pickup in financials and continue to see broad-based results from technology, consumer and healthcare.
Looking forward to our second quarter, based upon anticipated closings of some larger previously announced transactions and of course, barring a substantial change in the market or the economy, we expect to see a solid increase in our advisory revenue.
In terms of our overall pipelines, they are up double digits compared to where we began the year, and I remain very optimistic for our investment banking business in 2021.
Let me begin by making a few comments regarding our GAAP earnings.
In the quarter, we generated the second highest GAAP earnings per share in our history at $1.40, which was only surpassed by the results generated last quarter.
We again generated strong returns on equity with an ROE of 18% and ROTCE of nearly 27%.
Similar to last quarter, the strong GAAP earnings resulted in increases in our book value and tangible book value.
This was accomplished while increasing assets by $1.5 billion, resuming our open market share buyback program and given the seasonal impact of stock compensation on equity in the first quarter.
And now let's turn to net interest income.
For the quarter, net interest income totaled $113 million, which was up $8 million sequentially.
Our firmwide net interest margin increased to 200 basis points, and our bank's net interest margin improved to 240 basis points.
Both NII and NIM benefited from the remix of bank assets out of our securities portfolio and into our loan portfolio as well as growth in our average interest-earning asset levels by 6% during the quarter.
I would also note that we did see some more episodic loan fees earned during the quarter that contributed to NII.
We expect this contribution to decline somewhat in the second quarter, but the loan and securities growth that occurred in the first quarter will more than offset this decline.
As such, in terms of the second quarter, we expect net interest income to be in a range of $110 million to $120 million and with a similar NIM to the first quarter.
Further, while we have produced a stabilized NIM over the last few quarters, we continue to be very asset sensitive.
As an update to what we discussed last quarter, assuming a 100 basis point increase in rates across the curve and a 30% deposit beta, we would generate an additional $150 million to $175 million of pre-tax earnings.
I would note that our deposit betas have been and will continue to be driven by the competitive environment.
But for this analysis, we used a 30% deposit beta.
This represents an estimate from what actually happened to Stifel over the entire last rate cycle, but I would highlight that beta was very much weighted to the latter portion of the cycle.
Moving on to the next slide.
I'll go into more detail on the bank's loan and investment portfolios.
We ended the period with total net loans of $12.2 billion, up approximately $1 billion from the prior quarter.
We saw growth in both the consumer and commercial portfolios.
Our mortgage portfolio increased by $200 million sequentially, and as we continue to see demand for residential loans from our wealth management clients despite the increase in interest rates during the quarter.
Our securities-based loan portfolio increased by approximately $170 million.
Growth in these loans continues to be strong as FA recruiting momentum continues to drive increased loan balances.
Our commercial portfolio accounts for 39% of our total loan portfolio and is primarily comprised of C&I loans, which increased by 15% during the quarter.
Our portfolio is well diversified with our highest sector exposure in fund banking and PPP loans, each representing approximately 5% of the portfolio.
PPP loans accounted for more than $400 million of C&I growth, while fund banking accounted for $260 million.
But given its size, we felt it made sense to break this out as an individual line item.
We will look to continue to be active in the fund banking space as we view this as an attractive risk-adjusted return.
Moving to the investment portfolio, which continues to be dominated by AAA and AA CLOs.
We've not seen any material change in the underlying credit subordination provided by these securities and continue to be pleased with their performance.
This can be seen in the fair value of the portfolio, which was at an average price of 99.9% of amortized cost at quarter end.
We increased our CLO holdings by 7% from last quarter in anticipation of some payoffs expected to occur in the second quarter.
Turning to the allowance.
We had a $5 million reversal of our allowance through a negative provision expense as additional reserves tied to loan growth were more than offset by the improved economic scenario in our CECL calculation.
As a result of the reserve release and the composition of our loan growth during the quarter, our ratio of allowance to total loans declined to 118 basis points, excluding PPP loans.
It is important to look at the level of reserves between our consumer and commercial portfolios given their relative levels of inherent risk.
At quarter end, the consumer allowance to total loans was 31 basis points, while the commercial portfolio was at 174 basis points.
We also continue to see strong credit metrics with nonperforming assets and nonperforming loans remaining at seven basis points.
Further, we did take the opportunity to derisk from our commercial book by selling or reducing positions by $83 million on five C&I loans, which resulted in less than $1 million of charge-offs.
This equates to a roughly 1% discount to bar.
All five of these loans were in sectors more impacted by COVID and carried reserves well in excess of where we sold them.
Moving on to capital and liquidity.
Our risk base and leverage capital ratios came in at 19.4% and 11.5%.
The decline in our capital ratios was driven by balance sheet growth and the $68 million impact in equity to net settle taxes on our issues in the first quarter.
This was offset by the strength of our retained earnings.
We also resumed our open market share repurchase program late in the first quarter.
We repurchased approximately 195,000 shares at an average price of $61.79 per share.
Our book value per share increased to $35.96, up modestly from the prior quarter as the impact of net income on equity was offset by the aforementioned vesting of restricted stock.
Our tangible book value per share increased to $23.93.
We continue to feel good about our financial position as our liquidity remains strong.
The total third-party cash REIT program increased by approximately 5% during the quarter, which was used to fund the aforementioned bank growth.
I would also highlight that S&P recently improved Stifel Financial's outlook to positive based on our strong operating results and overall financial position.
On the next slide, we go through expenses.
In the first quarter, our pre-tax margin improved 730 basis points year-on-year to more than 21%.
The increase was the result of strong revenue growth, lower compensation accruals and our continued expense discipline.
Our comp-to-revenue ratio of 60.9% was down 160 basis points from the prior year.
That ratio came in above our full year range of 58.5% to 60.5% and is consistent with our strategy to be conservative in our compensation accruals early in the year given the transactional nature of a large portion of our business.
That said, assuming market conditions stay strong, we anticipate that our conservative accruals early in the year could lead to added flexibility in the back half of the year.
Noncomp opex, excluding the credit loss provision and expenses related to investment banking transactions, totaled approximately $184 million and represented approximately 16% of net revenue.
This was also below our recent guidance, primarily due to stronger-than-expected revenue.
The effective tax rate during the quarter came in at 24.1%, which was driven by the impact of the excess tax benefit related to stock compensation.
Absent any other discrete items, we would expect to see the effective rate to be in the 25% to 26% range in the second and third quarters as we have limited RSU vesting that occurs before the fourth quarter.
In terms of our share count, our average fully diluted share count was up 1% primarily as a result of the increase in our share price.
Absent any assumption for additional share repurchases and assuming a stable stock price, we'd expect the second quarter fully diluted average share count to total 118.7 million shares.
As I said at the beginning of the call, this year is off to a very strong start.
Looking back at our guidance for 2021, many of the expectations for economic and market conditions that we then highlighted have not only played out as we expected but in some cases, has happened much faster.
Our business is benefiting from past recruiting success, higher equity markets, increased levels of interest-bearing assets, robust trading activity for debt and equity, record equity issuance, solid credit metrics and a strong investment banking pipeline.
As vaccinations increase and the economy continues its recovery, we continue to expect a very strong operating environment for the remainder of 2021.
Additionally, looking forward to our second quarter, for many of the same factors already cited, our business is off to a good start.
With respect to our full year revenue guidance of $3.8 billion to $4 billion, based on what I'm seeing in our outlook, we are tracking above the high end of our full year guidance.
And if favorable market conditions continue, we see a path to exceed our full year revenue guidance.
With that said, I'll make some comments about what we're seeing so far in the second quarter and our expectations.
Global Wealth Management is off to a strong start.
Our asset management fees will benefit from the 7% increase in fee-based assets last quarter.
And the midpoint of our NII guidance is above first quarter levels, and we continue to see client engagement.
For Institutional Group, our investment banking pipelines remain at robust levels.
While timing will always play a factor in our investment banking revenue in any given quarter, we'd expect to see a greater contribution from our advisory business given the expectation for increased M&A, particularly in financials.
Additionally, as I look forward, we have a number of large transactions that are scheduled to close, and this increases my confidence for the remainder of the year.
In terms of underwriting, activity levels so far in the quarter have pulled back from the torrid pace experienced in the first quarter but still remains strong.
Moving on to expenses.
Our full year compensation guidance remains in place, and we would expect to see the typical sequential decline in the compensation ratio in the second quarter, assuming market conditions remain stable.
Our noncomp operating expenses should be similar to those in the first quarter as we continue to see relatively modest increases in travel and entertainment expenses.
In terms of capital deployment, as always, we will continue to focus on risk-adjusted returns.
In the first quarter, we took advantage of good credit conditions to deploy capital into growing our balance sheet.
The $1.5 billion in balance sheet increase represents 75% of our full year guidance.
If we continue to see similar credit conditions, we could grow our balance sheet more than our initial guidance as we see solid returns from this use of capital.
We will continue to repurchase shares to offset dilution, but otherwise, we're likely to continue to be opportunistic with our repurchase activity.
Lastly, we will continue to look at acquisition opportunities and investments into our business as Stifel is and always has been a growth company and investing in our franchise has historically generated strong returns.
So let me sum all this up by saying our business is in a great position to not only capitalize on the current strength of the operating environment but has proven to have the flexibility to successfully adapt to changes that could occur. | q1 non-gaap earnings per share $1.50.
q1 earnings per share $1.40.
q1 revenue rose 24.3 percent to $1.1 billion. | 1 |
This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2020 fourth quarter earnings call for the Boston Beer Company.
Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.
As the COVID-19 panic slowly winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to meet consumer demand.
I'm very proud of the passion, creativity, and commitment to community that our company has demonstrated during this pandemic.
We achieved depletions growth of 26% in the fourth quarter and 37% for the full year.
We remain positive about the future growth of our diversified brand portfolio and we believe that our depletions growth is attributable to our key innovations, the quality of our products, and our strong brands.
We see significant distribution and volume growth opportunities in 2021 for our Truly, Twisted Tea, and Dogfish Head brands, which remain our top priorities for 2021.
Early in 2021, we launched Truly Iced Tea Hard Seltzer, which combines refreshing hard seltzer with the real brewed tea and fruit flavor.
The launch has been well received by distributors, retailers and drinkers, but it is too early to tell if it will be successful.
We are working hard to further develop our brand support and messaging for our Samuel Adams and Angry Orchard brands to position them for long-term sustainable growth, in the face of the difficult on-premise environment.
We are excited about the response to the introduction in early 2021 of several new beers, Samuel Adams Wicked Hazy, Samuel Adams Wicked Easy and Samuel Adams Just the Haze, our first non-alcoholic beer, as well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign.
We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth.
I will now pass over to Dave for a more detailed overview of our business.
Before I review our business results, I'll start with the usual disclaimer.
Now, let me share a deeper look at our business performance.
Our depletions growth in the fourth quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Samuel Adams, Angry Orchard and Dogfish Head brands.
The growth of the Truly brand, led by Truly Lemonade Hard Seltzer, continues to be very strong and well ahead of hard seltzer category growth.
Truly Lemonade was the most incremental new product in the entire beer industry in measured off-premise channels in 2020.
The Truly brand overall generated triple-digit volume growth in 2020 and grew its velocity and its market share sequentially despite other national, regional and local hard seltzer brands entering the category.
In 2020, Truly increased its market share in measured off-premise channels from 22 points to 26 points and was the only national hard seltzer, not introduced in 2020, to grow share.
There remain many opportunities to expand package, channel and geographic distribution and we expect the Truly brand to continue to lead the growth of the business as it has come to stand for a great-tasting, refreshing, pure-play hard seltzer brand.
In early 2021, we launched Truly Iced Tea Hard Seltzer and, while it's still in the early stages, we're encouraged by the support our wholesalers have provided, the trial we are generating as a result of the brand's established equity, and the social media response from consumers.
We will continue to invest heavily in the broader Truly brand and work to improve our position in the hard seltzer category, as competition continues to increase.
Our Twisted Tea brand has benefited greatly from increased at-home consumption and continues to generate accelerating double-digit volume growth, even as new entrants have been introduced and competition has increased.
Our Samuel Adams, Angry Orchard and Dogfish Head brands have been most negatively impacted by COVID-19 and the related on-premise closures.
For 2021, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly and Twisted Tea brands.
We are expecting all of our brands to grow in 2021 and for the growth rate of our operating expenses to be below our top line growth rate, delivering leverage to our operating income.
During the fourth quarter, as we increased our brand spend, we also made investments in our supply chain to ensure we are prepared for increased competitive activity in the hard seltzer category.
We have invested to increase our can and automated variety pack capacity, but these capacity increases keep on getting eclipsed by our depletions growth, resulting in higher than expected usage of third-party breweries.
We will continue to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through this combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased usage of third-party breweries has a negative impact on our gross margins.
We have begun a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently.
We expect to complete this transformation over the next two to three years.
While we anticipate the program to start delivering margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until the volume growth stabilizes.
While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovations and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth, in line with the opportunities that we see.
Based on information in hand, year-to-date depletions reported to the company through the 6 weeks ended February 6, 2021 are estimated to increase approximately 53% from the comparable weeks in 2020.
Now, Frank will provide the financial details.
For the fourth quarter, the reported net income of $32.8 million or $2.64 per diluted share, an increase of $1.52 per diluted share or 136% from the fourth quarter of last year.
This increase was primarily due to increased net revenue, partially offset by lower gross margins and higher operating expenses.
Shipment volume was approximately 1.94 million barrels, a 54% increase from the fourth quarter of 2019.
Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of December 26, 2020, when compared to December 28, 2019.
The Company believes distributor inventory as of December 26, 2020 averaged approximately 5 weeks on hand and was at an appropriate level, based on supply chain capacity constraints and inventory requirements to support the forecasted growth.
Our fourth quarter 2020 gross margin of 46.9% decreased from the 47.4% margin realized in the fourth quarter of last year, primarily as a result of higher processing costs due to increased production at third party breweries, partially offset by cost saving initiatives at Company-owned breweries and price increases.
Fourth quarter advertising, promotional and selling expenses increased $48.1 million from the fourth quarter of 2019, primarily due to increased investments in media and production, increased salaries and benefits costs and increased freight to distributors because of higher volumes.
General and administrative expenses were flat from the fourth quarter of 2019, primarily due to non-recurring Dogfish Head transaction-related expenses of $2.1 million incurred in the comparable 13-week period of 2019, partially offset by increases in salaries and benefits costs.
Our full-year net income per diluted share of $15.53 increased $6.37 or 70% compared to the prior year.
This increase was primarily due to increased revenue, partially offset by lower gross margins and increases in advertising, promotional and selling expenses.
Our full-year 2020 shipment volume was approximately 7.37 million barrels, a 38.8% increase from the prior year.
Looking forward to 2021.
Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $20 and $24, but actual results could vary significantly from this target.
This projection excludes the impact of ASU 2016-09.
We are currently planning increases in shipments and depletions of between 35% and 45%.
We're targeting national price increases per barrel of between 1% and 2%.
Full year 2021 gross margins are currently expected to be between 45% and 47%, a decrease from the previously communicated estimate of between 46% and 48%.
We plan increased investments in advertising promotional and selling expenses of between $120 million and $140 million for the full year 2021, a decrease from the previously communicated estimate of between $130 million and $150 million, not including any increases in freight costs for the shipment of products to our distributors.
We estimate our full-year 2021 effective tax rate to be approximately 26.5%, excluding the impact of ASU 2016-09.
This effective tax rate also excludes any potential future changes to current federal income tax rates and regulations.
We are not able to provide forward guidance on the impact of ASU 2016-09 will have on our 2021 financial statements and full-year effective tax rate, as this will mainly depend upon unpredictable future events including the timing and value realized upon exercise of stock options versus the fair value of those options were granted.
We are continuing to evaluate 2021 capital expenditures and currently estimate investments of between $300 million and $400 million.
The capital will be mostly spent on continued investments in capacity and efficiency improvements at our breweries.
Similar to the last couple of calls, Dave will be the MC on our side and coordinate the answers when needed since we are in different locations. | compname reports q4 earnings per share $2.64.
q4 earnings per share $2.64. | 1 |
This is Matt Eichmann.
I'm joined by Ole Rosgaard, Greif's president and chief executive officer; Larry Hilsheimer, Greif's chief financial officer; and Matt Lady, Greif's vice president of corporate development and investor relations.
We will take questions at the end of today's call.
In accordance with regulation fair disclosure, please ask questions regarding issues you consider important because we're prohibited from discussing material, nonpublic information with you on an individual basis.
Actual results could differ materially from those discussed.
Today is my first quarterly earnings call as Greif's president and chief executive officer.
And I'm excited to be with you.
My plan today is: to review the state of our business; to briefly share our new Build to Last strategy and its key components; to introduce Greif's new executive leadership team; and finally, to engage meaningfully in a Q&A session.
Our fiscal 2022 is off to an outstanding start.
We delivered record financial results in the first quarter despite a challenging operating environment, complicated by the pandemic, supply chain disruptions, and inflationary pressures beyond our control.
We also announced the pending divestiture of our 50% ownership in the flexible products and service business for outstanding value, solidified our net leverage position, and increased our profit expectations for fiscal 2022.
These accomplishments results from disciplined operational execution and the commitment of our global Greif team.
I would like to briefly share our new Build to Last strategy review.
I will summarize the strategy's high points today as we will dive much deeper into it at our investor day on June 23 and review our continued growth plans.
The Build To Last strategy consists of four missions: creating thriving communities, delivering legendary customer service, protecting our future, and ensuring financial stream.
Mission 1, creating thriving communities.
It's about achieving zero-harm environments and creating an even more engaged, diverse, and inclusive workplace in the future.
Thriving communities will help us win in the war for talent.
Our second mission, delivering legendary customer service involves finding ways to serve customers better each day.
This mission includes implementing new technologies that will increase our agility and help us deliver faster and more comprehensive customer solutions.
Legendary customer service, combined with Greif's unmatched global portfolio and product offerings, forms a powerful business competitive advantage.
Mission 3, protecting our future.
It's about embracing a low-carbon world and further enhancing our focus on product circularity.
Greif is already a sustainability leader today, evidenced by our recently awarded fourth consecutive EcoVadis Gold rating.
But we will take additional steps to mitigate risks associated with climate changes and capture opportunities related to product circularity and sustainable solutions for our customers.
Finally, our fourth mission.
Ensuring financial strength entails generating high-margin EBITDA growth to deliver a growing sustainable profit and cash flow stream that enhances shareholder value creation.
The Build to Last strategy is founded upon our bedrock, the Greif Way, which has guided our business for many years and remains the focal point of our culture.
I look forward to sharing more about Build To Last with you at our investor day.
I'm fortunate to be surrounded by an exceptional team charged with helping to activate the Build To Last brand.
These extraordinary service leaders possess extensive industry knowledge and a demonstrated commitment to disciplined operational execution and customer service excellence.
Their rich and diverse set of skills and experiences along with proven records of performance will drive even greater success at Greif in the future.
I hope you will join us at investor day in June to interact with them.
Finally, before jumping into our results, I would like to announce some changes to our investor relations team.
Matt Eichmann, who you know well, has been promoted to chief marketing and sustainability officer effective March 1.
Matt has done an outstanding job representing Greif to the investment community the last six years, and I'm excited to have him take on this exciting leadership opportunity.
Matt Lady, who currently leads our corporate development team, has added the role of Investor Relations to these responsibilities.
Matt Lady has extensive buy-side experiences and has been instrumental in executing Greif's acquisition strategy and portfolio changes since joining our team almost four years ago.
I'm confident that Matt Lady will be a strong leader in the Investor Relations role and will build upon Matt Eichmann's efforts to improve investor communications, share insights on our business and financial condition, and ensure that leaders across Greif understand what our investors and owners expect of us.
Global Industrial Packaging delivered an outstanding first quarter results.
Global large plastic drums and IBC volumes grew by roughly 8% and 11% per day, respectively, versus the prior-year quarter.
Global steel drum volume fell by 4% per day versus the prior year due to customer supply chain and labor issues despite strong underlying demand.
Similar to quarter 4, the biggest volume shortfall was in APAC, reflective of our decision to implement strategic pricing actions and supply chain disruptions that negatively impacted our customers' operations.
Generally speaking, our end markets remain healthy.
Customers report solid order backlogs and strong underlying demand, but continue to face external supply chain disruptions and labor challenges.
We also hear that our customers' customers have depleted inventory levels, which should eventually translate to a tailwind for Greif.
GIP's generally stronger volumes and higher average selling prices resulted in significantly higher segment sales year-over-year.
The business' first quarter adjusted EBITDA rose by roughly $35 million due to higher sales, partially offset by higher raw material costs.
During the quarter, we continued to experience favorable price cost conditions.
Given timing, inventory costs and the structure of our price adjustment mechanisms, we anticipate GIP's price/cost benefit to deteriorate as we move later into the fiscal year.
Finally, we received several questions about our Ukrainian and Russian businesses that I want to address directly.
This is an evolving situation that we continue to monitor and assess continuously with a dedicated task force.
We are appalled by the ruthless aggression we have witnessed in the Ukraine over the last several days.
We operate one flexibles plant in the country that has been temporarily closed.
Our primary focus has been and will continue to be the safety and well-being of our Ukrainian colleagues and assisting them and their families any way we can.
In Russia, we operate nine facilities.
The business predominantly source raw materials locally and service local customers.
It possesses a very minimal cross-border exposure and contributes less than 3% to total company operating profit annually.
We do hedge roughly half of our ruble exposure.
In times of crisis, we lean on our values and use the Greif way to guide our direction, while extremely upset and aghast by the aggressive actions taken by the Russian government.
As with our Ukrainian colleagues, our focus is on all Greif people.
We remain in full support of our Russian colleagues and continue to operate in Russia with also their well-being as our priority.
In January, we announced an agreement to divest our 50% ownership in FPS.
Although we have worked closely with our joint venture partner in the last 12 years, we evolve to have differing views on the future of this business.
The sale of our 50% stake in flexibles will generate net cash proceeds of approximately $123 million, subject to customary closing conditions.
We anticipate the deal closes by the end of March 2022, and have incorporated the divestitures impacts into our financial fiscal '22 guidance.
Until we refine this further, you can assume FPS ballpark annual adjusted EBITDA contribution to be roughly $35 million.
For context, seven years ago when FPS was struggling, we tried to market considering that this position with virtually no interest.
Now we're selling our half of FPS for substantially more than the best offer at that time for the entire business.
The team has driven considerable improvements in the business and demonstrated professionalism throughout.
Paper packaging's first quarter sales rose by roughly $129 million versus the prior year due to stronger volumes and higher published containerboard and boxboard prices.
Adjusted EBITDA rose by roughly $24 million versus the prior year due to higher sales, partially offset by higher raw material, transportation, and utility costs, including a significant $42 million drag from significantly higher OCC costs.
Similar to the fourth quarter, volume demand across the business remains strong.
At quarter end, our combined build backlogs still exceeded eight weeks.
First quarter volumes in our CorrChoice [Inaudible] system were up roughly 0.5% per day versus the prior year.
E-commerce, automotive parts, food, and durables demands all remained very solid.
First quarter [Inaudible] core volumes were up by 4.6% per day versus the prior year, with demand strong across almost all end markets.
I will now turn you over to our CFO, Larry Hilsheimer, on Slide 9.
By my count, this is the 13th consecutive quarter that we have met or exceeded consensus expectations.
First quarter adjusted EBITDA rose by $58 million year-over-year despite an OCC index headwind of $42 million and roughly $33 million of nonvolume-related transportation and manufacturing labor inflation.
Absolute SG&A dollars rose $17 million versus the prior-year quarter, mainly due to higher health, medical, and incentives costs, but fell 200 basis points on a percentage of sales basis.
Below the line, interest expense fell by $8 million versus the prior-year quarter, due primarily to refinancing our 2021 euro notes with a low rate bank debt.
We expect interest expense to fall further as we utilize proceeds from the flexes divestment on debt repayment and also benefit from having refinanced on Tuesday, our 6.5% 2027 senior notes with additional bank debt, utilizing a mix of floating and fixed rates below 3.5%.
Our first quarter non-GAAP tax rate was roughly 31% and significantly higher year-over-year due to increased pre-tax income, with a higher proportion of that income in the U.S., and less positive discrete items than the prior year.
Even with significantly higher tax expense, our first quarter adjusted Class A earnings per share was still more than double to $1.28 per share.
Finally, first quarter adjusted free cash flow was $19 million cash outflow and lower year-over-year, primarily due to higher capex-related maintenance and organic growth investments in IBCs, plastics, and specialty corrugated products.
Our core capital priorities remain unchanged: reinvest in the business to create value and support growth; return excess cash to shareholders via an attractive and growing dividend; and maintain a compliance leverage ratio between 2 times to 2.5 times.
As promised, we're back comfortably within our targeted leverage ratio range and anticipate further downward bias in the near future.
Balance sheet strength provides us with financial flexibility to pursue value-accretive opportunities.
And we are currently finalizing our strategic planning process to determine the focus of growth activities going forward.
We will share more with you at investor day in June.
We are increasing our fiscal 2022 guidance despite eliminating flexibles income for the period of April 1 to October 31, which was present in the guidance we issued at Q4.
We have overcome that headwind and increased the midpoint of our adjusted earnings per share guidance by $0.45 to $6.60 per share for fiscal '22, reflective of solid first quarter performance, announced paper price increases, and lower interest expense.
We have deliberately kept a wider range than normal given uncertainty introduced by the unfortunate events in Europe.
We now anticipate generating between $380 million and $440 million of adjusted free cash flow in fiscal '22.
While our profit expectations have increased since Q4, that improvement isn't fully reflected in free cash flow, primarily due to higher anticipated cash taxes and increased working capital, largely due to announced price increases.
Finally, you will find a slide with key modeling assumptions in the appendix of today's deck for use as needed.
It is important to take a step back from time to time and look at the bigger picture when considering investment opportunities.
At Greif, we don't run our enterprise with a quarter in mind.
Instead, our value creation model is focused on performance over the long term.
As I've just shown on the prior slide, we have a track record of delivering on our guidance expectations.
The execution discipline we've demonstrated to grow profits over the long haul, no matter the circumstance, has fueled sustained outperformance you will see here relative to a broader bucket of industrial companies.
Despite sustained outperformance, we continue to trade at a substantial discount relative to other packaging firms, which mystifies us.
Clearly, I understand that it is investors who determine our value.
However, our opinion is that our equity deserves a much closer look given the substantial discount present in our stock today.
I am very proud of our team's first quarter performance.
As Greif's legendary customer service comes together, with execution discipline and unmatched product portfolio, a proven and disciplined capital allocation strategy, and sustainability leadership to form a value-creation engine that benefits our shareholders and other stakeholders alike.
Looking ahead, we are well-positioned to benefit from ongoing strength and improving trends in our key end markets, and our future is bright. | q1 earnings per share $1.28 excluding items. | 1 |
The Toro Company delivered very strong results for the second quarter of fiscal 2021, driven by robust broad-based demand across our Professional and Residential segments.
Our team continued to execute well in this dynamic environment, managing the supply chain challenges affecting our industry and the global economy and working together with our channel partners to serve customers and fulfill retail demand.
As a result, net sales for the second quarter were up 24% year-over-year.
Professional segment net sales increased 25%, continuing the growth trend for this segment and setting a new record.
The increase was primarily driven by a strong demand for golf, landscape contractor, irrigation and rental and specialty construction products.
Our lineup of innovative products combined with increasing business confidence in the economic recovery helped fuel exceptional demand.
Residential segment net sales for the second quarter were up 20% year-over-year, setting another record.
This growth was led by a strong demand for zero-turn riding mowers and our all-season Flex-Force 60-volt home solutions products.
In addition, enhanced retail placement boosted sales of our snow equipment and late-season snowstorms helped clear the channel.
The introduction of innovative new Residential products coupled with the refreshed marketing and expanded mass retail distribution continue to strengthen our brand and drive growth for this segment.
We also set records for earnings in both segments this quarter, as we drove productivity and operational synergies enterprise wide.
Professional earnings were up 57%, and Residential earnings grew 24%.
Reflecting on the outstanding results this quarter, we note three prevailing themes.
First, demand has been exceptionally strong.
We see this continuing for the foreseeable future, albeit with year-over-year growth rate comparisons that will ultimately stabilize off a higher base.
This demand is driven by improving consumer and business confidence coupled with public and private investment priorities and current lifestyle trends.
We expect to capitalize on these drivers with our commitment to new product development, best-in-class distribution channel, and a strong balance sheet that provides the financial flexibility to invest in the future.
Second, along with the exceptionally strong demand, we've seen escalating supply chain and inflation challenges.
These challenges are not unique to The Toro Company and are having a global impact.
Our teams have worked effectively to keep up with increased demand while navigating the current supply chain environment.
We've also focused on mitigating material, freight and wage inflationary pressures through productivity and synergy initiatives, disciplined expense control and market-aligned pricing actions.
We'll continue to prioritize important investments to support growth.
Third, we're leveraging our strong balance sheet to position the Company for future growth.
As we continue to generate strong free cash flow, we are allocating capital to best drive value for all stakeholders.
This year, we've made strategic investments in technology accelerators through the acquisitions of TURFLYNX and Left Hand Robotics.
These teams have immediately helped us advance our innovation roadmap.
At the same time, we've continued to invest organically in key technologies, including alternative power, smart connected and autonomous.
As an example, our expanding line of Flex-Force 60-volt products will soon include a battery-powered two-stage snow thrower, which is ready to launch and is generating a lot of excitement in the field.
Our healthy cash flow also allows us to return capital to shareholders, while maintaining ample liquidity.
Year-to-date, we've paid down $100 million of debt, invested $107 million in share repurchases, and paid out $57 million in dividends.
While we work to capitalize on this period of great growth, we remain committed to our employees and channel partners, and continued to diligently manage and mitigate COVID-related risks.
We're keeping the health and safety of our team in the forefront, while executing operationally to get the right products to the right places at the right.
Through the SoWeCan [Phonetic] campaign we're incenting our employees to get vaccinated.
Looking ahead, we remain focused on our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people.
We will continue to execute against these priorities to position the Company for long-term sustainable growth.
I'll discuss our outlook further following Renee's more detailed review of our financial results.
Our record second quarter was driven by robust demand across our Professional and Residential segments, coupled with strong operating performance.
We grew net sales by 23.6% to $1.15 billion.
Reported earnings per share was $1.31 per diluted share, up from $0.91 last year.
Adjusted earnings per share was $1.29 per diluted share, up from $0.92 in the prior year.
Moving to our segment results for the quarter.
Professional segment net sales were up 25.3% to $828.4 million.
This increase was primarily due to strong demand for golf, landscape contractor, irrigation, and rental and specialty construction products, slightly offset by lower sales of underground construction equipment driven by supply chain disruptions that impacted product availability, and continued softness in oil and gas market.
Professional segment earnings were up 57.3% to $167.1 million; and when expressed as a percent of net sales, increased 410 basis points to 20.2%.
This increase was primarily due to productivity improvements, including COVID-related manufacturing inefficiencies in the second quarter of last year that did not repeat, net price realization and volume leverage, partially offset by higher commodity costs.
Residential segment net sales were up 20.2% to $315 million.
This increase was primarily driven by strong retail demand for zero-turn riding mowers due to new and enhanced products, higher sales of Flex-Force battery electric products mainly driven by successful new product introductions, and higher shipments of snow equipment as a result of late-season storms and expanded retail placements.
Residential segment earnings were up 23.9% to $46 million; and when expressed as a percent of net sales, up 40 basis points to 14.6%.
The increase was primarily driven by productivity improvements, including COVID-related manufacturing inefficiencies in the second quarter of last year that did not repeat, net price realization and product mix, partially offset by higher commodity costs.
Turning to our operating results for the second quarter.
We reported gross margin of 35.1%, an increase of 210 basis points from the prior year.
Adjusted gross margin was 35.1%, up 170 basis points.
These increases were primarily due to productivity improvements, net price realization and favorable mix, partially offset by higher commodity costs.
SG&A expense as a percent of net sales decreased 10 basis points to 19.4%.
This favorable performance was primarily driven by volume leverage and lower indirect marketing expenses, partially offset by higher incentives due to improved performance and the reinstatement of certain costs that had been part of the Company's fiscal 2020 pandemic-driven expense reductions.
Operating earnings as a percent of net sales increased 220 basis points to 15.7%.
And adjusted operating earnings as a percent of net sales increased 170 basis points, also to 15.7%.
Interest expense was down $1.5 million to $7.1 million, driven by reduced debt and lower interest rates.
The reported effective tax rate was 19.8%, and the adjusted effective tax rate was 20.9%.
Now, turning to the balance sheet and cash flow.
At the end of the second quarter, our liquidity remained consistent at $1.1 billion.
This included cash and cash equivalents of $500 million and full availability under our $600 million revolving credit facility.
We have no significant debt maturities until April of 2022.
Accounts receivable totaled $391.2 million, down 2.3% from a year ago, primarily driven by channel mix.
Inventory was down 12% from a year ago to $628.8 million, primarily as a result of increased demand.
Accounts payable increased 28.8% from last year to $421.7 million.
This was primarily due to increased purchases of components, as well as more normalized expenses.
Year-to-date free cash flow was $292.4 million, with the conversion ratio of 115%.
This positive performance was largely the result of higher earnings and lower working capital, driven by higher payables and reduced inventory levels.
Our disciplined capital allocation strategy fueled by our strong balance sheet includes investing in organic and M&A growth opportunities, maintaining an effective capital structure and returning cash to shareholders.
Our capital priorities remain the same, and include: reinvesting in our businesses to support sustainable long-term growth, both organically and through acquisitions; returning cash to shareholders through dividends and share repurchases; and maintaining our leverage goals to support financial flexibility.
At the midpoint of the fiscal year, demand momentum is strong, and our leadership position in the markets we serve is solid.
Like many other companies, we are continually adjusting through these dynamic times.
The economy is experiencing a surge in demand, while suppliers struggling to keep pace.
In the long run, we expect the positives from the heightened demand trends across our markets to endure and outweigh the near-term pressures.
While we continue to drive productivity and synergies and take appropriate market-based pricing actions, our operating margins in the second half of our fiscal year will be pressured.
This is driven by the escalation in supply chain challenges, as well as material, freight and wage inflation, which we expect will result in manufacturing inefficiencies and higher input costs relative to our prior guidance.
With that backdrop, we are updating our full year fiscal 2021 guidance.
We now expect net sales growth in the range of 12% to 15%, up from 6% to 8% previously.
We expect Professional and Residential segments net sales growth rates to be similar to the overall Company, with Residential trending slightly ahead of Professional.
This is due to the strong demand we continue to see across our businesses.
Looking at overall profitability, we continue to expect adjusted operating earnings as a percent of net sales for the full year to be slightly higher than fiscal 2020.
This reflects a strong performance in the first half coupled with a more challenging supply chain and inflationary environment in the second half.
Given our strong balance sheet and future growth expectation, we are increasing our estimated capital expenditures for the year to $130 million, up from $115 million.
This aligns with our priorities of investing in key technology areas and ensuring we have the capacity to meet future growth.
Based on current visibility, we now expect full year adjusted earnings per share in the range of $3.45 to $3.55 per diluted share.
This increase reflects the robust demand environment, while also taking into account the near-term supply chain and inflationary pressures.
We anticipate the impact of these pressures to be the most pronounced in the third quarter before our mitigating actions are more fully realized.
We expect adjusted earnings per share per diluted share in the fourth quarter to be similar to fiscal 2020 against a very strong Q4 of last year.
Looking to the rest of the fiscal year, we remain excited about the broad-based demand for our product.
We are well positioned as we continue to execute on our long-term strategic priorities and invest in innovation to capitalize on future growth opportunities.
As we look ahead to the remainder of the year, we're watching a number of key drivers in our end markets: for Residential and certain Professional businesses, continuing consumer interest in home investments; for landscape contractors, capital investments, including catch up purchases of prior deferrals, driven by improved business confidence; for golf, continued strong momentum, in general, the reopening of international courses and the return of resort golf; for grounds equipment, the prioritization of outdoor space maintenance and improvement by municipal and other tax-supported entities; for underground, increased government support and funding for infrastructure spending, this includes broadband build out, alternative energy investments and critical need infrastructure rehab and replacement; for rental and specialty construction, strong demand by both professional contractors and homeowners; for snow and ice management, channel demand, given lower end of season inventory levels.
In short, these end market drivers should continue to support robust demand.
Our biggest challenge for the remainder of the year will be our ability to produce at the desired rate, given the supply chain constraints we are facing.
We believe the constraints will improve as key commodity availability normalizes, global vaccination rates improve, COVID restrictions ease, and logistical capacity finds a balance.
We anticipate demand will remain strong even after supply chain constraints ease.
At that point, we expect to be in a position to rebuild field inventory levels across our channels.
Our operations team remains committed to doing everything possible to meet the increased production demands.
With our team's dedication, our innovative suite of products, and our market leadership, as well as our consistently strong cash flow to support growth investments, we are well positioned to capitalize on this demand opportunity.
We're also well positioned to capitalize on the electrification trends, given our expertise and leadership across our markets.
We are committed to developing electric products that offer both power and durability with no compromise on performance.
For example, in March, our 60-volt Personal Pace Recycler Mower was named Editor's Choice by Popular Mechanics in its evaluation of electric lawn mowers; build quality and cut quality were cited as the two reasons.
Toro mowers have received more Editor's Choice awards than any other brand.
In addition to the Residential Flex-Force line, we have an increasing number of Professional battery-powered products, including our all-electric Greens Mowers and lithium-ion Workman utility vehicle.
Sustainability is fundamental to our enterprise strategic priorities, and our focus on alternative power, smart connected and autonomous technologies is embedded as part of our sustainability into our strategy.
It's the right thing to do and provides the opportunity for our Company to create value for all stakeholders while helping our customers achieve their sustainability goals.
A recent win highlights this focus.
One of our European channel partners, Jean Heybroek of Reesink group, was awarded a four-year preferred supplier agreement and fleet management partnership with the City of Amsterdam.
The city has an objective of zero emissions by 2030, and we are excited to partner with them in achieving this goal.
Another example is our new 20-year partnership with the National Links Trust in Washington, DC.
Their mission is to protect and promote accessible and affordable municipal golf courses to positively impact communities.
We are honored to support this mission together with our distributor Turf Equipment and Supply Company, as well as our longtime partner Troon, the world's largest golf management company.
Involvement in this project exemplifies who The Toro Company is, a team focused on long-term carrying relationships, our communities and the environment.
In closing, we are optimistic as we begin the second half of our fiscal year.
We believe our updated guidance appropriately reflects the risks we face in the current operating environment, while also accounting for the robust demand we expect.
We have strong momentum across our businesses and are positioned to capitalize on future growth drivers. | compname reports q1 adjusted earnings per share of $0.66.
q1 earnings per share $0.66.
q1 sales rose 6.8 percent to $932.7 million.
q1 adjusted earnings per share $0.66.
now expects fiscal 2022 total net sales growth in range of 12% to 14%.
company is holding its fiscal 2022 adjusted earnings per share guidance in range of $3.90 to $4.10 per diluted share. | 0 |
This is Jim Koch, Founder and Chairman, and I'm pleased to be here to kick off the 2021 second quarter earnings call for The Boston Beer Company.
Joining the call from Boston Beer are Dave Burwick, our CEO and Frank Smalla, our CFO.
During the second quarter, we saw a significant growth in the on-premise channel and reopened all of our retail locations as most COVID-19 restrictions have been lifted across the country.
However, our 24% depletions growth for the second quarter decelerated from our first quarter growth of 48% and was below our expectations as the hard seltzer category and the overall beer industry were softer than we had anticipated.
Hard seltzer category growth was negatively impacted by several developments.
First, slowing growth in household penetration as the market matures and there is less new trial.
Second, a gradual transition of industry volume to the on-premise channel as hard seltzers became more regular option in that channel.
Third, new hard seltzer brands at retail that have resulted in a proliferation of choices and consumer confusion.
And fourth, a challenging comparative period of significant pantry loading related to on-premise restrictions in the second quarter of 2020.
We are encouraged that four of our five major brands grew in the second quarter and we continued to expand our market share.
In measured off-premise channels in the first half of this year where our brand portfolio represented 4% of total industry volume, we delivered over 45% of industry volume growth.
By far the highest of all brewers.
We will continue to invest behind our brands with a particular emphasis on fueling the momentum behind Truly and Twisted Tea.
We recently announced plans to develop new innovative beverages with Beam Suntory that we are planning to launch in early 2022.
We believe these new beverages will further demonstrate our ability to innovate and grow our business as drinker preferences evolve.
We remain highly positive about the future growth of our brands and that our diversified brand portfolio will continue to fuel double-digit growth.
I will now pass over to Dave for a more detailed overview of our business.
Before I review our business results, I will start with the usual disclaimer.
Okay, now let me share a deeper look at our business performance.
Our depletions growth in the second quarter was a result of increases in our Truly hard seltzer, Twisted Tea, Samuel Adams and Dogfish Head brands.
They were only partially offset by decreases in our Angry Orchard brand.
Twisted Tea continues to generate double-digit volume growth rates and is the fastest-growing flavored malt beverage brand family in measured off-premise channels during the first half of this year.
Early in 2021, we launched Truly Iced Tea hard seltzer and during the second quarter we launched Truly Punch hard seltzer.
Similar to the Truly Lemonade, these new products deliver against drinkers' interest in both their flavor profiles and demonstrate Truly's distinctiveness and innovations leadership within the hard seltzer category.
In measure off-premise channels, Truly Iced Tea is the number one innovation in the overall beer industry over the first half of this year and Truly Punch is the number two innovation over the past four weeks.
The overall Truly brand growth rate improved to 2.7 times the hard seltzer category growth rate in the latest 13 weeks, resulting in a 4 point share gain and closing the share gap to the number one brand to single digits.
We are excited about our new Truly advertising campaign "No One Is Just One Flavor" featuring Grammy award winner and pop icon, Dua Lipa and showcasing Truly's superior variety of flavors and the colorful and adventurous nature of Truly drinkers.
Based on the brand's innovation leadership, strong brand building and growing cultural relevance, we believe Truly is well positioned to continue to grow share.
We overestimated the growth of the hard seltzer category in the second quarter and the demand for Truly, which negatively impacted our volume and earnings for the quarter and our estimates for the remainder of the year.
We increased our production of Truly to meet our summer peak and have had lower-than-anticipated demand for certain Truly brand styles, which has resulted in higher than planned inventory levels at our breweries and increased supply chain costs and complexity.
At the same time, we've been experiencing out-of-stocks on certain of our can [Phonetic] products, most significantly on our Twisted Tea brand family.
We expect wholesaler inventories of Twisted Tea to remain tight for the rest of the summer.
Our outlook for the hard seltzer category in the second half of 2021 is uncertain, and we planned our capacity and spending based upon several volume scenarios.
We'll continue to manage our capacity requirements through a combination of internal capacity increases and higher usage of third party breweries.
We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes and allow us to scale up more efficiently.
While we're in a very competitive business, we're confident in the continued growth of our current brand portfolio and innovations, and we remain prepared to forsake short- term earnings as we invest to sustain long-term profitable growth.
Based on information in hand, year-to-date depletions reported to the Company to the 28 weeks ended July 10, 2021 are estimated to have increased approximately 32% from the comparable weeks in 2020.
Now Frank will provide the financial details.
For the second quarter, we reported net income of $59.2 million, a decrease of $0.9 million or 1.6% from the second quarter of 2020.
Earnings per diluted share were $4.75, a decrease of $0.13 per diluted share from the second quarter of 2020.
This decrease was primarily due to increases in operating expenses, lower gross margins and the higher tax rate, partially offset by increased revenue growth driven by shipment growth.
Shipment volume was approximately 2.45 million barrels, a 27.4% increase from the second quarter of 2020.
Shipment volume for the first half was significantly higher than depletions volume and resulted in higher distributor inventory as of June 26, 2021 when compared to June 27, 2020.
The Company believes distributor inventory as of June 26, 2021, averaged approximately five weeks on hands and was an appropriate level for each of its brands, except for Twisted Tea, which has significantly lower than planned distributor inventory levels for certain styles and packages.
Our second quarter 2021 gross margin of 45.7% decreased from the 46.4% margin realized in the second quarter of 2020, primarily as a result of higher processing and other costs due to increased production at third party breweries, partially offset by price increases and cost saving initiatives at company owned breweries.
Second quarter advertising, promotional and selling expenses increased by $61.3 million from the second quarter of 2020, primarily due to increased brand investments of $41.2 million, mainly driven by higher media, production and local marketing costs and increased freight to distributors of $20.1 million that was primarily due to higher rates and volumes.
General and administrative expenses increased by $3.3 million from the second quarter of 2020, primarily due to increases in external services and salaries and benefits costs.
Based on information of which we are currently aware, we are now expecting full year 2021 earnings per diluted share of between $18 and $22, a decrease from the previously communicated range of between $22 and $26.
Excluding the impact of ASU 2016-09, the actual results could vary significantly from this target.
We're currently planning increases in shipments and depletions of between 25% and 40%, a decrease from the previously communicated range of between 40% and 50%.
We're targeting national price increases per barrel of between 1% and 3%.
Full year 2021 gross margins are currently expected to be between 45% and 47%.
We plan increased investments in advertising, promotional and selling expenses of between $80 million and $100 million for the full year 2021, a decrease from the previously communicated range of between $130 million and $150 million.
These amounts do not include any increases in freight costs for the shipment of products to our distributors.
We estimate our full year 2021 non-GAAP effective tax rate to be approximately 26 % excluding the impact of ASU 2016-09.
We're not able to provide forward guidance on the impact that ASU 2016-09 will have on our 2021 financial statements and full year effective tax rate, as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value when those options are granted.
We're continuing to evaluate 2021 capital expenditures and currently estimate investments of between $180 million and $230 million, a decrease and a narrowing from the previously communicated range of between $250 million and $350 million.
The capital will be spent, mostly on continued investments in our breweries and could be higher if deemed necessary to meet future growth.
We expect that our cash balance of $103 million as of June 26, 2021 along with our future operating cash flow and unused line of credit of $150 million will be sufficient to fund future cash requirements. | q2 earnings per share $4.88.
sees fy 2020 non-gaap earnings per share $11.70 to $12.70.
began seeing impact of covid-19 pandemic on its business in early march.
began seeing the impact of the covid-19 pandemic on its business in early march.
boston beer company- direct financial impact of pandemic primarily shown in significantly reduced keg demand from on-premise channel.
boston beer- in 1st half of 2020, co recorded covid-19 related pre-tax reductions in net revenue, increases in other costs that total $14.1 million.
boston beer- given trends for 1st half of year, co adjusted expectations for higher 2020 earnings. | 0 |
The global pandemic created unprecedented challenges for all of us, as we saw the virus impact our family and friends, our end markets and disrupt our daily lives on a scale we have never experienced before.
But throughout the year, our company faced into these challenges showing the resolve of our people, the strength of our market positions and the value of our enterprise.
As a team, our collective focus was and continues to be working together to keep each other healthy and safe, to adapt to changing market conditions and service our customers and to provide needed support to the communities where we work and live.
These efforts are aligned with our company's purpose and resulted in strong operational and financial performance.
During today's call, I'll start with an overview of Owens Corning's fourth quarter and full-year 2020 results, before turning it over to Ken, who will provide additional details on our financial performance.
I will then come back to talk about our outlook for the first quarter and how we are positioning the company to capitalize on both near-term market opportunities and longer-term secular trends.
I'll begin my review with safety, where we continue to perform at a very high level.
Our commitment to the health and safety of our employees is unconditional.
In the fourth quarter, we achieved a recordable incident rate of 0.4, representing a 37% improvement over the same period in 2019.
This lowered our full-year 2020 RIR to 0.61, which is an 8% improvement over the prior year.
I'm pleased to note that over half of our global locations worked injury free in 2020.
I'm pleased to note that over half of our global locations worked injury free in 2020.
For the quarter, we delivered revenue of $1.9 billion, a 14% increase compared with the fourth quarter of 2019, and adjusted EBIT of $306 million, up 50% from the same period one year ago.
All three of our businesses delivered double-digit EBIT margins for the second consecutive quarter.
For the full-year, we delivered $7.1 billion in revenues, down 1%.
Adjusted EBIT was $878 million, a 6% improvement over 2019.
Increasing demand for our products, combined with strong manufacturing performance and improved operating efficiencies resulted in earnings growth for the year despite a slight decline in revenues.
During the back half of the year, we continue to see our end markets recover and improve.
In the US residential market, which impacts all three of our businesses and accounts for about half of the company's revenue.
Demand grew at a strong pace, driven by increased repair and remodeling activity, as well as higher new construction start.
Most of our commercial, industrial markets also strengthened throughout the second half as projects restarted, manufacturing activity increased, and customers replenished inventories.
In 2020, Insulation EBIT margins grew to 10%, despite a 2% revenue decline.
In addition to higher residential insulation demand, our ongoing focus on network optimization and manufacturing performance drove the earnings growth in the business.
Our composites business also benefited from increased demand, delivering double-digit EBIT margins in both the third and fourth quarters.
Our focus on higher value downstream businesses and key geographies where we have strong market positions, combined with increased manufacturing productivity continues to drive our financial performance.
And in roofing, revenues increased 2% compared to 2019 and EBIT margins grew 22% driven by strong volumes and a positive price cost mix.
Overall market demand for shingles grew by 10% versus 2019, driven by above-average storm demand and the strong second half remodeling market.
Across our businesses, rapidly improving markets and high demand for our products have created supply shortages and extended lead times.
Our manufacturing and supply chain teams continue to work hard to increase the availability of our products and reduce our lead times, leveraging the benefits of both improved productivity and capacity expansion investments.
In Insulation, as I shared with you last quarter, we have initiated work to restart our Batt & Roll line in Kansas City.
I'm pleased to report that this line is on track to start production in this month.
We've also increased some additional loosefill production and took actions in our US mineral wool plants to meet growing customer demand.
In composites, we are expanding our glass non-woven capacity, adding a new production line next to our current facility in Fort Smith, Arkansas.
This will add needed capacity to our network and allow us to optimize costs by replacing our existing smaller production line at the site.
We expect to start production in mid-2023 to service a growing number of building material applications.
And in roofing, capital investments over the past two years have increased incremental capacity at several of our manufacturing facilities.
Our strong earnings performance in 2020, combined with working capital management and disciplined capital investments, led to record operating and free cash flow of $1.1 billion and $828 million.
During the year, we also returned approximately $400 million of cash to shareholders through share repurchases and dividend payments.
At Owens Corning, sustainability is central to our purpose and represents a competitive advantage for our company.
It also is becoming increasingly important to our customers and other key stakeholders.
Even as we face near-term uncertainties from the pandemic, we continue to invest in achieving our 2030 sustainability goals, one of which is to double the positive impact of our products.
Our new FOAMULAR NGX product line used in a variety of residential and commercial applications is a great example of this commitment and a testament to our teams who found creative ways to continue this important work remotely.
NGX launched last month, uses a new blowing agent chemistry with 90% lower global warming potential compared with traditional products without sacrificing performance, demonstrating how product and process innovation can reduce the environmental impact.
In addition, we were honored to be recognized as a leader in ESG, earning a position on the Dow Jones Sustainability World Index for the 11th consecutive year and being named Industry Leader for the DJSI World Building Products group for the eighth straight year.
In early April, we'll release our 15th Annual Sustainability Report in which I invite you to read more about the full scope of our sustainability performance and progress.
As Brian mentioned, Owens Corning delivered solid results in 2020 against the backdrop of global uncertainty from the pandemic.
Our company results were highlighted by record performance across a number of key financial measures.
The actions taken by the company enhanced by the recovery in US residential markets have driven the earnings growth, robust free cash flow conversion and a strong liquidity position for the company.
Now, turning to our results on slide five.
For the fourth quarter, we reported consolidated net sales of $1.9 billion, up 14% over 2019, as all three segments delivered revenue growth in the quarter.
Adjusted EBIT for the fourth quarter of 2020 was $306 million, up $102 million compared to the prior year.
Adjusted earnings for the fourth quarter were $207 million, or $1.90 per diluted share, compared to $125 million, or $1.13 per diluted share in Q4 2019.
For the full-year 2020, our adjusted earnings were $566 million, or $5.21 per diluted share compared to $500 million, or $4.54 per diluted share in 2019.
The full-year earnings per share comparison was affected by a few below the line items in 2020.
In addition to tax items adjusted out in the first three quarters, we adjusted out at $32 million non-cash income tax benefit in the fourth quarter resulting from the inter-company transfer of certain intellectual property rights into the US.
Depreciation and amortization expense for the quarter was $141 million, up $21 million as compared to last year.
The growth in the fourth quarter of 2020 was mainly impacted by higher accelerated depreciation from this quarter's restructuring actions.
For 2020, depreciation and amortization expense was $493 million, up from $457 million in the prior year, primarily due to higher accelerated depreciation from our restructuring actions and incremental amortization from new finance leases.
Our capital additions for the year were $320 million, down $131 million versus 2019.
Given the uncertain market environment early in 2020, we took actions to reprioritize capital investments and preserve liquidity.
Looking ahead, we will continue to be disciplined in our capital spending as we focus on delivering strong free cash flow and will prioritize investments that drive growth and productivity.
On slide six, you see adjusting items reconciling full-year 2020 adjusted EBIT of $878 million to our reported EBIT loss of $124 million.
For the year, adjusting items to EBIT totaled approximately $1 billion, largely driven by $987 million of non-cash goodwill and intangible impairment charges recorded in the first quarter.
In the first three quarters, we recognized $26 million of gains on the sale of certain precious metals.
We've excluded these gains from our adjusted EBIT.
During 2020, we recorded $41 million of restructuring costs, with $31 million of costs being recognized in the fourth quarter.
The bulk of these fourth quarter costs are non-cash and are primarily associated with restructuring actions in our insulation and composites businesses as part of our ongoing network optimization activity to improve manufacturing productivity and reduce our cost position.
Slide seven provides a high-level overview of full-year adjusted EBIT comparing 2020 to 2019.
Adjusted EBIT of $878 million was a new record for the company and increased $50 million over the prior year.
Roofing EBIT increased by $136 million, Insulation EBIT increased by $20 million and Composites EBIT decreased by $82 million.
General corporate expenses of $128 million, were up $24 million versus last year, primarily due to higher incentive compensation expense associated with improved adjusted EBIT results and the absence of small one-time gains realized in 2019.
Now, I'll provide more details on each of the business results, beginning with Insulation on slide eight.
Insulation sales for the fourth quarter were $728 million, up 1% from Q4 2019.
In the North American Residential Fiberglass Insulation business, while lagged, housing starts in Q4 were higher than the prior year.
Supply constraints and limited inventories coming into the quarter caused volumes to be down slightly year-over-year.
We continue to be encouraged by US residential new construction demand and the realization of our September price increase.
In the technical and other Insulation businesses, volumes improved from the time of our Q3 earnings call and finished the quarter up slightly versus the prior year, driven primarily by strong performance in our US formular and global mineral wool businesses.
EBIT for the fourth quarter was $106 million, up $17 million as compared to 2019.
The EBITDA increase was driven by positive manufacturing performance and higher selling prices in North American residential.
Overall volumes for this segment were relatively flat.
For the full-year, sales in Insulation were $2.6 billion, down 2% versus 2019 with growth in North American residential more than offset by COVID-19 related declines in the technical and other Insulation businesses.
Overall volumes for the segment were flat.
The decline in revenue was driven by lower selling prices, unfavorable product and customer mix and the divestiture of a small business in the first quarter.
In 2020, Insulation EBIT increased by $20 million to $250 million, primarily due to favorable manufacturing performance and strong cost controls, partially offset by lower selling prices and unfavorable product and customer mix.
The business delivered EBIT margins of approximately 10% in 2020 with increased EBIT on lower revenues.
Sales in Composites for the fourth quarter were $547 million, up 14% as compared to the prior year, driven primarily by higher sales volumes.
During the quarter, we experienced robust volume improvements in many regional markets, particularly North America and India.
Additionally, we saw a strong performance in our wind and roofing downstream specialty applications along with continued improvement in automotive.
EBIT for the quarter was $60 million, up $4 million from the same period a year ago with the benefit of higher sales volumes and favorable manufacturing performance, partially offset by furnace rebuild and production curtailment cost and continued pricing headwinds.
Composites delivered a 11% EBIT margins for the quarter.
Full-year sales were about $2 billion, down 5% as compared to 2019.
The decline was driven by weaker volumes due to COVID-19 primarily in the second quarter, lower selling prices from negative year-over-year carryover, unfavorable customer and product mix and negative foreign currency translation.
In 2020, EBIT declined by $82 million to $165 million.
For the year, favorable manufacturing performance and lower SG&A costs were more than offset by weaker volumes, the negative impact of production curtailments and negative pricing carryover.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $702 million, up 33% compared with Q4 2019.
The increase was driven by 36% volume growth, partially offset by lower third-party asphalt sales.
Price in the quarter was flat with favorable transactional shingle pricing on realization of the August increase offset by higher rebates associated with stronger 2020 shingle demand.
In the fourth quarter, the US asphalt shingle market grew significantly as compared to the prior year.
The market growth, which was higher than the expectation we provided in last quarter's call, was a result of milder weather that extended the Roofing season.
Our volumes trailed the market in the fourth quarter as we continue to operate in sold out conditions with low inventory levels.
EBIT for the quarter was $183 million, up $96 million from the prior year producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes in both shingles and roofing components and the continued deflationary impact of asphalt.
Roofing sales for 2020 were $2.7 billion, up 2% versus 2019.
The increase was driven by higher sales volumes of about 6%, partially offset by lower selling prices and lower third-party asphalt sales.
In 2020, Roofing EBIT improved by $136 million to $591 million.
The increase was driven by strong market volumes in both shingles and components and strong manufacturing performance.
We experienced additional EBIT improvement from a price cost perspective as the benefit of asphalt cost deflation and lower transportation costs more than offset lower selling prices.
For the year, the business delivered EBIT margins of 22%, up approximately 500 basis points from 2019.
Turning to slide 11.
I'll discuss significant financial highlights for 2020.
As a result of disciplined actions taken to manage working capital, operating expenses and capital investments and the recovery of our markets, US residential in particular, we delivered record full year levels of operating and free cash flow.
Our free cash flow for 2020 was $828 million, up $238 million as compared to 2019.
Free cash flow conversion of adjusted earnings was 146% in 2020, as compared to 118% in 2019.
In December, the Board of Directors approved a new share repurchase authorization for up to 10 million additional shares.
During 2020, we returned $396 million of cash to shareholders through stock repurchases and dividends.
At the end of 2020, 9.5 million shares remained available for repurchase under the current authorization.
During 2020, we completed several deleveraging activities to further improve our credit metrics.
These actions included repaying the term loan in advance of the February 2021 due date, repaying the mid-2020 borrowing on our revolver and contributing $122 million to our global pension plans.
Based on our strong cash flow performance and deleveraging activities, we've maintained an investment grade balance sheet and are operating within our target debt-to-adjusted EBITDA range of 2 times to 3 times with ample liquidity.
At year-end, the company had liquidity of approximately $1.8 billion, consisting of $717 million of cash and nearly $1.1 billion of combined availability on our bank debt facilities.
Earlier this month, the company's Board of Directors declared a quarterly cash dividend of $0.26 per share payable on April 2nd.
Since inception in 2014, the dividend has grown an average of 7% per year.
We remain committed to strong cash flow generation returning at least 50% to investors over time and maintaining an investment grade balance sheet.
General corporate expenses are expected to range between $135 million and $145 million.
Capital additions are expected to be approximately $460 million, which is below expected depreciation and amortization of approximately $480 million.
While we're expecting growth in both capital and operating expenses as conditions begin to normalize over the course of the year, we remain committed to closely managing these investments.
Interest expense is estimated to be between $120 million and $130 million.
And finally, our 2021 effective tax rate is expected to be 26% to 28% of adjusted pre-tax earnings.
We expect our 2021 cash tax rate to be 18% to 20% of adjusted pre-tax earnings.
The growth in our cash tax rate as compared to our guidance in the last few years approximating 10% is due to the utilization of substantially all of our US federal net operating losses and foreign tax credits by the end of 2020.
Our 2020 performance demonstrated the value of our enterprise and the ability of our global teams to successfully execute on our operating priorities even during challenging conditions.
While uncertainties remain, we are well positioned to deliver another strong year in 2021 as we see the strength in our residential markets and improving conditions in our commercial and industrial markets continuing into the first half.
In keeping with prior practice, I will focus my outlook comments on the current quarter.
Based on trends we are seeing to start the year, we expect the company to deliver significant revenue and adjusted EBIT growth in Q1 versus prior year.
Starting with Insulation, we are seeing continued strength in new US residential construction with lag starts in Q1, up 12% versus Q1 2020.
Our North American residential volumes are expected to largely track with the market during the quarter, and we continue to see favorable pricing based on positive traction from our January price increase.
We are beginning to see some inflationary pressure in the business, particularly transportation cost, and recently announced a price increase for April.
Our technical and other building insulation businesses are expecting modest volume improvement in the first quarter, as we continue to experience a gradual recovery in our commercial and industrial end markets across the globe.
Pricing in these businesses is expected to remain relatively stable.
Overall for Insulation, we expect first quarter EBIT to be about double what we delivered in the first quarter last year.
In Composites, we expect Q1 volumes to increase mid single-digits versus Q1 2020, given our strength in a few key regions and downstream applications supporting the wind and building and construction markets.
We also expect to start realizing price gains from actions implemented as part of our annual contract negotiations.
This along with continued strong manufacturing performance should generate first quarter EBIT generally in line with Q4 2020.
And in Roofing, January shingle shipments were substantially higher than last year, reflecting the strength and carryover demand from 2020.
Based on this, we expect to see market volumes of approximately 25% in the first quarter.
Against this backdrop, we continue to ship our available capacity and would expect our volumes to increase in line with this growth.
From a price cost perspective, we expect to deliver another strong quarter with some incremental price realization from our February increase combined with continued asphalt inflation, albeit at a slower rate than in Q4.
We are seeing asphalt cost increasing and expect this to continue through the quarter turning to inflationary in Q2.
Similar to our other businesses, we are also seeing an increased inflation and recently announced a price increase effective the first week in April.
Based on these factors, Roofing EBIT margins in the first quarter are expected to be up year-over-year and more in line with the long-term operating margins we have discussed for this business of about 20%.
With that view of our businesses, I'll turn to a few key enterprise areas.
Our team remains committed to generating strong operating and free cash flow.
In terms of capital allocation, our priorities remain focused on reinvesting in our business, especially productivity and organic growth initiatives, returning at least 50% of free cash flow to shareholders over time through dividends and share repurchases and maintaining an investment grade balance sheet.
In addition, we are also evaluating investments in bolt-on acquisitions that leverage our commercial, operational and geographic strength and expand our building envelope offering.
Overall, Owens Corning is well positioned to capitalize on our near-term market opportunities as well as several longer-term secular trends that will fuel our revenue and earnings growth moving forward, including the demand for new housing in the US, which has been under built for several years and continued remodeling reinvestments as homeowners renovate their living spaces and upgrade their homes.
We also see growing opportunities to benefit from the drive for increased energy efficiency in homes and buildings, product safety and sustainability, material durability and performance and investments in renewable energy and infrastructure.
Each of these trends creates opportunities for Owens Corning to leverage our material science, building science and unique product and process technologies to partner with our customers and help them win in the market through additional products, systems and services.
Our team is proud of the results we delivered in 2020 and are excited about the opportunities we have in 2021 to service our customers, grow our company and deliver value for our shareholders. | compname reports q3 adjusted earnings per share $2.52.
q3 adjusted earnings per share $2.52.
q3 sales rose 16 percent to $2.2 billion. | 0 |
Such statements involve risks and uncertainty, such that actual results may differ materially.
As we transform our company, I'm pleased with our performance in the first quarter of fiscal 2021.
We had strong financial results and we made progress on our digital transformation.
Our team was able to effectively serve our customers through our broad product portfolio and diverse paths to market.
At the same time, our gross margins were in line with those in the fourth quarter even on lower sequential sales and we continue to generate a significant amount of free cash flow.
I'm pleased and grateful for the outstanding way our team has continued to manage through the pandemic.
We remain diligent about protecting the health and well-being of our associates and ensuring the continuity of our operations.
Turning to first quarter highlights.
We are committed to making the communities in which we operate better.
We published our second annual EarthLIGHT report, highlighting the company's priorities, actions and metrics for environmental, social and governance matters.
We continue to wisely deploy capital by repurchasing 2.6 million shares of the company's common stock for $255 million.
We successfully reintroduced ourselves to the debt capital markets through the issuance of a $500 million 10-year bond with a coupon of 2.15%.
Proceeds were used largely to repay our existing term loans.
We are making strong progress on the execution of our digital transformation.
So I'll provide more updates on that progress later in the call.
Finally, we have added talent to the organization.
As we build out our technology organization, we have added outstanding data science, product management and engineering talent.
As we further [Technical Issues] team, Candace Steele Flippin joined Acuity in November as our Chief Communications Officer.
Candace will work with me and our team to define and amplify our company's narrative among our stakeholders.
I'm very pleased with the quality of people who are joining our team.
I will add some additional insights to our financial performance for the first quarter of fiscal 2021.
By way of context, for the past decade, we have provided our best estimates of the impacts of volume and price mix on net sales.
Our intent when we began providing this information was to reflect the impact of the conversion of our lighting products to LED.
Today, our lighting business is fundamentally different.
For example, our product life cycles are shorter and our pace of innovation has increased.
We frequently and successfully introduced new features and benefits of products rather than just direct product substitutions.
Therefore, we believe our historical reference to price mix is no longer meaningful and is less descriptive of how we manage our business.
Going forward, we believe the change in net sales is better described by the activity in our key sales channels.
To help with this transition, I will provide the historical explanation to you this quarter so that you can bridge the gap.
In the future, our explanations for changes in net sales will be aligned with our disaggregated revenue disclosure in the 10-Q.
Should acquisitions have an impact in the future, we will provide that impact if it is meaningful.
Net sales for the three months ended November 30, 2020, of $792 million decreased 5% compared with the prior-year period, due primarily to an estimated 4% decrease in the change in product prices and mix of products sold, as well as an estimated 1% decrease in sales volume.
Both fiscal 2021 first quarter price mix and volume were adversely affected by the negative impacts of the COVID-19 pandemic.
Also recall that last year's first quarter benefited from price increases put in place to offset tariffs.
Looking sequentially from the fourth quarter using the same calculations, price mix decreased 1%.
Due to the changing dynamics of our product portfolio, it is not possible to precisely quantify or differentiate the individual components on a comparable basis of volume, price and mix.
And as noted previously, we will not be quantifying this in the future.
Now, I would like to highlight the key changes in our sales channels.
I'm encouraged with the net sales of $599 million through our independent sales network in which we saw a modest decrease of 3% due to the negative impact of the pandemic.
Turning to our direct sales network, we continue to experience weakness in large industrial projects that we believe have been postponed due to the pandemic.
Sales in this channel of $76 million were down 9.5% in the quarter.
Our retail sales channel continues to be a bright spot with net sales up 3% to $55 million, driven largely by higher demand primarily for residential products.
Finally, a key impact of the pandemic has been and continues to be delayed or canceled projects by large retail customers in our corporate accounts channel.
Net sales in this channel of $24 million were down 28% as compared to the prior year.
These retrofit opportunities were delayed or canceled as these customers were limiting the activity in the stores.
In the first quarter of fiscal 2021 and 2020, we had some adjustments to the GAAP results that we find useful to add back in order for the results to be comparable.
We believe adjusting for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations.
We think you will find this transparency very helpful in your analysis of our performance.
I would like to highlight that our current quarter's gross profit margin of 42% was consistent with our fourth quarter gross profit margin even on lower sales.
Gross profit margin was $332 million, down approximately $23 million from the year-ago period.
This decrease in gross profit was due primarily to the decline in volume and lower price on certain products, as well as the changing mix of products sold, partially offset by our aggressive cost reduction efforts and productivity improvements.
Our SD&A expenses decreased approximately $19 million compared to the year-ago period.
This decrease in SD&A expense was due primarily to decreased employee cost, including lower stock compensation, lower freight and commissions associated with decreased sales and the reduction of cost in response to lower sales.
Reported operating profit was $86 million, compared with $84 million in the year-ago period, while adjusted operating profit for the first quarter of 2021 was $104 million, compared with adjusted operating profit of $119 million in the year-ago period.
Reported operating profit margin was 10.8%, an increase of 80 basis points compared to the prior year.
Adjusted operating profit margin was 13.2%, a decrease of 110 basis points compared with the margin reported in the prior year.
The effective tax rate for the first quarter of fiscal 2021 was 24.7% compared with 22.9% in the prior-year quarter.
The increase in the effective tax rate was due primarily to the recognition in the first quarter of fiscal 2021 of unfavorable discrete items related to the deductibility of certain compensation.
We currently estimate that our blended effective income tax rate before discrete items will approximate 23% for fiscal 2021.
Our diluted earnings per share for the first quarter of fiscal 2021 was $1.57, an increase of $0.13 per share or 9%.
Our adjusted diluted earnings per share this quarter of $2.03 was $0.10 lower than the prior year.
The decrease was primarily due to lower pre-tax income and a higher effective tax rate, partially offset by lower diluted shares outstanding.
I'm pleased with our positive cash flow from operations and the improvement in our working capital days, driven by improvements in accounts receivable and inventory.
We generated $124 million of net cash provided by operating activities for the quarter ended November 30, 2020.
We invested $11 million or 1.4% of net sales in capital expenditures during the quarter.
We currently expect to invest approximately 1.5% of net sales in capital expenditures in fiscal 2021.
Additionally, during the first quarter of fiscal 2021, we repurchased 2.6 million shares for approximately $255 million or an average price of $100 per share.
We have approximately 5.1 million shares remaining under our current share repurchase board authorization.
At November 30, 2020, we had a cash and cash equivalents balance of $507 million.
We've demonstrated our ability to generate cash and use that cash to create shareholder value through investments in our business, dividends to shareholders and share repurchases during the quarter.
Our company is a unique combination of domain expertise in the industries that we serve and in the technology that will change them.
Our core lighting business is a durable performer in all markets, including the current market.
And we are executing on the transformation of this business.
We are in the process of making a better, smarter and faster to transform the service levels to our customers and the vitality of our product portfolio.
Distech and Atrius are attractive, valuable and strategically impactful technology assets that we believe we can build upon over time.
We are demonstrating consistent cash generation, and we have the opportunity to use that cash to grow our current businesses and invest in new businesses, while managing our capital structure, including share repurchases.
I'll now turn to our Q1 performance.
As Karen mentioned, net sales of $791 million were 5% below the prior year.
I'm particularly pleased with the performance in our retail sales channel, which was up 3% over last year's first quarter and in our independent sales network, which was down 3% as compared to the prior year.
As I described last quarter, our broad portfolio enables us to flex where there is opportunity, which this quarter included strength in warehouse and logistics, education and residential verticals.
Throughout the pandemic, we've seen broad disparity of performance across geographies and that continued in the first quarter.
We also manage productivity and cost relative to price to maintain our gross margin at 42%.
Throughout the pandemic, we've maintained our investment in product development.
We are introducing new lighting and controls products, as well as improving and evolving parts of our product and solutions portfolio.
We are increasing the impact of software in our product portfolio.
In the first quarter, we had a major firmware release for our nLight AIR product.
This release is called ABT, Autonomous Bridging Technology and is designed to increase the overall range of the nLight AIR system in networked environments by 300%, taking connectivity more reliable.
We've increased our focus on contractors and making their lives easier.
We launched the Compact Pro High Bay fixture by Lithonia Lighting during the quarter.
This is a new addition to our contractor select portfolio and is the most compact High Bay on the market, making it easier and quicker to install.
Contractors and distributors continue to respond favorably to our contract select portfolio.
This portfolio of products has enabled us to respond to discretionary opportunities in the independent sales network and to serve the needs of customers in the retail channel.
Sales growth in these products continue to meaningfully outpace the market.
We expanded our capabilities to provide a broad portfolio of leading germicidal UV products.
In addition to our relationships with Ushio, PURO and Violet Defense we had an agreement to purchase and resell the UV Angel Clean Air disinfection system, as well as pursue joint development of UV light disinfection products.
We now have the ability to serve multiple end use alternatives and are in the market, selling a variety of GUV products.
We are uniquely positioned to support customers with our luminaire, controls and building management portfolio.
We continue to make progress on our digital transformation that we call better, smarter, faster.
I'm pleased with the team we are creating to deliver on our platform and how we are enabling more customer-centric sales and operations.
For example, we are streamlining and enhancing our product catalog to make the process of finding, configuring and ordering products simpler and faster.
We are also increasing our ability to communicate with and update our contractors, distributors and agencies with more detailed status notifications.
We were offering them the ability to know in real time the status of the product orders.
We will continue our work to increase these service levels.
We've successfully recruited talented data scientists to leverage our data and build products powered by machine learning algorithms.
I'm excited about the progress we've made on our digital transformation to date and look forward to further enhancements for our customers.
Effectively allocating capital is an important part of how we will create value for our company.
Our priorities remain to first, grow our current businesses; second, grow our company through acquisitions; third, maintain our dividend; and fourth, create value through repurchasing shares.
In the first quarter, we repurchased 2.6 million shares of stock for $255 million.
Since we restarted our program during the fourth quarter, we have repurchased almost 8% of the company's stock.
We also successfully reintroduced ourselves to the debt capital markets during the fourth quarter.
We issued a $500 million 10-year bond at 2.15%.
We're pleased to lock in this capital for this duration at these rates.
As you can see in the first quarter, we continued to demonstrate our ability to generate cash and our ability to deploy that cash for long-term value creation.
As we look ahead, while we still see uncertainty in the end markets we serve, we are cautiously optimistic about improvement during calendar year 2021.
We are using the breadth of our product portfolio and the strength of our go-to-market teams to deliver solid top line performance.
At the same time, we are managing our costs well, while continuing to invest in our business for the future so that we will become a larger, more dynamic company.
As we look to grow, we believe that both for business performance, as well as for the understanding of our company, we should more clearly separate our lighting, lighting controls and components business and our intelligent buildings business.
To that end, later this fiscal year, we plan to reorganize our business into two units; Acuity Brands Lighting and Intelligent Buildings.
Acuity Brands Lighting will include our lighting, lighting controls and components businesses and Intelligent Buildings will include Distech and Atrius.
This new structure will better position Acuity to meet our customers' needs and strengthen our innovation through better prioritization and alignment within each unit.
We also believe this change will provide improved visibility with respect to the operational performance and underlying results of these businesses.
We are a company that delivers for our customers, our associates, our communities and our shareholders. | q1 adjusted earnings per share $2.03.
q1 earnings per share $1.57.
q1 sales $792 million versus refinitiv ibes estimate of $788.1 million. | 1 |
In addition, on the call, we will discuss non-GAAP financial measures.
Investors can find, both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's annual reports, quarterly reports and other forms filed or furnished with the SEC.
This past year has been exceptionally challenging as the world contends with a pandemic that has upended all of our lives.
We are grateful for the first responders who keep us safe and for those who provide the services we all count on every day.
I am proud that Six Flags has been able to make a difference in the communities we serve by hosting vaccination sites and testing locations and by donating food banks for those in need.
They have continued to amaze me with their dedication, perseverance and resilience as we found innovative ways to safely entertain nearly 7 million guests as a preferred entertainment choice.
We established the highest standards of cleanliness and safety protocol as validated by local health officials and our guest feedback.
We strengthened our liquidity position, significantly reduced our operating and capital expenditures and continue to innovate to safely and successfully reopen our parks.
I've never been more proud of our company or more confident in our future.
In the fourth quarter, we continued to make significant progress on our transformation plan, which focuses on strengthening our core business.
This plan is in full action and will fuel our new strategy to drive long-term profitable growth.
Our new strategy is evolutionary, not revolutionary.
We are going to do many of the same things we did in the past.
We are going to do them better.
Specifically, we will modernize all aspects of the guest experience and we will operate more efficiently as an organization.
As I stressed on our last call, our guests still love our roller coasters and funnel cakes.
They just want a more seamless experience and we can provide them that through technology.
We have divided our call into three parts.
First, I will provide an overview of our recent operating performance and the strong demand trends we are seeing.
Second, Sandeep will go into more detail about our financial results and give an update on the progress of our transformation plan.
Finally, I will return to discuss our new strategy in more detail and review our three strategic focus areas.
We are pleased that our attendance has consistently improved since we first reopened our parks last year in the second quarter.
I'd like to highlight a few reasons why we're so optimistic about the upcoming season despite the challenging operating environment.
First, on a comparable period basis, attendance trends in open parks have increased from 20% to 25% of 2019 levels in the second quarter to 35% in the third quarter to 51% in the fourth quarter.
We have continued to see strong signs so far this year with attendance in open parks trending at consistent levels as the fourth quarter despite extreme weather conditions in Texas over the past couple of weeks.
Our guest surveys indicate that there is extraordinary pent-up demand for outdoor entertainment options close to home.
And we believe that this widespread desire will drive attendance in the coming quarters.
Second, we are encouraged by the resiliency of our Active Pass Base which was approximately flat between the third quarter and fourth quarter of 2020.
Even more encouraging, the number of members who retained their memberships after their initial 12-month commitment period, our most valuable guests, is actually up versus this time last year.
We see the strong retention of our members even in the midst of a pandemic as a testament to our unique offering and our loyal following.
Once our parks are back up and running at full capacity, we expect that our Active Pass Base will quickly ramp back up to previous levels and beyond.
Third, the pandemic encourage us to think creatively about how to maximize use of our parks.
Both the creative solutions we found and the underlying dynamism of our team will continue to drive growth well past COVID.
Demand was so high that we will operate the drive-through safari again starting in March 2021 creating the longest season in the Animal Parks history.
In the fourth quarter, we also offered drive-through or walk-through holiday experiences with our rides at four of our theme parks giving our guests the opportunity to celebrate the season with lights, beloved characters and festivities.
These events proved so popular that we extended them into January.
Going forward, we expect to continue many of these events, which will allow us to extend our operating season and give guests even more reasons to visit our parks throughout the year.
So while the environment remains fluid, we are encouraged by recent trends and are optimistic about both the short and long-term prospects of our business.
Results for the fourth quarter and full-year are not comparable to prior year because of temporary park closures, modified operations and attendance limitations.
Total attendance for the quarter was 2.2 million guests, 338,000 of which came from the four parks that offered modified Holiday in the Park lights without rides and our drive-through safari in New Jersey.
Revenue in the quarter was down $152 million or 58% to $109 million as a result of a 65% decline in attendance.
Sponsorship, international and accommodations revenue in the fourth quarter declined by $8 million due to the deferral of most sponsorship revenue and the suspension of the majority of our accommodations operations.
Guest spending per capita in the quarter increased 17% driven by a 16% increase in admissions spending per capita and a 19% increase in in-park spending per capita.
The increase in admissions spending per capita was driven primarily by recurring monthly membership revenue from members who retained their memberships after their initial 12-month commitment period, as well as an increase in the mix of single-day guests.
The increase in in-park spending per capita was primarily driven by a higher mix of single-day guests who tend to spend more per visit.
In addition, revenue from recurring monthly all-season membership products such as the all-season dining pass contributed to the increase.
Attendance from our Active Pass Base in the fourth quarter represented 55% of total attendance versus 71% for the fourth quarter of 2019 demonstrating our success in attracting visitation of single-day guests.
On the cost side, cash, operating and SG&A expenses decreased by $30 million or 18%, primarily due to the following: first, cost saving measures, primarily related to reduced salaries and wages and lower Fright Fest and Holiday in the Park related costs due to the restricted operating environment and our organization redesign completed in October; second, lower advertising costs; third, savings in utilities and other costs related to the fact that several of our parks were not operating or were operating with a reduced product offering.
These cost savings were offset by a charge of $19 million due to an increase in legal reserves.
The total amount recorded reflects managements estimate of the probable outcome of a legacy class action lawsuit.
Excluding the litigation charge, cash costs decreased by $49 million or 29%.
While we have taken measures to reduce our variable costs, we retained 90% of our full-time members and maintained their benefits in order to position ourselves to reopen parks as safely and as soon as possible.
We reduced salaries of all employees by 25% during 2020 in order to preserve cash and our Directors also deferred their compensation for the last three quarters of 2020.
Several of them, including our retiring and new Chairman, opted to take that compensation in the form of stock.
Due to the improving outlook, we have restored all our employees to full salaries, with the exception of our CEO who opted to be restored in March.
Although these actions offset our cost reduction efforts somewhat, we believe they were the right decisions for both the short and long-term.
By keeping our parks in a state of readiness, we were able to maximize the number of days we could operate.
We also were able to keep our guests engaged, our employees motivated and our parks prepared for 2021.
Adjusted EBITDA for the quarter was a loss of $39 million which included a $19 million increase in legal reserves compared to income of $72 million in the prior year period.
Moving to full year performance.
Attendance of 6.8 million guests was down 79% from prior year.
Total revenue of $357 million was down 76% driven by lower attendance due to park closures, limited operations.
Total guest spending per capita increased more than $6 or 14% due to a higher percentage of single-day guests and the positive revenue impact from members who have remained past their initial 12-month commitment period.
Attendance from our Active Pass Base for the full year represented 56% of total attendance versus 63% for full year 2019.
Cash, operating and SG&A expenses were down 35% for the year due to cost savings measures taken immediately after we suspended operations.
This cost reduction offset a portion of the revenue decline resulting in an adjusted EBITDA loss of $231 million.
Fully diluted GAAP loss per share was $4.99, a decline of $7.10 primarily due to the lower attendance in our parks.
We are making significant efforts to ensure the continued loyalty of our Active Pass Base.
We extended the use of all 2020 season passes through the end of 2021.
For our members, we added an additional month to their membership for every month they paid when their home park was closed.
We are also rolling out a gift card option in the second quarter that members can choose to use in our parks in lieu of adding additional months to their membership.
Finally, all members have the option to pause their membership payments at any time through spring 2021.
However, we have offered a menu of benefits including upgrades to higher membership tiers if they elect to continue on their normal payment schedule.
As of today, only about 20% of current members have chosen to pause their membership.
We anticipate that most of these paused members will return to active paying members once we reopen our remaining parks.
We are pleased with the retention of our very large Active Pass Base, which included 1.7 million members and 2.1 million season pass holders at the end of 2020.
Our Active Pass Base was approximately flat compared to the end of the third quarter 2020 when we had 1.9 million members and 1.9 million season pass holders.
Our Active Pass Base at the end of 2020 is down 51% compared to the end of 2019.
While this is a significant decline, it is important to assess this in proper context.
This decline is almost entirely due to lower sales of new season passes and memberships during 2020 as they were difficult to sell with so much uncertainty during the pandemic.
We also did not hold our usual pass sales events including our flash sale in September, which contribute significantly to our year-end Active Pass Base.
That being said, because we extended our 2020 season passes through the end of 2021, our Active Pass Base, as of today, is down less than 10% versus the same day last year, which preceded the pandemic's impact.
We believe this represents a more meaningful comparison for our Active Pass Base heading into the 2021 operating season as we believe the season pass holders and members who were extended will visit our parks in 2021.
Looking ahead, we expect the Active Pass Base trends to continue to improve as we start selling more new passes and memberships.
Deferred revenue as of December 31, 2020 was $205 million, up $61 million or 42% to prior year as we expect to recognize most of this deferred revenue in 2021.
The increase was primarily due to the deferral of revenue from members and season pass holders whose benefits were extended through 2021, partially offset by lower new season pass and membership sales.
Total capital expenditures for the year were $98 million, a reduction of 30% from 2019.
We expect our 2021 capital spend to be slightly lower than 2020 due to the carryover of new rides that were delivered and paid for, but not commissioned in 2020.
Our liquidity position, as of December 31, was $618 million.
This included $460 million of available revolver capacity, net of $21 million of letters of credit and $158 billion of cash.
This compares to a liquidity position of $673 million as of September 30, 2020.
Net cash outflow for the quarter was $56 million, representing an average of $19 million per month.
As a reminder, our net cash outflow in the fourth quarter included partnership park distributions that represented an average of $7 million per month.
Our fourth quarter cash flow benefited by $8 million from the sale of some excess land in New Jersey, which was not in our prior estimates.
Without the landfill, our net cash outflow was $21 million per month, an improvement from our prior estimates of $25 million to $30 million.
We historically experienced significant cash outflow in the first quarter of the year as the majority of our parks are closed, yet, we incurred an elevated operating and capital expenditures to prepare for our parks opening in the spring.
We estimate that our net cash outflow in the first quarter of 2021 will be higher than normal or approximately $53 million to $58 million per month.
This is primarily due to three things.
First, the normal seasonality of our business.
Second, the timing of interest payments on our newly issued $725 million of senior secured debt.
And, third, the pandemic-related limitations on our parks, including our California and Mexico parks that typically have year round operations.
We are striving to be cash flow positive for the balance of the year but this is largely dependent upon all our parks opening and attendance levels continuing to normalize.
I would now like to give you an update on the progress of our transformation plan.
The headline is this.
We are on track with our plan and we are highly confident in our ability to achieve our objectives.
Executing the transformation plan will require one-time cost of approximately $70 million through 2021, including $60 million of cash and $10 million of non-cash write-offs.
So far, $35 million has been incurred through the end of 2020, including the non-cash write-offs of $10 million.
We expect to incur the remaining $35 million by the end of 2021.
Approximately two-thirds of the spending in 2021 is related to investments in technology, beginning with the implementation of a state-of-the art CRM system.
We expect the transformation plan to unlock $80 million to $110 million in incremental annual run rate EBITDA once fully implemented and the company is now operating in a normal business environment.
In 2021, we expect to achieve $30 million to $35 million from our organization redesign and other fixed cost reductions.
In January alone, we realized more than $2 million of fixed cost value due to transformation, so we are well on track to achieve our estimated savings for 2021.
We expect to ramp up to the full amount of benefits as attendance grows to 2019 levels.
We have already completed significant portions of the work that will benefit us in 2021 starting with our three cost initiatives.
First, as we announced last fall, we reduced our full time headcount costs by approximately 10%.
We are piloting new approaches to recruiting and training and moving to centralize some of our back office operations, such as finance, human resources and IT.
Second, from a non-headcount cost perspective, we closed offices in New York City and West Hollywood and are in the midst of driving savings through centralized negotiations with a number of our vendors.
Initial results are validating the projected value opportunities of these initiatives.
Third, from a variable labor perspective, we are piloting our park level labor model, which will allow us to dynamically match stuffing with attendance levels throughout the day.
We are conducting this pilot in our Texas parks and plan to roll it out to our remaining parks once we validate that the model is working effectively.
We will realize the benefits of the model as attendance levels rise and we will keep you updated as our parks continue to open.
We are also making excellent progress on our revenue initiatives.
Specifically, we are testing our new and improved menu assortment, pricing and merchandising strategy in Over Texas and Fiesta Texas.
We expect to expand these initiatives to all other parks once they reopen.
Our marketing team and media agency have incorporated the use of our media ROI tool and we plan to measure our ROI by park in the future.
We continue to improve our website, which we rolled out last fall.
We will soon make it available for our parks in Mexico and Canada.
Finally, we continue to make progress with our initiative to bring back single-day visitors, particularly those living far away enough from our parks where a season pass is not an attractive option.
While we always prefer to sell a season pass or a membership because of the highest full season revenue, we believe there is a significant opportunity to capture additional attendance by targeting single-day visitors.
We are already seeing a positive impact on our attendance and per caps as a result of this initiative.
As we announced last December, we are changing our method of determining our fiscal quarters and fiscal years, such that each fiscal quarter shall consist of 13 consecutive weeks ending on a Sunday.
Each fiscal year shall consist of 52 weeks or 53 weeks and shall end on the Sunday closest to December 31.
During the years when there are 53 weeks, the fourth quarter shall consist of 14 weeks.
Because of this change, our first fiscal quarter of 2021 will end on April 4 instead of March 31 and the current fiscal year will end on January 2, 2022.
The purpose of this change is to align our reporting calendar with how we operate our business and to improve comparability across periods.
Looking ahead, the operating environment remains unpredictable.
So it's difficult to project beyond the next three months.
For that reason, we are not providing annual guidance at this time.
We have announced opening dates for all our parks that are not already open with start dates beginning in March.
That being said, we will remain flexible and we'll be cautious to commit our capital, media and labor dollars only when we believe there will be a strong ROI.
We are extremely encouraged by the improvements in our attendance trends in the face of the pandemic, and we are very excited about the value creation that will come from implementing our transformation plan.
We have more work to do, but I'm pleased by our progress so far.
The whole company is intently focused on executing the transformation plan over the coming quarters.
Now, I will pass the call back over to Mike who will tell you more about our strategy.
Our strategy is to drive profit from our core business because this will create sustainable value over time.
We can grow our business from its core because we operate in a healthy industry that is benefiting from long-term secular trends as consumers increasingly choose to spend on experiences over objects.
Even within out-of-home entertainment, regional theme parks are a compelling sector because they enjoy high recurring cash flow that has proven to be extremely resilient during downturns.
These attributes have enabled our industry and our company to deliver strong revenue and earnings growth over time.
However, over the past few years, we did not evolve at the same pace as our guest expectations.
As a result, we underperformed the industry from both a top-line and bottom-line perspective.
To reinvigorate profitable growth, our team has reassessed every aspect of our business.
We have developed an updated strategy to ensure that we constantly evolve so we not only meet but exceed our guests' expectations, both now and for many years to come.
So here it is.
Our strategy is to create thrilling memorable experiences at our regional parks delivered by a diverse and empowered team through industry-leading innovation and technology.
Our vision is to be the preferred regional destination for entertainment and our mission is to create fun and thrilling memories for all.
Our core values prioritize safety and the guest experience and drive accountability throughout the organization.
Our values will result in a guest-centric culture; a commitment to prioritize the guest at every decision point.
Looking to the future, three key long-term focus areas will drive our strategy.
First, modernizing the guest experience through technology; second, continuously improving operational efficiency; and third, driving financial excellence.
For each of these focus areas, we will measure our progress based on certain key performance indicators.
For our first focus area, modernizing the guest experience through technology, our goal is to create a seamless and improved in-park experience with new applications of technology.
First, we will provide opportunities for our guests to tailor the in-park experience to each of their individual preferences.
Second, we will decrease wait times wherever possible, especially for our roller coasters where we are testing several virtual queuing and reservation systems.
Third, we will facilitate our guests' ability and desire to share their experience on social media.
Finally, we will improve food and beverage quality and the overall appearance of our parks.
In everything we do, we will prioritize the guest experience.
Here are a few highlights of our progress on this focus area thus far.
Website redesign; our new simplified website has made it easier than ever for guests to find information about our offerings and to purchase tickets.
This has led to higher sales conversion rates and higher per caps.
Customer relationship management; we are in the midst of developing a new CRM platform that will allow us to understand and predict our guests' preferences from the moment they visit our website to the moment they leave the park.
Based on this consumer data, we will begin tailoring our offerings to their preferences and customize their experiences so they get exactly what they want when they want it.
Contactless security; our guests no longer have to wait in long lines or have their bags searched to enter our parks.
They now walk seamlessly through our contactless security systems which scans them for anything unsafe and also measures their temperature to ensure safe environment.
Cash card kiosks; our domestic parks that opened for normal operations in the fourth quarter have offered any guests who only have cash the ability to obtain cash cards from kiosks throughout the parks in order to facilitate electronic transactions.
This improves hygiene within our parks, while also speeding up transactions and eliminating cash handling costs.
Mobile dining; our guests no longer have to wait in long lines to order food.
Instead they can choose to order on their smartphones and pick up their food when it is ready.
Mobile dining has also led to higher average checks.
For this first focus area of modernizing the guest experience through technology, the key performance indicators will be attendance and revenue.
Moving on to our second focus area; continuously improving operational efficiency, we will deliver products and services in a more cost-efficient manner, including effectively deploying park-level labor, leveraging our scale of increased purchasing power and optimizing our ride portfolio.
We are also focused on increased guest throughput on our rides, as well as our food and beverage locations.
As Sandeep mentioned, we have moved quickly to streamline our organization and reduced other fixed costs and we expect to realize $30 million to $35 million of fixed cost savings in 2021.
For the second focus area; continuously improving operational efficiency, the key performance indicator will be operating expense ratio, which is the ratio of our operating expenses relative to our revenue.
We will begin to measure this ratio once we return to a more normal business environment.
Finally, our third focus area is driving financial excellence.
We expect our transformation initiatives to create a new adjusted EBITDA baseline of $530 million to $560 million once our plan is implemented and we are operating in a more normal business environment.
After we achieve this baseline, we believe our strategy will allow us to grow revenue at low-to-mid single-digits, in line with the overall out-of-home entertainment industry.
Combined with our annual productivity initiatives, we will continue to invest back in our parks and improve margins to accelerate annual adjusted EBITDA growth to a range of mid-to-high single-digits.
In addition, we will be disciplined in the way we allocate capital to ensure we deliver sustainable earnings growth.
We have developed the following capital allocation priorities to guide our path toward financial excellence.
First, invest in our base business to facilitate profitable and sustainable growth.
this includes investments in our park infrastructure, in technology for our parks, and in systems that help us oversee our park operations.
This also includes investments in new rides and attractions, as well as other in-park offerings such as food and beverage.
We expect to maintain our annual capital expenditures at 9% to 10% of revenue.
Second, use free cash flow to pay down debt and return our net leverage ratio to between 3 and 4 times.
Third, once we are within our targeted leverage range, consider strategic acquisition opportunities to further build our regional network of parks.
Finally, if there are no acquisition opportunities that meet our strategic and financial return thresholds, we will return excess cash flow to shareholders via dividends or share repurchases.
For this third focus area of driving financial excellence, the key performance indicator will be adjusted EBITDA.
We have a resilient team and a resilient business.
Our team's focus for 2021 is to safely open all of our parks and ensure that we successfully execute our transformation plan.
I look forward to updating you on our continued progress in the months ahead.
Catherine, at this point, can you please open the call for any questions? | compname reports q3 revenue of $638 mln.
q3 revenue $638 million.
qtrly total revenue was $638 million, an increase of $17 million compared to q3 2019.
six flags entertainment - expects transformation plan announced in march 2020 to generate incremental $80 million to $110 million annual run-rate adjusted ebitda.
qtrly increase in operating costs was driven by higher wage rates & incentive costs to attract and retain team members. | 0 |
This is Debbie Young, director of investor relations at SCI.
With that out of the way, I'll now pass it on to our chairman and CEO, Tom Ryan.
I'm so very proud of your resolve.
You've never wavered from your mission.
You've continued to do what we do best, helping our client families gain closure, comfort, and healing through the process of grieving, remembrance, and celebration.
And a special shoutout to our frontline teammates, who provide peace of mind to our preneed customers, comfort and support to our grieving families, and to our maintenance teams that make every effort to ensure our locations and parks are world class.
Our team gets it.
It's the details that matter.
Now to the business at hand.
Then I will offer some commentary on our 2022 outlook.
Keeping in mind, we must be flexible as we navigate the uncertainty of another year impacted by COVID.
First, in terms of the full year 2021 results.
We ended the year with a strong performance in both our cemetery and funeral segments.
For the year, we grew revenue $632 million, or 18%; and adjusted earnings per share to $4.57, or 57% compared to the prior year.
While we saw 4% comparable funeral volume growth, even growing over a COVID-impacted 2020, the primary drivers of our revenue was mid-20% growth in both preneed and atneed cemetery revenues, combined with a strong 7% increase in our funeral sales average.
Timely, meaningful action in our share repurchase program and debt refinancing also drove healthy increases in our full year 2021 earnings per share.
Now, shifting to the fourth quarter.
We generated adjusted earnings per share of $1.17, a 4% increase over the prior year quarter and a 95% increase over a pre-pandemic fourth quarter of 2019.
Compared to the 2020 fourth quarter, funeral results drove the earnings per share increase as a healthy 8% increase in the funeral sales average offset slightly lower volumes and cost increases associated with staffing and energy.
On the cemetery side, profitability was relatively flat as revenue growth from atneed cemetery sales and preneed cemetery sales was offset by lower impact from new construction on cemetery projects and increased costs from staffing and maintenance.
Below the line, the benefit of fewer shares outstanding offset higher general and administrative, and interest expense, as well as a higher tax rate.
Now, let's take a deeper look into the funeral results for the quarter.
Total comparable funeral revenues grew $47 million, or about 9% over the prior year quarter, exceeding our expectations as core revenues, non-funeral revenues from SCI Direct and general agency revenues all saw impressive growth in the fourth.
Comparable core funeral revenues were $32 million, led by an impressive 8.4% increase in the comparable funeral sales average, The core sales average continues to climb sequentially and is up about 5% over the 2019 pre-COVID fourth quarter.
Our percentage of families selecting to have funerals and celebrations of life has essentially returned to pre-COVID levels, and the funeral sales average is being further positively impacted by an uptick in ancillary revenues, such as flowers and catering.
This increase in average was achieved despite a 120-basis-point increase in the core cremation rate.
Comparable core funeral volume declined 1.5% compared to the prior year quarter, slightly offsetting the positive impact of the funeral sales average.
Keep in mind, the 2020 fourth quarter we were comparing against was acutely impacted by COVID and saw a 17% higher core funeral volume increase over the 2019 fourth quarter.
From a profit perspective, general gross profit increased $10 million while the gross profit percentage dropped 60 basis points to 27%.
Fixed costs in the funeral segment include salaries, fringe, vehicles, facilities, and general and administrative expenses.
In the fourth quarter of 2020, those costs were actually down 2% versus the 2019 fourth quarter even with 17% more volume as the pre-vaccine era of the virus restricted both the consumers and our ability to provide a full service funeral.
In the 2021 fourth quarter, these costs increased by 8% compared to the 2020 fourth quarter.
So overall, our fixed costs have increased 6% over the two-year period, or let's say, 3% on a compounded annual basis while we are caring for 17% more customers than we did in 2019.
So bottom line, I believe we're managing our costs very well against an unusual and difficult 2020 fourth quarter comparison.
Preneed funeral sales production for the quarter exceeded our expectations, growing $30 million from nearly 14% over the fourth quarter of 2020.
Both our core funeral homes and SCI Direct businesses posted strong production increases against an easier fourth quarter comparison in 2020.
Our core preneed funeral average revenue per contract [Inaudible] the backlog now is over $6,300.
This is an 8% increase over 2020 and more than $300 higher than our atneed average for the quarter.
We continue to see positive momentum in generating significantly more high-quality marketing leads at a lower cost through increased focus on digital leads, as well as more sophisticated data targeting for our direct mail and seminar programs.
Now shifting to cemetery.
Comparable cemetery revenue increased $21 million, or 5%, in the fourth quarter.
In terms of the breakdown, atneed cemetery revenue generated $13.5 million of the growth, driven by a higher quality core average sale and a modest increase in contract velocity.
Recognized preneed revenues generated about $8 million of the revenue growth, primarily due to higher recognized preneed merchandise and service growth.
So preneed cemetery sales production grew 30 -- $39 million or 13% in the fourth quarter.
This growth is on top of a 2020 fourth quarter, which grew by 16% over 2019.
A higher core sales average accounted for the majority of the increase.
However, we were still able to grow the velocity of contract sold by almost 5%, which accounted for the remainder of the sales production.
As I mentioned in my preneed funeral discussion earlier, we continue to see production growth from marketing generated leads program that very successfully led to preneed sales production.
Additionally, we're seeing improvements in key sales metrics, such as the number of appointments set and our close rate.
I want to take a moment to recognize the tremendous efforts of our entire cemetery sales team.
For the full year 2021, they produced $1.3 billion cemetery preneed sales production.
This represents a 28% increase over and above the very strong 15% growth in 2020.
This could not be accomplished without a tremendous sales organization that is supported by the tireless efforts for cemetery management, administration, and especially our talented grounds maintenance associates that keep our parks beautiful.
Cemetery gross profits in the quarter declined slightly by $1 million and the gross profit percentage dropped 200 basis points to 36.8%.
Recall that in the prior year quarter, no vaccine exists and we saw fewer visitors to our cemeteries, so labor and maintenance costs were temporarily low.
Now, as we normalized staffing levels and make enhancements in our park's appearance, these costs combined with higher selling costs, higher energy costs, reduced margins as compared to the prior year.
Now let's shift to a discussion about our outlook for 2022.
At the midpoint, this represents a 20% increase from our previously mentioned model midpoint $2.80 in our third quarter conference call.
The $3 midpoint reflects a $0.165 compounded annual growth rate over the pre-COVID earnings per share base in 2019 of $1.90, well above our historical guidance range.
As you think about the cadence for the year as we compare back to a $4.57 2021, we would expect negative comparisons for each quarter.
We should see continued elevated earnings in the first quarter due to COVID as we are continuing to experience increased demand with funeral volume and atneed cemetery sales.
As the year goes on, we would anticipate that the COVID impact becomes immaterial and that we should begin to see the pull-forward impact from 2020 and 2021 having a mildly negative effect on funeral volumes and atneed cemetery revenue, thereby making the quarterly comparisons increasingly more difficult.
For the year, we believe the favorable COVID impact from the fourth quarter and the pull-forward effect later should effectively offset into an impact that will not be material.
So how are we going to grow earnings per share at a 16.5% compounded annual growth rate from the 2019 base?
First, we reduce the share count with accelerated share repurchases during the uncertainty of the last two years.
The pandemic also forced us to quickly leverage and implement technology in ways that would have taken many years to take hold in an organization of our size.
We believe these accelerated changes have made us more productive with our processes, staffing, and other efficiencies.
On the sales side, we had to lean on our technological tools to manage, allocate leads, and develop and train our counselors, which has resulted in a much more productive organization.
Now, let's discuss some of the segment assumptions.
Within our funeral segment, we know we're going to have to transition period where volumes are affected by the pull-forward of services into 2020 and 2021 that I just described.
Our expectations for the pull forward continue to diminish as we see a larger number of the younger population being affected by these latest surges in COVID and COVID-related mortality.
For funeral volumes, we're anticipating a possible volume decrease in the mid-teen percentage range from 2021, but at levels that are flattish to a pre-COVID 2019 after considering the full-forward impact.
Meanwhile, we expect the average revenue per case to continue to compare favorably, growing at a low single digit range.
And finally, we forecast preneed funeral sales production to grow in a 3% to 5% range for the year.
On the cemetery side of the business, cemetery atneed revenue should correlate strongly with funeral volume so we expect them to also be down in the mid-teen percentage range.
We expect preneed cemetery sales production to fare much better as we can drive activity with marketing leads so e expect a decline in the mid to high single digit percentage range when compared to a very robust 2020 and then returning to a more normalized growth in 2023 but on a much higher base.
Beyond 2022, as I just mentioned, we believe the pull-forward effects will wane, and the trend of year-over-year growth should begin as we approach this aging baby boomer cohort with a leaner, more technologically efficient, and effective operating model.
We continue to believe that after establishing a new base here in 2022, we will return to earnings growth in the 8% to 12% range in 2023.
And with demographic tailwinds and the improvements we have made and planned to continue to make to our operating platform, we expect to capture upside opportunities in the years ahead.
As we reflect over the past seven or eight quarters during this pandemic, we're so proud of all of our associates, especially those who have been on the frontlines with the families and communities we've had the privilege to serve.
We're all hopeful we are closer to the end of this pandemic, which will enable us to return to some form of normalcy for all of us.
So with that, I'd now like to transition to walking you through our cash flow results and capital for the quarter and full year of '21 and then provide some comments on our outlook for 2022.
So operating cash flow is approximately $190 million in the current quarter, compared to $245 million in the prior year with the primary decline due to an increase in cash tax payments during the quarter of $97 million versus the $36 million in the fourth quarter of last year.
Excluding cash taxes in both periods, operating cash flow before taxes increased almost $6 million to $287 million in the fourth quarter, driven by modest increases in earnings and favorable working capital, partially offset by $6 million of higher cash interest payments.
So as we step back and look at the full year of 2021, we generated $912 million in adjusted operating cash flow, representing a substantial increase of $108 million or 13% over the prior year.
Deducting recurrent capex of $260 million, which again represents maintenance, capex and cemetery development capex, we calculate free cash flow for the full year to be an impressive $652 million in 2021, up $33 million from $619 million in 2020.
So capital deployment has really been a highlight all year for us.
And the fourth quarter was no exception, deploying nearly $500 million, which is the highest quarterly capital deployment we have seen in recent history.
This capital went to reinvesting in our businesses first, expanding our footprint through key acquisitions and new funeral home builds and returning capital to shareholders.
Now let's talk about the breakdown.
We invested $110 million in our businesses with $65 million of maintenance capital and $45 million of cemetery development capital spend during the fourth quarter.
From a growth capital perspective, and as I mentioned on our October call, recall that we were very excited about the acquisition candidates we're working with late in 2021.
So I'm happy to report, as you've seen, that those acquisitions closed, bringing the total investments during the quarter to $112 million and again expecting low double digit to mid-teen IRRs on each of these transactions.
These businesses added almost $40 million of full year revenues from 28 funeral homes and two cemeteries in Ohio, California, Illinois, Oregon, and Rhode Island.
We also deployed about $16 million toward new builds in Texas, Colorado, Washington, and Florida.
This brings total 2021 spend on new builds to $43 million with again low double digit to maintain IRRs, which also helped drive additional earnings and cash flow growth for the company.
Finally, we deployed $248 million of capital during the quarter to shareholders through dividends and share repurchases and $700 billion for the full year of 2021.
For the last two years alone, we meaningfully reduced our outstanding shares by about 10% through timely execution on our repurchasing strategy.
Since the inception of our repurchase program, we have now reduced our shares outstanding by just over 50%.
So now let's shift to our outlook for '22 in terms of cash flow and capital.
As Tom mentioned, at the midpoint of our earnings guidance range of $3, we expect to meaningfully exceed our 8% to 12% earnings growth framework for earnings per share when comparing back to pre-COVID 2019 base of $1.09.
So from a cash flow perspective, our 8% to 12% earnings growth framework generally translate historically into about a 4% growth in adjusted cash flow before cash taxes.
So adjusting for $150 million of expected cash taxes in '22, our adjusted cash flow from operations before cash taxes is expected to be about an $850 million at the midpoint.
This equates to a 6.5% CAGR over our pre-COVID 2019 adjusted cash flow from operations before cash taxes of $700 million, which is similarly in excess of this normalized 4% annual growth that we normally expect.
So there are also a couple of items that I'd like to highlight when we think about our adjusting cash flow in 2022.
First, we'll be required to pay the remaining half for about $20 million of payroll taxes that were deferred in 2020 as allowed under the CARES Act.
And as I just mentioned, cash tax payments in '22 are anticipated to be about $150 million based on the midpoint of our earnings guidance, or $115 million lower than the $265 million of 2021.
And from an effective tax rate standpoint, we continue to model in the range of 24% to 25% in 2022.
One other topic I'd like to address for 2022 as we look forward for the full year is our corporate G&A expectations.
Now historically, we've guided to around $125 million to $130 million of annual recurring corporate general administrative expenses.
Recently, we have begun a process to reevaluate our overhead structure with all of the initiatives we currently have underway.
As a result of this review that is ongoing, we have identified about $20 million to $25 million of costs, which we believe may be more appropriately characterized as corporate in nature versus field-related expenses that is primarily related to certain technology, risk, and governance areas.
Therefore, when you're modeling 2022 at this point, I would expect annual corporate G&A to increase to maybe around $145 million to $150 million per year with the corresponding dollar for dollar decrease in costs and the segment margins.
So therefore, with no effect on our bottom line or our cash flows.
So looking forward to 2023, we expect to return to a normalized cash flow growth trajectory with an expected 4% growth and adjusted cash flow from operations before cash taxes, which again is in line with our 8% to 12% earnings growth framework per share that we just mentioned.
So in terms of capital deployment, moving on to some thoughts in 2022.
Our expectations for maintenance and cemetery development capital spending is $270 million to $290 million for the year.
At the midpoint, cemetery development capex comprises about $120 million of this amount, and maintenance capex makes up the remaining $160 million.
This maintenance capex of $160 million includes about $110 million of normal routine maintenance capital used at our funeral and cemetery operating locations, as well as another $50 million for field and corporate support capital.
This $50 million is primarily being deployed toward technology to not only improve the customer experience with ultimately customer-facing technology, but also toward network infrastructure at our operating locations.
In addition to these recurring capital expenditures of $280 million at the midpoint, we expect to deploy $50 million to $100 million toward acquisitions, and roughly $50 million more in new funeral home construction opportunities, which together, as I continue to say, drive meaningful after-tax IRRs, well in excess of our cost of capital.
So to summarize this for a capital deployment strategy for 2022, we really expect to continue much of the same as you've seen from us over the past several years.
We follow a disciplined and balanced approach, deploying capital to the highest relative value for our shareholders.
And of course, this strategy is predicated on our stable free cash flow, our robust liquidity, which is over $1 billion at the end of the year, as well as our favorable debt maturity profile.
Lending additional support to this strategy, our leverage ratio at the end of the quarter landed just under 2.6 times from a net debt to EBITDA perspective.
And as we've noted in the past, looking beyond the impacts of this pandemic, we continue to expect to increase back to our targeted leverage range of 3.5 to 4 times toward the latter part of this year as we lap stronger EBITDA quarters moving forward.
So in closing, after a very strong 2020, we're very pleased that we exceeded those results in 2021.
We are most proud of our team has persevered over the last two very challenging years.
The compassion and professionalism our teams have demonstrated is truly remarkable and we appreciate each and every one of our team members.
As we look forward to another year, I'm very excited about the momentum we have moving forward into 2022. | q4 adjusted earnings per share $1.17.
qtrly revenue grew $73 million, or 8%, over prior year quarter to $1,043 million.
sees 2022 adjusted earnings per share $2.80 - $3.20. | 1 |
It is important to note that the ongoing uncertainty related to COVID-19 and its potential effects on the global retail environment could continue to impact our business results going forward.
You may also hear us refer to amounts under U.S. GAAP.
At the beginning of last year, we were confronted with significant uncertainty about our business due to impacts from the COVID-19 pandemic.
With dynamic changes in purchase behavior and marketplace demand, we faced several obstacles as we worked through what we believe to be a recovery year following a difficult 2020.
At that point, it would have been easy to stay conservative and adopt a wait-and-see strategy, yet the tremendous progress we made following our multiyear transformation, including healthier demand for the Under Armour brand, and the passion that this team shows up with every day meant going on offense was the only path for 2021.
And because we stayed on offense, Under Armour delivered a record year of financial results, a year that exemplifies the power of our long-term strategic plan and our ability to stay hyperfocused on execution while leveraging our core strengths to position us more strongly for our next chapter of growth.
Throughout 2021, we worked methodically to expand our brand's awareness and engagement, ensuring we showed up more consistently, louder and with a sharper point of view about the distinct role we play in an athlete's journey to compete.
We underscored our commitment to performance by delivering some of the most innovative products that we've ever produced.
We forged deeper and more productive relationships with our key wholesale partners.
We saw significant progress in our largest long-term growth drivers, our international, direct-to-consumer, women's and footwear businesses.
And we're stronger financially than we've ever been.
In this respect, looking at some of our highlights.
While our year-over-year comparisons benefited from the significant COVID-19 impacts we experienced in 2020, we are equally pleased with our performance over the past two years.
For the full year 2021, revenue was up 27% to reach $5.7 billion, which is a record.
Versus 2019, revenue is up 8%.
So solid progress from before the pandemic, and the result driven by several strategies that have lifted the quality and composition of our sales compared to a few years ago.
Wholesale revenue increased 36% to $3.2 billion in 2021.
On a two-year basis, wholesale is up 3%.
As detailed in previous calls, this performance has been tempered by the strategic decisions we've made to improve brand health by reducing our sales to the off-price channel and exiting approximately 2,500 undifferentiated retail doors in North America, an effort which is now concluded.
Our direct-to-consumer business was up 26% to $2.3 billion in 2021.
Versus 2019, direct-to-consumer is up 29%, with strong momentum in our owned and operated stores and our e-commerce business.
Following a 40% increase in 2020, our e-commerce business was up 4% in 2021, equating to 45% growth on a two-year stack.
This result gives us confidence that this business is well-positioned following a prolonged period of elevated promotional activities.
2021 gross margin was up 210 basis points to a record 50.3%.
Versus 2019, gross margin is up 340 basis points, so excellent progress over two years, driven by benefits from pricing and a more favorable channel mix being offset by supply chain headwinds related to COVID-19 and the absence of MyFitnessPal, which we sold at the end of 2020.
Rounding out the P&L.
Our full year operating income reached $486 million, net income was $360 million, and our diluted earnings per share was $0.77, all three of which are records.
We also realized strong balance sheet and cash flow performances with inventory down 9% to an absolute dollar value that is only slightly higher than in 2015 when we were a $4 billion business.
And finally, one more record having ended the year with $1.7 billion in cash.
All in, what an incredible period for Under Armour.
Having operated for nearly two years amid a global pandemic, I am proud of the progress we've made, the resilience we've shown and the potential we have to do even better in the future.
By staying focused on our key strategies, we are competing and executing at progressively higher levels, helping us unlock value and returns for our shareholders.
Driving us forward at the heart of why we exist is our purpose.
We empower those who strive for more.
For Under Armour, everything is about the journey.
From an awful workout when you want to quit but don't, to pushing through that last rep and adding one more, to earning that PR because you put in the work, Under Armour makes you better.
We do this by delivering innovative products, experiences and styles influenced by athlete insight and real-world data.
Innovations wrapped in our engineering to empower the journey to sport through training, competition and recovery, 2021 was an exceptional year for Under Armour products.
There are too many to list, but a few standouts on the apparel side include RUSH, Iso-Chill, Rival Fleece, Crossback, Infinity, Unstoppable and Meridian, all names that delivered a 33% increase in revenue we achieved.
On the footwear side, franchises like HOVR Sonic, Machina and Infinite; UA Flow Velociti Wind; Charged Pursuit, Assert, Aurora; Curry; and Project Rock contributed nicely to 35% growth, validating one of our largest long-term growth opportunities.
2021 was also an exceptional year in Under Armour's progress to connect our brand even more deeply with consumers.
From the optionality we created in our P&L, we were able to make incremental marketing investments, which we expect to fuel even stronger brand momentum in the years ahead.
At the center of these efforts, product, experience and inspiration fits The Only Way is Through.
More than a mantra, it's become an ethos, synonymous with the hard work necessary to power the journey, and it's always a journey.
From an initial product drawing to shopping bag to the closet, we obsess athletes and those who strive for more.
However, being purpose-led means that it's about more than just shirts and shoes.
And sport is so much more than just a game.
It teaches us to push past our limits, to be collaborators, to be leaders.
It increases confidence, reduces stress and improves mental health.
Yet many young athletes face barriers that prevent them from starting their journey to sport.
With a lack of fields and courts, gaps in coaching, shrinking leagues and the shortage of gear to play, train and compete with, we recognize that not everyone has access to sport.
Addressing this opportunity, a few weeks ago, we announced the long-term commitment of our resources, focus and energy to break down these barriers.
As we lay the foundation for our Access to Sport initiative, we are excited to share more in the years ahead as we build opportunities for millions of youth to engage in sport by 2030, ensuring that the next generations of focused performers are inspired even more holistically than those before them.
Now back to our business.
And the last two years have proven to be one of the most dynamic yet opportunistic times in Under Armour's history.
Managing the marketplace prudently through our constant focus on operational excellence to ensure we're keeping the brand healthy and moving forward, we are delighted with our results.
That said, let's look at how our regions performed in 2021, starting with North America, where revenue was up 29% to $3.8 billion or up 4% since 2019.
In our largest market, we continue to focus on three fundamentals.
First is becoming a better retailer by creating more compelling in-store experiences and delivering best-in-class service across our fleet.
Additionally, this means continuing to build on the momentum we've seen in our e-commerce business.
Realizing we'd likely see traffic declines compared to the abnormality that was 2020, we stayed focused on quality by investing in high-return vehicles like targeted PLAs and improved product wayfinding to improve our online shopping experience, and it's working.
In 2021, while we did experience a year-over-year traffic decline, it was more than offset by meaningful increase in conversion and therefore, solid revenue growth.
Second, with the critical mass of undifferentiated wholesale door exits behind us, we are encouraged by the productivity KPIs we're seeing across this channel in North America.
A more premium position driven by outstanding inventory management and promotional discipline is translating nicely to additional shelf space opportunities with our largest strategic partners, higher AURs and significantly better turns.
And that last point turns, which is really about execution, is a core element that gives me confidence that we're in an excellent position to adapt to however the environment may develop over the short term.
Third, we are continuing to drive performance by investing more smartly in marketing, which shows up in improved brand affinity scores around awareness, consideration and conversion.
Gaining better productivity from how and where we spend has always been the goal.
By delivering higher quality traffic through strategic paid media and targeted email activations, our ability to connect more meaningfully across key moments and multiple platforms has never been greater.
Turning to our international business.
Revenue in EMEA was up 41%, driven by nearly 50% growth in our wholesale business and continued momentum in direct-to-consumer.
We are encouraged by the quality of business results delivered in 2021.
Our efforts to position Under Armour as premium performance, healthier wholesale relationships and improved retail capabilities continue to validate the power of our playbook.
Our two-year performance is strong as well, with revenue in EMEA up 36% versus 2019.
Next up is Asia Pacific, where revenue was up 32% in 2021, driven by nearly 50% growth in our wholesale business and a strong increase in direct-to-consumer sales.
Clearly, the story here is about a more challenging environment that has developed in China as of late as evidenced by a 6% decline in our fourth quarter APAC revenue.
The recent market trends in China are impacting our business.
However, our focus in China remains the same: staying premium; continuing to invest in digital innovation, including working to deliver much improved end-to-end consumer engagement platform; and ensuring that store expansions are done at an appropriate pace in the dynamic market conditions.
Versus 2019, revenue in Asia Pacific was up 31%, so strong growth on a two-year basis.
And finally, revenue in our Latin America region in 2021 was up 18%, driven by strength in our full-price wholesale and distributor businesses.
As a reminder, we have transitioned certain countries in this region to a strategic distributor model, a decision we believe will begin to optimize this region's ability to grow and contribute more profitably in the years to come.
Versus 2019, revenue in Latin America is about flat on a two-year basis.
So in closing, we remain both confident and cautious in this operating environment.
And while current macro factors are having material impact on our business, we have no intentions of sitting idle.
Innovation, consumer connectivity and inspiring those to strive for more are not tactics at Under Armour.
They are a way of life.
Moving forward, we believe that the things we can control will continue to serve us as strengths, just as they did in fiscal 2021.
Regardless of the short-term environment, we are running a stronger, better company, one that is increasingly more capable of delivering sustainable, profitable growth and value creation for our shareholders over the long term.
I am pleased with where Under Armour is sitting, incredibly proud of this team.
And in my nearly five years here, I have never been more excited about our future.
And with that, I'll hand it over to Dave.
Since the beginning of COVID-19 pandemic, our intent has been to deliver appropriate financial performance while protecting the Under Armour brand and positioning ourselves for sustainable, profitable growth over the long term.
Leveraging the strength of a data-driven, consumer-centric strategy and a constant focus on operational excellence, we believe we can emerge from this unprecedented time as a stronger, more profitable company.
Despite the high level of uncertainty, we committed to staying agile to minimize downside risk while executing against our playbook to help us capitalize on upside opportunities as they arose.
In 2021, we did just this.
That isn't to say that uncertainty is over.
We remain vigilant about the dynamic environment we are operating in, including ongoing supply chain headwinds, rising wages and inflationary input cost pressures that continue to permeate the marketplace.
Yet we remain confident in our ability to deliver against our plan by staying focused on our business strategies and remaining nimble as we implement them.
Our fourth quarter results reinforce that confidence.
Compared to the prior year, revenue was up 9% to $1.5 billion.
As a reminder, we expected several headwinds in the quarter, including lower sales of SPORTSMASKs, lower sales to the off-price channel, the absence of MyFitnessPal and proactive supply constraints, among others.
Versus our previous expectation, our revenue overdrive was primarily due to higher demand across our full-price wholesale and direct-to-consumer businesses, particularly in North America, coupled with better-than-expected supply chain execution during this challenging environment.
From a channel perspective, fourth quarter wholesale revenue was up 16%, driven by strong performance in our full-price business, partially offset by lower year-over-year sales to the off-price channel.
Our direct-to-consumer business increased 10%, led by 14% growth in our owned and operated retail stores and 4% growth in our e-commerce business.
In addition, our e-commerce business is up more than 30% on a two-year basis.
And licensing revenue was down 33%, driven primarily by the recognition timing of minimum royalty payments.
By product type, apparel revenue was up 18%, with strength in our training and outdoor businesses.
Footwear was up 17%, driven primarily by our running and training categories.
And our accessories business was down 27% due to planned lower sales of our SPORTSMASKs compared to last year's fourth quarter.
From a regional and segment perspective, fourth quarter revenue in North America was up 15% to $1.1 billion, driven by premium growth in our full-price wholesale and direct-to-consumer businesses.
So excellent barometers to improving brand strength and consumer demand in our largest region.
Compared to 2019, North American revenue was up 8% in the fourth quarter, driven by higher quality revenue than two years ago.
In our international business, EMEA revenue was up 24%, driven primarily by strength in our wholesale business.
Compared to the fourth quarter of 2019, revenue in EMEA was up 11%.
Next up is APAC, where the business was down 6% in the quarter, driven by softer demand in our wholesale business, which more than offset DTC growth.
Compared to 2019, total APAC revenue was up 19%.
And finally, in line with expectations, Latin America revenue was down 22% due to the change in our business model as we moved certain countries to distributors, an effort which is now completed.
Versus the fourth quarter of 2019, Latin America was down 20%.
Related to gross margin, our fourth quarter improved 130 basis points to 50.7%.
This expansion was driven by 350 basis points of pricing improvements due primarily to lower promotional activity within our DTC business, favorable pricing related to sales to the off-price channel and lower promotions and markdowns across our wholesale business.
And 90 basis points of benefit related to lower restructuring charges.
These improvements were partially offset by 190 basis points of COVID-related supply chain impacts, driven by higher freight costs, which meaningfully offset product cost benefits during the quarter; 80 basis points related to the absence of MyFitnessPal; and 50 basis points of unfavorable product mix, related primarily to lower SPORTSMASK sales, which carry a higher gross margin.
Versus our previous expectation, our fourth quarter gross margin overdelivery was primarily due to favorable pricing developments from lower-than-planned promotional activity within our DTC business, more favorable pricing related to sales to the off-price channel and lower-than-planned promotions and markdowns within our wholesale business.
SG&A expenses were up 15% to $676 million, primarily due to increased marketing investments, incentive compensation and nonsalaried workforce wages.
Related to our 2020 restructuring plan, we recorded $14 million of charges in the fourth quarter.
So we now expect to recognize total planned charges ranging from $525 million to $550 million.
Thus far, we've realized $514 million of pre-tax restructuring and related charges.
We expect to recognize any remaining charges related to this plan by the end of the first quarter of our fiscal year 2023.
Moving on, our fourth quarter operating income was $86 million.
Excluding restructuring and impairment charges, adjusted operating income was $100 million.
After tax, we realized a net income of $110 million or $0.23 of diluted earnings per share during the quarter.
Excluding restructuring charges, income related to our first year of the MyFitnessPal divestiture earnout and the noncash amortization of debt discount on our senior convertible notes, our adjusted net income was $67 million or $0.14 of adjusted diluted earnings per share.
From a balance sheet perspective, inventory was down 9% to $811 million, driven by continued improvements in our operating model and inbound shipping delays due to COVID-related supply chain pressures.
Our cash and cash equivalents were $1.7 billion at the end of the quarter, and we had no borrowings under our $1.1 billion revolving credit facility.
Finally, following last year's convertible bond exchanges, we are proud to share that our cash position less debt of $663 million nearly doubled to $1 billion by the end of the fourth quarter.
Looking forward, one last reminder about our fiscal reporting year change.
Mechanically, the current period we're in right now, January 1 through March 31, 2022, will serve as a transition period until we begin our new fiscal year 2023 on April 1.
To revisit what we detailed last year, we believe this change, namely putting our two largest quarters in the middle of our new fiscal year, will provide us with greater visibility when providing our initial annual outlook.
In this respect, by the time of our next call, which is expected in early May, we'll have booked orders in hand for the majority of our fall/winter wholesale business.
That said, let's turn to our outlook for the current transition quarter.
From a revenue perspective, we now expect our transition period to be up at a mid-single-digit rate compared to the previous expectation of a low single-digit rate increase.
This includes approximately 10 points of revenue headwinds related to reductions in our spring/summer 2022 wholesale order book from supply constraints associated with ongoing COVID-19 pandemic impacts.
Moving forward, we expect many of these headwinds to continue well into fiscal 2023 until longer-than-usual transit times, backlogs and congestion find balance, associated freight and logistics costs normalize and inbound shipping delays subside.
At this time, we do expect these uncertainties to cause material impacts and variability in our future results.
And accordingly, we will remain cautious and agile as we operate our business into fiscal 2023.
That said, the proactive strategies we're employing, greater operational agility and overall demand for the Under Armour brand give us confidence in our ability to navigate this dynamic and challenging business environment effectively.
And we believe these COVID-related supply chain pressures are just a temporary speed bump on our road to continued profitable growth over the long term.
Turning to gross margin.
We expect our transition quarter rate to be down approximately 200 basis points against our Q1 2021 adjusted gross margin, which includes approximately 240 basis points of negative impact from higher freight expenses related to ongoing COVID-19 supply chain challenges in addition to an unfavorable sales mix, partially offset by pricing benefits.
With that, we expect operating income to reach approximately $30 million to $35 million and diluted earnings per share to be approximately $0.02 to $0.03.
In closing, we're proud of the record results we achieved in 2021 and the consistent progress we've made over the past couple of years.
This gives us great confidence in our brand and business and our team's ability to navigate this dynamic environment.
As we work through our transition quarter and head into fiscal 2023, we're monitoring and tracking the dynamic supply chain and inflationary pressures.
And we'll be mindful of the uncertainty and volatility that comes along with it.
These conditions demand that we maintain a high degree of agility, and I am confident we will. | compname posts q4 earnings per share $0.40.
q4 revenue $1.4 billion versus refinitiv ibes estimate of $1.26 billion.
q4 adjusted earnings per share $0.12.
q4 earnings per share $0.40.
qtrly wholesale revenue decreased 12 percent to $662 million and direct-to-consumer revenue increased 11 percent to $655 million.
qtrly gross margin increased 210 basis points to 49.4 percent compared to prior year.
quarter-end inventory was relatively flat at $896 million.
sees 2021 diluted loss per share is expected to be about $0.18 to $0.20.2021 revenue is expected to be up at a high-single-digit percentage rate.
sees 2021 adjusted diluted earnings per share in range of $0.12 to $0.14.
experienced significant ecommerce growth around world during q4 and full-year 2020. | 0 |
Our disclosures about comparable sales include sales from our full-price stores and e-commerce sites, and excludes sales associated with outlet stores and e-commerce flash clearance sales.
Just two weeks ago, I would have wanted to spend a good amount of time on our fiscal 2019 results and share with you the details of our exciting plans for 2020.
With the recent events associated with the COVID-19 outbreak that no longer seems as relevant.
First and foremost, our thoughts are with the people who have been affected by the COVID-19 virus as well as everyone who is working to protect and serve impacted communities.
During these unprecedented times, our priority is and will continue to be the health and well-being of our employees, our customers and the communities in which we live and work.
To the extent it provides a framework for our current environment, I'm going to spend just a moment on our fiscal 2019 results and then spend the rest of our time on how we are responding to the current environment.
Our consolidated financial results for fiscal 2019 were fairly consistent with fiscal 2018.
However, looking at our performance in more detail shows that big strides were made in the right place.
Our direct businesses which are 70% of our sales were strong with positive comps in all quarters of the year by brand and on a consolidated basis.
Importantly, our e-commerce business led the charge with 10% year-over-year growth and 11% comp and now represents 23% of sales.
At the same time, our wholesale sales declined in 2019 as many of those retailers continued to face strategic challenges with sales to department stores representing only 11% of our consolidated revenue.
We would love to continue to partner with these retailers, but in some cases their business model is becoming more challenging and our strategy reflects that.
Our adjusted earnings of $4.32 per share, which were flat with fiscal 2018 included the negative impact of increased tariffs as well as an increase and our effective tax rate, importantly as we ended the fiscal year with very strong liquidity, including $53 million of cash and no borrowings under our $325 million asset-based credit facility which leads us to the topic of the day.
In our 78-year history, Oxford has weathered many crises and we are highly confident in our ability to weather the impact that COVID-19 outbreak is having on our business and the retail marketplace.
We are approaching our businesses with three top priorities; our people, our brands and our liquidity.
First, we have been and will continue to make the health and well-being of our employees, guests and communities in which we live and work our priority.
All of our North American stores and restaurants have been temporarily closed since March 17th and our Australian stores closed earlier this week.
All of our distribution centers are operational and we've implemented a comprehensive program of prudent measures in all of our distribution centers to keep our people safe.
Most of our associates in our corporate and brand offices are working remotely.
As we come out of this crisis, it is critical that any actions we take preserve our ability to have the team we need in place for the future.
Second, our lifeblood is the strength of our compelling brands and we will zealously protect them.
We have a tremendous portfolio led by Tommy Bahama, Lilly Pulitzer, Southern Tide as well as our collection of smaller brands like the Beaufort Bonnet Company and Duck Head.
We will not take actions to try to prop up our top line in the short run that could harm our brands over the long term.
Each of our brands engages their customers with exciting websites and memorable digital marketing programs.
Our technological capabilities will serve us well as we stay connected with our customers during this period of self-isolation.
Our third priority is liquidity.
Importantly, we entered fiscal 2020 with the inventory levels in very good shape.
We had a strong start through the middle of March.
However, as concerns about COVID-19 virus began to impact our business, sales have substantially deteriorated.
We are taking steps to mitigate the risk of the inventory increases by working with our suppliers to cancel delay or reduce our forward purchases.
We are also taking advantage of our strength in digital to remerchandise and remarket our seasonal offerings for this channel.
Finally, preserving our liquidity will be paramount over the near term and we are extremely well positioned on this front.
As I mentioned earlier, we entered 2020 with over $50 million in cash and an undrawn $325 million credit facility.
To further bolster our cash concession and maintain our high level of liquidity, we have drawn down $200 million from the facility.
On the expense side, we are pulling levers across most spending categories.
One of the largest is employment costs which were approximately $260 million in fiscal 2019.
As store and restaurant closures persist, we are using furloughs and layoffs as needed and warranted.
Where possible our plans will include preserving employee benefits at least for a period of time.
At all times, our priorities will be protecting the health of our employees and ensuring Oxford remains well-positioned for the future.
Today Tommy Bahama announced a furlough of most of its retail and restaurant team to begin on March 31st.
Through March 30th these employees will have received full pay and benefits.
During the month of April, Tommy Bahama will continue to cover the cost and benefits for furlough employees.
We are also focusing efforts, including partnering with our landlords as appropriate on mitigating our occupancy costs which were over $100 million last year.
Marketing expense, which was over $50 million last year is being addressed in phases.
Our reliance on digital marketing affords us opportunities to quickly modify our messaging and our spend as needed while continuing to stay engaged with our customers and generate traffic for our e-commerce websites.
Meanwhile reductions are being taken in other areas such as catalogs and photo shoots.
Also other variable costs such as credit card transaction fees, royalties on licensed brands, sales commissions, packaging in the supplies were approximately $50 million in fiscal 2019.
All capital expenditures are being reevaluated with many, including new store openings and remodels, as well as certain IT projects being deferred in this uncertain environment and our Board of Directors reduced our quarterly dividend from $0.37 a share to $0.25 per share.
We believe these measures, among others, position us well to successfully navigate through these unprecedented times.
Ultimately, it's the character and the quality of our people that will help us navigate these troubled times.
By focusing on our people, our brands and our liquidity, we are confident in our ability to continue our history of delivering long-term shareholder value. | oxford industries - during march 2020 has drawn down $200 million of $325 million asset-based revolving credit facility.
oxford industries - due to uncertainty created by covid-19 pandemic, is not providing financial outlook for fiscal 2020 at this time.
oxford industries - board declared quarterly cash dividend of $0.25 per share, a reduction from previous level of $0.37 per share. | 1 |
During the call, you'll be hearing from Steve Moster, our president and CEO; David Barry, our president of Pursuit; and Ellen Ingersoll, our chief financial officer.
During the call, we'll be referring to certain non-GAAP measures, including loss before other items, adjusted segment EBITDA, and adjusted segment operating income or loss.
I hope you all are staying safe and healthy.
Following my opening comments, I'll hand the call over to David Barry to discuss our Pursuit business, and then I'll come back on to cover the GES business.
Before turning to the business, I, first and foremost, want to commend our team members at Viad for their resiliency, positivity, and dedication during these challenging times.
Like many businesses, we've had to make tough decisions by way of employee furloughs and wage reductions in order to protect our financial position in this unprecedented operating environment.
Nevertheless, our team members have not missed a beat in acting quickly to help maintain the health and safety of our clients, guests, and the communities we operate in as our No.
Now moving into our business.
The first two months of the quarter were largely in line with our expectations.
In March, we began to experience some operational impacts as the spread of COVID-19 began to reach all corners of the world, including some event postponement and cancellations.
There were some signs of reprieve as CONEXPO-CON/AGG took place in early March with less than 3% of the floor space affected by exhibitor cancellations and attendee registrations of more than 100,000.
However, by the end of March, travel and live event activity had essentially halted and with continued travel restrictions and social distancing guidelines in place, we are anticipating a very weak second quarter for 2020.
In response, we took swift and effective steps to bolster our company's liquidity and financial position.
We drew on our revolving line of credit to increase our cash position, and we've obtained a waiver of our financial covenants for the second quarter.
We implemented aggressive cost-reduction actions, including furloughs, mandatory unpaid time off, and salary reductions for all employees across the company.
Our executive management team voluntarily reduced its base salaries by 20% to 50%, and each of our nonemployee members of our Board of Directors has agreed to reduce his or her cash retainer by 50% for payments typically made to them in second quarter of 2020.
We have limited all nonessential capital expenditures and discretionary spending.
We have suspended future dividend payments and share repurchases.
And finally, we've made changes to our executive management team to reduce costs and prioritize client-facing team members.
In addition to some other terminations, Jay Altizer, president of GES, will be leaving the company, and I will be taking over the leadership of GES.
As many of you know, this is a position I know well, having led GES before bringing Jay on board about two years ago.
During the last two years, GES has undergone significant streamlining to improve the cost structure and create a more nimble organization, putting us in a much better position today to navigate the current environment.
While these are extremely difficult steps to take, these actions are necessary to ensure that Viad and GES can outlast the challenging road ahead.
I firmly believe the management team that's in place today is the right one to steer the company through these challenging times.
We have successfully navigated past periods of disruption with a strict focus on cash flow and liquidity, a proven playbook that we are once again turning to.
And as with other prior macro shocks, we believe this one presents us with an opportunity, if not a mandate, to rethink and reimagine how we run our business so that we can emerge in a stronger, more flexible position.
So Pursuit came into the year with lots of momentum, and we saw a very strong start to 2020.
At the end of February, revenue and EBITDA were well ahead of plan, with revenue up significantly from the prior year.
And that's largely due to our acquisition of a controlling stake in the Mountain Park Lodges and outstanding results at FlyOver Iceland.
By the middle of March, though, the effects of the global health crisis and pandemic were becoming more clear.
So working with regional health authorities in three countries, we moved quickly to both facilities and organized teams into two workstreams, one being shutdown mode and the other being post-crisis recovery.
More than anything, this decision to organize our teams along multiple workflows has given us the bandwidth to move quickly in a crisis and make good decisions.
In the past 61 days, we've supported our communities through the donation of PP&E to regional health authorities, and we fed literally thousands of team and community members through a volunteer-driven meal program.
Like all of you, we stand strongly behind emergency responders, doctors and especially nurses who are working bravely to help those who are sick, and we offer our sympathies to those who have lost loved ones.
And It's obvious to point out that most of our second quarter bookings were impacted by governmental stay-at-home orders and the overall reduction in domestic and international travel, resulting in large numbers of cancellations.
We're not isolated from the global impact on travel and hospitality, we find ourselves among many fine brands and companies that are facing these same challenges.
Safety first is and always has been our No.
It was never a question of if we would be reopening, but more importantly, how?
Last week, we launched Pursuit Safety Promise, which was constructed using material from the CDC and regional health authorities.
As guests return to our iconic locations and our team members are present to host them, we've taken steps to ensure that we can do that safely.
And you can see all about that on the specifics on the Pursuit website.
So fast forward 60 days, looking to our iconic locations and FlyOver experiences, we're seeing the world begin to open back up.
FlyOver Iceland reopened last week in Reykjavik, and we expect to benefit from the over 30,000 units of presold product already in the hands of our Icelandic guests in that market.
And for our first weekend of operation, we handily surpassed our visit projection while maintaining a safe environment for visitors.
We appreciate the support of the Icelandic government as they've moved quickly to support both workers and businesses in this unprecedented global pandemic.
As travel restarts, we believe Iceland's thoughtful management of this public health crisis and renowned reputation as a safe destination, will position the country and our FlyOver Iceland experience well.
So let's travel to Canada, Western Canada, and we expect to begin safely opening facilities in Banff National Park and Jasper National Park at the beginning of June.
We expect visitation to be below 2019 levels with less international visitors.
However, we do anticipate more Canadians traveling within the country than usual.
To date, we have bookings in late June, and well into the third and fourth quarters of 2020.
We continue to take more every day.
For the week ending May 10, we were net positive for bookings, meaning we took more new reservations than cancellations at both the Mount Royal Hotel and the Glacier View Lodge.
Canadian government has been very industry-focused, has enacted several programs that have been super helpful, including wage subsidies of up to 75% for team members, and that's called the CEWS program.
And this has been extended to August, as well as everything from rent abatements within National Parks.
We head north to the great state of Alaska, we expect the National Parks in Denali and Kenai Fjords will open for summer 2020.
When they do, we'll be there to safely host guests and staff.
Our properties and attractions will open in Alaska on a staggered basis beginning mid-June, because we expect business levels to be impacted by the partial cancellation of many cruise departures from the lower 48.
We'll be prepared to adapt our properties and attractions accordingly.
So that means we'll shrink and expand the operating capacity of our experiences based on demand.
Down the West Coast of Vancouver, talk about Vancouver for a second.
Vancouver obviously expects that international visitation will be down from historical levels, but we do expect more Canadians will visit Vancouver and enjoy the culture and beauty of that amazing city, including FlyOver Canada.
And next, south of Montana, we expect to begin opening our facilities around Glacier National Park in June.
Over 90% of guests to this area are self-driving Americans, and so with record low gas prices and the overall safety allure of a family road trip, we anticipate attendance in Glacier will be less impacted than other locations.
In terms of future projects, we've made great progress on Sky Lagoon in Iceland and are on track for a late spring 2021 opening.
The team has been working hard on FlyOver Las Vegas.
And we've made great strides on the development of the creative product that will be shown in 2021.
But finally, we believe that the power of iconic locations will not be dimmed.
And looking back throughout history and now looking ahead into 2021, Pursuit is well-positioned to benefit from the pent-up perennial demand for iconic, unforgettable and inspiring experiences.
So back over to Steve to talk about GES.
Through February, GES performed well with overall results tracking slightly ahead of forecast.
We were looking forward to a tremendous year with strong momentum on the corporate side and an incremental $100 million of revenue from three nonannual events all set to take place this year.
Fortunately, the first of the major nonannual events, CONEXPO-CON/AGG took place as scheduled in early March before wide-sweeping stay-at-home orders and other restrictions went into place as a result of COVID-19.
As event activity essentially halted, we drew upon our logistical capabilities to help our communities in the battle against COVID.
We partnered with facilities, other contractors and members of the trade to convert four large exhibition centers in Chicago, London, New York City and Edmonton, Canada into temporary hospitals or shelters.
This was around the clockwork completed in a very short time, and we're proud of our employees for their drive and commitment to this important work.
Where we sit today, event activity has largely been canceled or postponed through July.
Exactly when large-scale events will resume remains unclear and will ultimately be determined by the lifting of restrictions by local authorities and at the discretion of the event organizers.
Just yesterday, MINExpo, one of our three major nonannual events that was scheduled to take place in Las Vegas in September, officially announced that it was postponing until September 2021.
And based on a reopening plan recently announced in Illinois, it appears unlikely that IMTS will be able to take place as previously scheduled for this September in Chicago.
That said, we do still have events on the books for the third and fourth quarter, including the International Woodworking Fair, a biannual event that is set to take place in Atlanta this August.
And we continue to receive and win RFPs for client work in late 2020 and 2021.
So there are definite signs that the live event industry is ready for a comeback as circumstances permit.
We are closely monitoring commentary and decisions made by local governments to understand how they intend to handle the reintroduction of exhibitions and conventions in their economic reopening plans.
While we wait for those decisions, we have effectively hibernated GES by leveraging its high variable cost model to minimize operating costs, while retaining the ability to reactivate parts of the company as business returns.
We expect certain sectors will return faster than others, including pharma and technology, which are two of our strongest verticals on the corporate side of our business.
We are taking this opportunity to design and build a better business, one that's more profitable, less asset-intensive, and more focused on our clients' future needs.
Our focus continues to be on transforming our exhibition business, which is the largest part of our revenue today and driving share gains in our corporate business, while smaller competitors struggle to stay alive during this challenging time.
When we begin to restart GES, we will do so with the future in mind and expect to emerge leaner, more nimble and more client-focused.
As a service business, we have a highly variable, largely labor-based cost structure, which allowed us to act very quickly when the COVID-19 restrictions began occurring.
Both business segments were able to flex down very quickly as conditions weakened.
At Pursuit, we immediately reduced more than half of our costs and still have additional cost levers to pull if conditions do not begin to improve in the coming months.
We can expand and contract the operating capacity of our experiences based on fluctuating business levels, which is a core competency for us, given the normal seasonal demand patterns of this business.
At GES, more than two-thirds of our costs are entirely variable with an even larger percentage able to be quickly adjusted based on business demand.
We essentially entered a hibernation mode until events return, reducing our semi-variable cost by approximately 70%, and we stand ready to quickly turn the faucet back on as events return.
In addition to reducing our costs, we took a variety of other steps to preserve cash.
We significantly reduced or eliminated planned capital expenditures, including both nonessential maintenance and small growth capital projects, and we slowed the pace of the two Pursuit FlyOver projects in development.
We amplified our focus on working capital management, we engaged in productive dialogues with landlords and local tax jurisdictions to eliminate or defer spending where possible and we received some benefits from various government relief programs, including wage subsidies offered in Canada, the U.K. and the Netherlands, as well as U.S. payroll tax deferrals available under the CARES Act.
We believe we have an adequate cash position and balance sheet to weather the near-term impacts of COVID-19.
At March 31, our cash balance was $130.5 million, and in early April, we drew the remaining $33 million down on our revolver, bringing our total cash at the beginning of the second quarter to approximately $163 million.
Given the swift and deep cost savings actions we've taken, we have significantly reduced our operating costs and expect our cash outflow during the second quarter will approximate $40 million.
This assumes continued collection of outstanding receivables, minimal new revenue, and no postponed events coming back in the quarter.
As it relates to our revolving credit facility, we were in compliance with all financial covenants at the end of the first quarter, and we have already received a waiver of financial covenants for the second quarter.
This waiver, combined with our cash position, gives us important breathing room to negotiate longer-term covenant relief and line up additional sources of capital as we prepare for COVID impacts to persist into the third quarter and perhaps beyond.
We are working closely with our lender group and outside advisors to ensure that Viad is sufficiently capitalized to withstand the downturn and emerge in a position of strength, with Pursuit poised to continue its pre-COVID growth trajectory.
As David mentioned, we believe experiential trips will rebound more quickly than large events, and this economic downturn may ultimately bring interesting investment opportunities we hope to be able to pursue.
Now switching over to our preliminary first-quarter results, which were in line with our pre-announcement in mid-March.
First, let me comment on the preliminary nature of these results.
The impact of COVID-19 has necessitated additional asset impairment testing, which we are currently working through.
We do not expect the noncash impairment charges to impact cash flow, debt covenants or ongoing operations.
However, we do expect the impairment charges to have a material impact on the final GAAP financial results presented in our Form 10-Q, which we expect to file no later than June 15, 2020.
Preliminary revenue was $306 million, up 7.1% from the 2019 first quarter primarily due to positive share rotation of approximately $57 million at GES, partially offset by show postponements and cancellations due to the COVID-19 pandemic.
January and February were in line with our original expectations, while March was impacted by postponements and cancellations resulting from virus concerns, causing us to reduce our original guidance for the first quarter and withdraw our full-year guidance.
GES revenue was $292.5 million, up $17.6 million or 6.4%.
This growth was largely due to the occurrence of a nonannual CONEXPO-CON/AGG trade show in early March before the COVID effects were fully felt.
Pursuit revenue was $13.5 million, up $2.9 million or 26.8%.
This is a seasonally slow quarter for Pursuit and although we began to feel the effects of COVID-19 during late March, Pursuit finished the quarter with higher revenue than 2019, largely due to strong pre-COVID results from our acquisition of Mountain Park Lodges and our new FlyOver Iceland attraction.
Preliminary net loss attributable to Viad was $10.6 million versus $17.8 million in the 2019 first quarter.
And preliminary net loss before other items was $8.5 million versus a loss of $10.2 million in the 2019 first quarter.
This non-GAAP measure excludes impairment and restructuring charges, acquisition, integration and transaction-related costs, and attraction start-up costs, as well as a legal settlement recorded in the 2019 first quarter.
Preliminary adjusted segment operating loss was $8.4 million versus a loss of $11 million in the 2019 first quarter, and adjusted segment EBITDA was $6.9 million, up $4.7 million from the 2019 first quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenue at GES and the elimination of performance-based incentives partially offset by increased seasonal operating losses at Pursuit driven by the June 2019 acquisition of Mountain Park Lodges and the opening of FlyOver Iceland.
GES adjusted segment EBITDA was $19.1 million, up from $10.9 million in the 2019 first quarter.
And Pursuit adjusted segment EBITDA was negative $12.2 million versus negative $8.8 million in the 2019 first quarter.
The second quarter will be extremely difficult, but our quick move to reduce variable expenses into increased liquidity will help protect our financial position.
We've essentially been in hibernation mode since early in second quarter, maintaining the lowest level of expenses we prudently can, while we wait for the slow resumption of travel and events.
At Pursuit, as you know, the seasonally strongest period is June through September.
And as David said, we believe the business will be the first to recover and are beginning to see signs of this.
GES is expected to take longer, although we are hopeful that as certain locations begin to lift restrictions, events will start to take place again during the third quarter.
We've controlled the factors we can control.
We've reduced expenses, prudently managed our balance sheet and maintained very close contact with our lending partners.
We are in a good financial footing to manage through a brutal second quarter and hope to emerge in the third quarter with growing visitation and bookings at Pursuit and the cessation of cancellations for future events at GES.
And now I'll hand the call back to you, Steve, for your concluding remarks.
In closing, the spread of COVID-19 affected our overall results for first quarter and we anticipate continued impact in the near term as planned events further unfold, air travel remains at a bare minimum for the time being, and the state-by-state regulations continue to shift.
We expect GES will experience a patient Rebound, whereas Pursuit will see more benefit in the short term as stay-at-home orders are lifted and domestic regional travel resumes.
As Ellen shared previously, we have taken swift steps to bolster our near term liquidity, and we are prepared to take other prudent steps to ensure we weather the storm.
We have an experienced management team that has navigated through previous downturns and are more than capable of leading this company through this uncertain time.
We see the current environment as an opportunity to reimagine the demand side of our two business segments and map out where we believe to be the most profitable pockets of opportunity and growth as we exit this downturn.
We anticipate making some strategic changes to the business in order to better facilitate the evolving needs of our clients, better serve our guests and provide significant value for our stakeholders as we improve our competitive position in a post-COVID-19 universe.
And we believe in the longevity and resiliency of our business, exhibitions, conferences and corporate events are a vital part of the economic engine, facilitating sales, networking and education and a relatively low-cost and high-impact way.
The replacement of live events by virtual events has been tested in the past and will likely be tested again.
But even in the most productive of virtual worlds, we do not believe that face-to-face meetings will go away.
They may change and our industry will change along with it.
In our GES business, we will focus on shrinking our footprint and choosing which markets we want to be in and which ones we don't.
On the Pursuit side, iconic location and experiences cannot be replaced, and people will not choose to stay at home indefinitely.
We will once again venture out to explore the world in its amazing places perhaps with pent-up demand.
More than ever, we believe that experiences will be more valuable than things. | viad q1 revenue rose 7.1 percent to $306 million.
q1 revenue rose 7.1 percent to $306 million.
suspended future dividend payments and share repurchases.
executive management team voluntarily reduced its base salaries by 20% to 50%.
eliminated all non-essential capital expenditures and discretionary spending.
fully drawn on our revolving line of credit to increase our cash position.
obtained a waiver of our financial covenants for q2.
implemented aggressive cost reduction actions, including furloughs, mandatory unpaid time off, and salary reductions for all employees. | 1 |
Actual results could differ materially from those suggested by our comments made today.
These risk factors and other key information are detailed in our SEC filings including our annual and quarterly reports.
I look forward to speaking with you today about PulteGroup's third quarter operating and financial results.
In combination, top line growth and margin expansion helped drive higher earnings per share of $1.82.
This is an increase of 36% over the prior year's third quarter adjusted earnings of $1.34 per share.
Inclusive of these strong third quarter numbers through the first 9 months of 2021, our home sale revenues were up 22% to $9.2 billion while our reported earnings per share are up 36% to $4.85.
The resulting strong cash flow being generated by our operations continues to put our company in an enviable position in which we can invest in our business, return funds to shareholders and still maintain outstanding balance sheet strength and overall liquidity.
More specifically, consistent with our constructive view on the housing market, we have invested $2.9 billion in land acquisition and development so far this year.
Our $2.9 billion of land spend is comparable to what we invested for the full year in both 2020 and in the pre-pandemic year of 2019, and we remain fully on track to invest approximately $4 billion in total for the full year of 2021.
I would highlight that while we are investing more into the business, we remain disciplined and focused on building a more efficient and lower-risk land pipeline.
At the end of the third quarter, our lots under option had grown to 54% of our total controlled lot position compared to when I set the initial 50% option target, we have over 65,000 more lots under option and now view 50% as the floor rather than the ceiling in terms of how we control our land assets.
Consistent with our capital allocation priorities, along with investing $948 million more in land acquisition and development through the first 9 months of 2021 compared with last year, we have also returned $726 million to shareholders through share repurchases and dividends and have paid off nearly $800 million in debt this year, leaving us with a net debt-to-capital ratio of only 5.7%.
Finally, consistent with our strategic focus, our operating and financial performance has helped drive a return on equity of 26% for the trailing 12 months.
Just like the broader economy, our operations continue to be impacted by the pandemic.
On one hand, we are managing through the disruptions COVID-19 and the Delta variant have inflicted on our workforce, our trade partners and the global supply chain.
On the other hand, our results have certainly benefited from the remarkable demand and pricing environment the homebuilding industry has experienced over the past 18 months.
Either way, to deliver our third quarter numbers during the global pandemic and with a supply chain that is clearly struggling reflects the commitment and tireless efforts of the entire PulteGroup team.
Since we updated our production guidance in early September, broader industry comments have validated the challenges within the construction supply chain are significant and don't have any quick fixes.
Based on a myriad of calls and questions we have received, I think it's hard for everyone to appreciate the full magnitude of the issues we're facing when you're not dealing with them on a day-to-day basis.
For some products, it's simply the materials aren't available.
Sometimes you can switch to an alternative.
But when you can, you wait.
For others, it's changing lead times where order fulfillment has gone from 6 weeks to 16 weeks, back to 11 weeks and then back to 16 weeks.
And for others, it's seeing allocations being imposed as manufacturers and distributors do their best to keep their major customers, which I would note we are one, at least partially satisfied.
Our local divisions may not get much advanced notice of the shortage resulting allocations so we have to adjust on the fly.
In other cases, it's logistics.
When you're forced to ship materials to solve near-term issues, this might be shipping siding from the Southeast to the Southwest or our trades driving across the state for paint.
In one form or another, these issues impacted our third quarter results and, as Bob will detail, will put additional pressure on our deliveries and margins in the fourth quarter.
As difficult and frustrating as this is, I can say that our suppliers have been outstanding partners and routinely bend over backwards to get us the materials we need to solve our issues.
I can say that we've been clear with our teams that we have to be -- that we have to overcommunicate with customers to keep them informed of any schedule changes.
We also have to be flexible and creative in sourcing materials even if this means spending additional dollars to acquire needed resources.
And finally, we must maintain our standards on the quality and completeness of each home that we deliver.
Given the very problems impacting the supply chain, we would expect a solution that -- we would expect that solutions will be found over different time lines, depending on the suppliers' underlying issue.
In the interim, we will adjust our production estimates for the fourth quarter and work to position the business for more consistent cadence in the year ahead.
We will also continue to work in close partnership with our suppliers to manage through the supply chain issues as quickly and as intelligently as possible.
Our teams have done an outstanding job navigating through the challenging production environment, which can be seen in the exceptional operating and financial results we delivered in the quarter.
Starting with our income statement.
Our home sale revenues for the third quarter increased 18% over last year to $3.3 billion.
The increase in revenues was driven by a 9% increase in closings to 7,007 homes in combination with an 8% or $37,000 increase in average sales price to $474,000.
The higher average sales price realized in the third quarter reflects meaningful price increases we've realized across all buyer groups, with first-time up 8%, move-up up 10% and active adult up 8%.
The mix of homes we delivered in the third quarter included 32% from first-time buyers, 44% from move-up buyers and 24% from active adult buyers.
In last year's third quarter, 30% of homes delivered were first-time, 45% were move-up and 25% were active adult.
Our net new orders for the third quarter were 6,796 homes, which represents a 17% decrease from last year that was driven primarily by a 14% decline in year-over-year community count.
In addition to fewer open communities, orders for the period were impacted by ongoing actions to manage sales paces to better align with current production volumes.
The actions to manage sales pace and outright restrict sales were more frequently targeted toward our first-time buyer communities as we strategically work to build up spec inventory within our Centex branded communities.
Looking at our third quarter orders in a little more detail.
Our orders from first-time buyers decreased 20% compared with last year.
This decrease was driven primarily by our actions to restrict sales as our first-time community count was only down 6% compared with last year.
In contrast, our orders from move-up and active adult buyers decreased 22% and 4%, respectively, which was driven by comparable 22% and 5% decreases in community count, respectively.
In the third quarter, we operated from an average of 768 communities.
Consistent with the guide in our recent market update, this is down 14% from last year's average of 892 communities.
Our Q3 community count should be the low watermark for the year as we expect our fourth quarter community count to increase to approximately 775 active communities.
Further, our existing land pipeline should allow us to realize a meaningful ramp-up in community count as we move through 2022.
As is our practice, we will provide more specifics on 2022 community count as part of our fourth quarter earnings call.
Our unit backlog at the end of the third quarter was up 33% over last year to 19,845 homes.
The dollar value of our backlog increased an even greater 56% to $10.3 billion as we benefited from robust price increases realized over the course of this year.
At the end of the third quarter, we had 18,802 homes under construction, of which 83% were sold and 17% respec.
We have almost 900 more spec homes in production than we did in the second quarter as we have been working to increase spec availability, particularly in our Centex communities.
In many instances, this has meant tightly controlling current period order rates, but we feel this is the appropriate action as we seek to better align our sales with the current pace of production.
Given that 90% of our specs are early in the construction cycle and we have only 109 finished specs, these units are about helping to position the company for 2022, rather than providing closings in 2021.
We faced similar dynamics within our production of sold units as 2/3 of these homes are in the earlier stages of construction, and we can see gaps in the supply of key building products needed to complete these homes.
Given these conditions, we believe it appropriate to update our fourth quarter guide for expected fourth quarter deliveries and currently expect to deliver approximately 8,500 homes in the fourth quarter, which would represent an increase of 24% over the fourth quarter of last year.
It's difficult to say there are positives to be gleaned from the challenging production environment, but one of the outcomes is that the limited supply of homes, coupled with ongoing strong demand, has supported higher prices across the market.
Reflective of these conditions, our average price in backlog increased 18% or $78,000 over last year to $519,000.
Although more than half of our quarter end backlog is expected to deliver in 2022, we will continue to see the benefit of rising prices in our fourth quarter as our average closing price is expected to be $485,000 to $490,000.
At the midpoint, this would represent an increase of approximately 10% over last year.
Our reported homebuilding gross margin in the third quarter increased 200 basis points over last year to 26.5%.
Given that our third quarter closings absorbed the elevated lumber prices from earlier this year, expanding our gross margin by 200 basis points attest to the strong pricing environment the industry experienced over the past year.
It's worth noting that the strong market conditions also contributed to another step down in incentives in the period as discounts fell to 1.3%.
This is down from 3% last year and down 60 basis points from the second quarter of this year.
As our margin increase demonstrates, strong buyer demand has allowed the company to pass through the higher labor and material costs we've experienced.
That said and as Ryan discussed, we are knowingly incurring additional expenses to get houses built within today's challenged operating environment.
In addition to the incremental build costs we are absorbing over the short term to get homes completed, our reported gross margins are being influenced by the mix of homes closed.
As we also highlighted in our recent market update, certain of the homes that we expected to close in Q3 slipped into Q4 and others have been pushed out of the fourth quarter into 2022.
These conditions are impacting our reported gross margins in the third and fourth quarters of 2021 but set us up to realize gross margin expansion as we head into 2022.
That said, with the changing mix of homes we currently expect to close in the fourth quarter, coupled with the added material, labor and logistics costs we're paying to get homes closed, we currently expect our fourth quarter gross margin to be 26.6% or 26.7%.
This would represent an increase of 160 to 170 basis points over last year's fourth quarter and an increase of 10 to 20 basis points over the third quarter of this year.
We see the opportunity to build on this momentum as the strong pricing conditions we've experienced, coupled with the lower lumber costs we expect in next year's closings, should result in further gross margin expansion in 2022.
Our SG&A expense for the third quarter was $321 million or 9.6% of home sale revenues.
Prior year SG&A expense for the period was $271 million for a comparable 9.6% home sale revenues.
Given there's still increase in closings, we expect [Technical Issues] in the upcoming quarter expected to fall to a range of 8.9% to 9.2% of home sale revenues.
Looking at our financial services operations.
Our third quarter pre-tax income was $49 million versus $64 million last year.
As has been the case for much of this year, higher origination volumes have been offset by lower profitability per loan given more competitive market conditions.
The company's reported tax expense in the third quarter was $145 million, for an effective tax rate of 23.3%.
In the comparable prior year period, our effective rate was 14% as we realized a tax benefit of $53 million associated with energy tax credits recognized in the period.
For the third quarter, our reported net income was $476 million or $1.82 per share.
This compares with prior year adjusted net income, excluding the impact of the energy tax credits, of $363 million or $1.34 per share.
Moving over to the balance sheet.
Our business continues to generate strong cash flow, which allowed us to end the quarter with $1.6 billion of cash after significant investment in the business and continued shareholder distributions in the quarter.
In the quarter, we repurchased 5.1 million shares or about 2% of our outstanding common shares for $261 million at an average price of $51.07 per share.
The $261 million in stock repurchase is a sequential increase of $61 million from the second quarter of this year.
As stated previously, we are fully prepared to allocate more capital to shareholders as conditions warrant.
We also invested $1.1 billion in land acquisition and development in the third quarter.
This brings our total land-related spend in 2021 to $2.9 billion and keeps us on track to invest approximately $4 billion of land acquisition and development for the year, which would be an increase of almost 40% over last year.
We ended the third quarter with a debt-to-capital ratio of 22.4%, which is down from 29.5% at the end of last year.
Adjusting for our cash position, our net debt-to-capital ratio at the end of the quarter was 5.7%.
We ended the third quarter with approximately 223,000 lots under control, of which 54% were controlled through options.
Our divisions and particularly our land teams have done an outstanding job building a more efficient land bank while helping to reduce market risk.
We're extremely proud of their efforts and the success that they've realized.
We continue to experience strong demand in the quarter with very consistent traffic and sign-up numbers across the period.
I would also add that strong demand has continued through the first few weeks of October.
While sign-ups in the quarter were lower compared with last year, the primary driver of the decline was the decrease in community count.
Beyond the impact community count had on order rates in the quarter, our divisions continue to manage or outright restrict sales pace to better match sales with our current production.
As Bob indicated, this most recent quarter should be the low point of our community count -- should be the low point of our community count this year as we expect our community count to move higher on a sequential basis as we move through 2022.
Reflecting the strong demand conditions and relatively limited supply of new and existing homes, we were able to raise prices in the quarter across most of our communities.
The most typical increase in the quarter was in the range of 1% to 3%, although some of our divisions were able to push pricing in select communities a little more aggressively.
That being said, we continue to keep a close eye on affordability metrics within our local markets, especially given the recent rise in mortgage rates.
Between an improving economy, a strong jobs market, wage inflation and government stimulus checks, consumers are in a very strong financial position and have proven they are prepared to pay today's higher prices for everything, from food to autos to homes.
We continue to see a very strong financial profile among our homebuyers with the average FICO score remaining above 7 50 and loan-to-value of 83% based on users of our mortgage company.
Looking at demand across the country.
I would tell you that generally where we have product available, we can sell it and at a higher price than earlier in the year.
Although frustrated at times because of limited supply, higher prices and longer build cycles, consumers remain engaged in the home buying process and are anxious to get into a new home.
Just to wrap up, while there are certainly challenges in the business, PulteGroup remains in an excellent position, both operationally and financially.
We have a strong and improving land pipeline that we continue to make more efficient through the use of lot options.
We have an opportunity to further expand margins based on limited supply, strong buyer demand, resulting favorable pricing dynamics and lower lumber costs in 2022.
We have an outstanding homebuilding operation that is generating tremendous cash flow, and we have an exceptional balance sheet strength and liquidity that can support our operations and gives us tremendous flexibility to capitalize on market opportunities. | q1 adjusted earnings per share $1.28.
q1 earnings per share $1.13.
quarterly net new orders increased 31% to 9,852 homes.
quarter-end backlog increased 50% to 18,966 homes with a value of $8.8 billion. | 0 |
They can be accessed at ir.
Following our prepared comments, we will open up the call for our question-and-answer session.
We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2020.
The extent of these impacts, including the duration, scope, and severity, is highly uncertain and cannot be predicted with confidence at this time.
We will also be referencing non-GAAP financial measures during the call.
I'm going to start with an overview and update on the ransomware attack that we reported on Monday.
We're following strict protocols laid out by industry-standard incident response directives.
Because of this, we're being careful not to share certain details around the incident at this time.
However, following is information that I can share with you today.
On Saturday, January 23, our systems identified what we've quickly determined was a ransomware attack.
We immediately implemented our business continuity processes and initiated our response containment protocols.
These processes have been supported by cybersecurity experts, and these include Dell SecureWorks, a global instant response leader.
These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution.
We've been in active communication with law enforcement.
While our incident response is still ongoing, we currently have no evidence that our customers' or teammates' data has been compromised.
In addition to our containment, recovery, and remediation efforts, we've taken steps to supplement the existing security monitoring, scanning, and antivirus protocols already in place.
We're committed to completing a full forensics investigation, and we're taking all appropriate actions in response to our findings.
WestRock maintains a broad set of insurance coverages that provide protection for the business operations and assets of the company.
Throughout this entire incident, we've been in constant communication with our customers to share with them the impact on their business.
We've been very appreciative of their understanding and support as we work through this challenging situation.
Our teammates and third-party experts have literally been working day and night to respond to this attack and safely restore our systems.
Our response is varied by operating the location.
Most of our mills and converting locations have continued to produce and deliver.
In locations where we've had systems issues, we have been and are using alternative and, in many cases, manual methods to process and ship orders, and this has limited our shipments.
The full restoration of the administrative processes of our business will take time, and we're implementing workarounds, including manual processes.
We're doing all that we can throughout our company to respond to our customers' needs.
We're only five days into this, and we're in the middle of our response.
What I've shared with you represents the information that we can share at this point given where we're at in the stage of our response.
We'll provide additional detail on the impact of the attack at the appropriate time.
Now, let's turn to the quarter.
WestRock remains very well-positioned for long-term success, as demonstrated by our strong results in the quarter.
Our markets continue to be shaped by changing customer habits and preferences that are driving increased demand for sustainable fiber-based packaging.
These trends fit well with our strategy of increasing our participation in high value-added packaging solutions and away from sales of lower-margin commodity paper products.
Our overall packaging volumes increased by 5% in the first fiscal quarter, including e-commerce volume growth of 23% on a per-day basis.
North American corrugated box shipments increased more than 11% per day in December and over 8% for the quarter.
Consumer shipments of packaging were also very strong, up 2.4% year over year.
We executed our strategic projects during the quarter, despite immense challenges that the pandemic has presented for large construction projects.
Our teams that are completing the projects at our Florence and Tres Barras mills have made tremendous progress.
We successfully started up our 710,000-ton paper machine at Florence that has replaced three older obsolete paper machines.
We successfully completed a major outage at our Tres Barras mill during the quarter, and this sets us up to complete our major expansion project in the spring.
Our company generates strong free cash flow over the long term.
This quarter's cash flow was exceptional.
We generated $562 million of adjusted free cash flow in the quarter.
We used the vast majority of this cash flow to reduce our net funded debt by $489 million.
Our net leverage ratio declined sequentially from 3.03 times to 2.86 times.
We expect that fiscal '21 will be the sixth consecutive year of strong free cash flow.
We have increasing line of sight toward returning to our targeted leverage ratio of 2.25 to 2.5 times.
All of this performance is being delivered in very challenging circumstances by the incredibly resilient WestRock team.
We recognized each one of our teammates in the quarter with a one-time payment that accumulated to a total of $22 million.
Sales of $4.4 billion, adjusted segment EBITDA of $670 million, and adjusted earnings per share of $0.61 per share in the quarter were all in line with the prior-year quarter.
Our packaging business has proven to be resilient throughout the pandemic.
Packaging volumes measured in tons were 5% higher compared to the prior year.
Offsetting this were declines in shipments of export containerboard, especially SBS and pulp, that totaled 470,000 tons.
This was a decline of approximately 180,000 tons or 27% lower than last year.
The increase in sales of higher value-added packaging more than offset lower corrugated pricing from previously published index reductions.
RISI has published higher prices in multiple grades during the fiscal -- first fiscal quarter.
This includes containerboard, specialty kraft, CNK, and CRB that we expect will benefit our results during the balance of the fiscal year.
Cost inflation was driven primarily by higher OCC prices and ongoing wage and healthcare cost increases and was offset by continued productivity gains and KapStone synergies.
Our free cash flow was unusually strong in the first fiscal quarter, and this was aided by WestRock's pandemic action plan.
We remain focused on increasing our share of higher value-added packaging and reducing our dependence on sales of paper to less attractive markets.
We made progress during the quarter.
73% of our sales were packaging sales, an increase of 5% or approximately 100,000 tons compared to last year.
The growth in packaging was driven by higher e-commerce demand, strong industrial shipments, including our Victory distribution channel, as well as growth across our food, beverage, beauty, and healthcare markets, with customers further utilizing our innovative solutions.
Shipments of paper declined by 10% or 180,000 tons compared to last year.
This included a reduction of 125,000 tons in shipments of export containerboard.
Higher box demand in North America required us to shift production to serve higher-value integrated box and domestic containerboard customers.
In Consumer, we had similar demand trends.
Strong volumes in our domestic food and beverage packaging and paperboard business led to a production shift to those higher-value markets.
The pricing environment has improved and record a RISI published pricing increases across several of our major grades, including a $50 per ton North American containerboard price increase in November and a $40 per ton unbleached kraft price increase in December.
We're in the process of implementing these published price increases in our business.
Our integrated mill converting distribution and machinery capabilities provide us the platform to provide our customers with value-added packaging solutions.
We placed more than 100 machinery solutions in the quarter, bringing our total machinery replacements to more than 4,150.
Customer demand for machinery solutions continues to grow, as they seek ways to improve their productivity and navigate the challenges caused by the pandemic.
For instance, a number of large retailers are implementing our Pak On Demand and Box On Demand systems to grow their ship-from-store business.
Our vision is to be the premier partner and unrivaled provider of sustainable winning solutions for our customers.
Sustainable fiber-based packaging is a key component of the circular economy.
We're partnering with our customers to help them achieve their sustainability goals.
We've collaborated with The Home Depot to develop custom packaging for plants and horticulture products.
This example highlights our ability to solve our customers' critical challenges and enhance their ability to participate in the e-commerce channel.
We've collaborated with Kraft Heinz to launch the new Heinz eco-friendly sleeve multipack in the United Kingdom.
By replacing plastic with fully recyclable fiber-based packaging, Kraft Heinz will remove over 500 tons of plastic from supermarket shelves and reduce their CO2 footprint by 18%.
This innovative project has incorporated the carton design, paperboard science, and machinery capabilities of the WestRock Enterprise team.
For Titan Farms, Enterprise team has developed attractive folding carton containers for peaches that provide both ventilation and product protection.
We're replacing plastic clamshells with fiber-based packaging and helping our customers meet their sustainability goals.
And for General Motors, we supplied them with a complete portfolio of packaging to rebrand their ACDelco product line, including very valuable counterfeit protection.
This is an enterprise win that leverages our digital platform capability to bring our customers' connected packaging solutions.
The pandemic has brought many challenges and forced business to operate differently and through different channels.
We're well-positioned to support our customers with the packaging and supply chain solutions that help them succeed in their markets.
Corrugated Packaging segment delivered adjusted EBITDA of $458 million in the first quarter.
Corrugated box demand was strong across most end markets, highlighted by e-commerce year-over-year growth of 23%, as well as strength in beverage, industrial, and distribution through our Victory Packaging business.
Higher box demand has allowed us to shift our containerboard shipments away from lower-margin export markets to serve our higher-value box and domestic customers.
Our export shipments fell by 125,000 tons compared to the prior year, and our integration rate increased to 80% in the quarter.
Offsetting this favorable business mix was the continued flow-through of the total of $40 per ton of containerboard index price declines that occurred in late 2019 and early 2020, as well as the $36 per ton increase in recycled fiber cost as compared to last year.
We've been implementing the $50 per ton containerboard index price increase that PPW published in November.
Our mill system operated well, with no economic downtime taken in the quarter.
We completed the KapStone acquisition just over two years ago and have achieved our target of $200 million in annual run-rate synergies.
This includes our reconfiguration of the North Charleston mill.
When we acquired KapStone, we saw that we would be able to improve their operations and fill out the geographic footprint of our North American corrugated mill and box plant system to better serve our customers.
This has worked well.
Victory Packaging, our distribution business, has worked out better than we anticipated due to our ability to integrate supply chain solutions into our service offerings.
This has been even more important during the pandemic.
In Brazil, mill outage reduced total mill production by approximately 48,000 tons.
The production, sales, and earnings decline was a direct result of the outage as market conditions remained strong in the region.
The Consumer Packaging segment's adjusted EBITDA in the first quarter was $234 million, so a $50 million increase from the prior year.
Adjusted segment EBITDA margins increased by 270 basis points to 14.7% compared to the prior year.
Strong demand across our core food, beverage, and healthcare packaging end markets drove 2.4% higher converting shipments and $18 million higher EBITDA by shifting shipments away from lower-margin SBS and pulp markets.
Our mill and converting system ran well in the quarter.
Cost reductions and efficiency improvements contributed $40 million of productivity and operational improvements in the quarter.
While SBS demand in the foodservice and commercial print markets was lower compared to the prior year, we saw a sequential improvement in both markets compared to our fiscal 2020 fourth quarter.
We took 39,000 tons of economic downtime primarily in the first two months of the quarter.
This compares to 87,000 tons in our fiscal 2020 fourth quarter.
As we noted previously, we restarted our idled paper machine at Covington in the quarter due to increased demand.
Backlogs increased in the quarter to between four and six weeks across all of our consumer grades, including SBS, and inventories remained steady.
We're developing alternatives to capture more value from our current assets, and we made significant progress during the quarter.
In addition to running containerboard at the Evadale mill, we're qualifying CNK from Evadale to serve our customers' growing CNK needs while reducing SBS production.
We're still in the process of trialing the board with our customers, as well as working through the engineering needed to ramp up production.
So we're in our fiscal second quarter.
We see strong demand across our core packaging markets.
We're implementing the PPW paperboard price increases that were published during our fiscal first quarter.
Turning to Slide 10.
The pandemic action plan has been an important component of our ability to pay down debt.
Over the past three quarters, the plan has contributed an additional $600 million in cash.
We are on track to achieve our goal of approximately $1 billion in additional cash available for debt reduction through the end of calendar year 2021.
We started the year with a strong first quarter.
Going forward, we see opportunities to grow earnings given the strong demand for paper-based packaging, along with implementing the previously published price increases and recognizing the benefits of our strategic capital projects.
We have a strong track record of generating free cash flow.
Each of the past five years, we have generated more than $1 billion of adjusted free cash flow, and we have generated over $1.6 billion of adjusted free cash flow during the past 12 months.
With our ability to generate strong free cash flow, we have a road map to return our net leverage ratio to the targeted range of 2.25 to 2.5 times.
And as Steve mentioned, we continue to work on remediation and recovery from the ransomware attack.
We will provide additional detail on the financial impact of the attack and provide an outlook for the quarter and the year at the appropriate time.
Turning to Slide 12.
We've been very clear about our near-term focus on paying down debt, investing in our business, and returning capital to our stockholders through our dividend.
Over the past 12 months, we've reduced our adjusted net debt by more than $1.3 billion, and our net leverage ratio has improved from 3.01 times to 2.86 times.
Capital investment plans remain unchanged, and we still expect fiscal 2021 capital investments of $800 million to $900 million.
Our Florence paper machine started up this past quarter, and we expect the Tres Barras project to be completed during the spring and begin ramping up in the second half of the fiscal year.
These strategic investments, combined with our KapStone synergy realization, will contribute approximately $125 million of EBITDA in fiscal year '21 and a similar amount in fiscal year '22.
Longer term, we expect normal capital investment levels will be between $900 million and $1 billion.
Our cash flows are resilient.
We will continue to pay a competitive and growing dividend, and we also expect the potential for M&A opportunities that help us grow our packaging business and our integration rate.
WestRock continues to operate from a position of financial strength and is supported by our significant cash flow generation.
We have minimal near-term debt maturities and approximately $3.4 billion of liquidity, and a road map to return our leverage to our targeted range of 2.25 to 2.5 times.
While the ransomware attack on WestRock is receiving our immediate attention and urgent response, I remain very optimistic about WestRock for the long term.
WestRock provides sustainable fiber-based packaging.
It's a market that's benefited from recent trends in consumer preferences and buying behavior that we expect to continue in our favor.
We're remarkably well-positioned to meet our customers' needs.
We see strong supply and demand conditions in almost every major grade, as well as strong demand for our converting and machinery solutions.
Export markets are tightening.
The need for packaging to serve the stay-at-home economy, as well as sustainable fiber-based packaging to replace plastic is growing.
The investments that we've made on our box plant system, our mill system, and our capabilities are benefiting our results and will continue to do so as we bring our strategic projects online over the next year.
We're generating very attractive free cash flows that, over the near term, will be used to reduce debt and our leverage ratio and, longer term, will be used to return capital to our stockholders and grow our business.
All of our success is due to the incredibly resilient WestRock team that has dealt with and is dealing with changing market conditions, COVID-19, and our ransomware attack.
Our resilience gives me confidence in our ability to succeed and to create value for our customers, communities, and stockholders.
James, we're ready for Q&A.
As a reminder to our audience to give everybody a chance for a question, please limit your question to one with a follow up as needed.
Also, we're not able to give any further information on ransomware attack.
We'll get to as many questions as time allows.
Operator, can we take our first question, please? | compname reports q3 core ffo per share $0.36.
q3 core ffo per share $0.36.
q3 ffo per share $0.36.
sees fy 2020 core ffo per share $1.44 - $1.46. | 0 |
Yesterday, we reported all-time record quarterly sales from continuing operations and record second quarter adjusted EBIT and EBITDA.
These outstanding results are a testament to the dedication and hard work of our employees around the globe.
Second quarter sales were $1.27 billion, EBIT was $172 million, and earnings per share were $0.82, all significantly higher than the second quarter of 2020.
Strong year-over-year results reflect recovery in most of our businesses from the significant impacts related to the COVID-19 pandemic.
When comparing to the pre-pandemic results of second quarter 2019, trade sales grew 5%, adjusted EBITDA was up 9%, and adjusted EBITDA margin improved 60 basis points and adjusted earnings per share increased 12%.
During the quarter, we made two strategic acquisitions, expanding our capabilities and product offerings in our Work Furniture and International Bedding businesses.
At the end of May, we acquired a small manufacturer of bent metal tubing used in office and residential furniture located in Poland that has been an important supplier to our local Work Furniture operation.
On June 4, we acquired a leading provider of specialty foam and finished mattresses, primarily serving customers in the U.K. and Ireland.
The company, Kayfoam, is located near Dublin and has two manufacturing facilities with combined annual sales of approximately $80 million.
Kayfoam expands the capabilities of our European Bedding business and establishes a platform in foam technology in finished mattress production.
Similar to our U.S. Bedding business, this acquisition allows us to support our European Bedding customers anywhere in the value chain from innerspring and foam components to finished products, including private label mattresses, toppers, pillows and other bedding accessories.
We increased our full year sales guidance as a result of continued material cost inflation and sales related to the acquisitions just mentioned.
Increased earnings per share guidance is largely due to metal margin expansion in our Steel Rod business.
Jeff will provide more detail on updated guidance later in the call.
Your commitment, resolve and ingenuity allowed us to navigate raw material constraints, labor shortages and freight challenges to service our customers in a very strong demand environment.
Your efforts and accomplishments are greatly appreciated.
We had strong operating performance in the second quarter as sales have recovered to near or above pre-pandemic levels in most of our businesses.
Supply chain disruptions continued throughout the quarter, most notably in chemicals, semiconductors, labor and transportation, constraining volume growth.
While we are seeing incremental improvements in many of these areas, they continue to create volatility in both supply and in cost.
Given the significant pandemic-related impact to last year's second quarter results, my comments will compare our segment and business unit results to second quarter 2019, which provides a more meaningful insight to our quarterly operating performance.
Sales in our Bedding Products segment were up 7% versus the second quarter of 2019, primarily from raw material related selling price increases from inflation in steel, chemicals and nonwoven fabrics.
Volume was down in part due to exited business in Fashion Bed and Drawn Wire.
Volume was also lower due to foam shortages and labor availability, which continue to constrain the U.S. mattress production, negatively impacting component demand and our finished goods production.
Availability of chemicals used in our specialty foam operation improved during the second quarter, but at a slower pace than anticipated, due to supplier production disruptions and logistics challenges.
While supply improved, chemical allocations could persist to some degree throughout the remainder of the year.
In U.S. Spring, our planned Comfort Core capacity expansion is largely in place, and we have built inventory of Comfort Core innersprings to fulfill customer requirements as foam becomes more readily available.
Demand in our European bedding business was strong throughout the second quarter, but recently, we are seeing some signs of seasonal softening over the summer months.
Long term, we anticipate more growth opportunities in Europe with the Kayfoam acquisition.
Similar to the trends we've seen in the U.S. bedding market over the past several years, European consumers are purchasing more mattresses online and in compressed form, increasing demand for specialty foam and hybrid mattresses.
Adjusted EBITDA margins in the segment improved over the two-year period, primarily from pricing discipline, expanded metal margins in our Steel Rod business and fixed cost actions taken last year.
Sales in our Specialized Products segment were down 9% for the second quarter of 2019 due to lower volume across the segment.
In our Automotive business, volume was down over the two-year period, primarily from recent semiconductor shortages.
Industry production was heavily impacted in April and May with many OEMs reducing or completely shutting down production of some models.
Supply is expected to slowly improve, but we anticipate these shortages to continue through at least the first half of 2022.
In our Aerospace business, demand for fabricated duct assemblies is near second quarter 2019 levels, but demand for welded and seamless tube products is still well below pre-pandemic levels.
With the lingering impact from pandemic-related disruption in air travel and resulting buildup of aircraft and supply chain inventories, the industry is not anticipated to return to 2019 demand levels until 2024.
End market demand in Hydraulic Cylinders is very strong with the surge in lift truck orders.
However, global supply chain constraints and labor availability have hampered the OEMs' ability to ramp up production.
We expect our sales to increase as OEM production increases, but supply chain constraints in this business could persist into early 2022.
EBITDA margins in the segment declined over the two-year period, primarily from lower volume, partially offset by fixed cost actions taken last year.
Sales in our Furniture, Flooring & Textile Products segment were up 11% versus the second quarter of 2019, driven by demand strength in home furniture and geo components.
We expect strong market demand in our Home Furniture products business for the remainder of the year and into 2022.
In our Geo Components business, private construction and retail market demand is strong.
Demand in our Fabric Converting business softened due to the foam constraints that are impacting bedding and furniture manufacturers.
As foam availability improves, we anticipate sales to rebound.
In Flooring products, residential end market demand is above pre-pandemic levels, whereas hospitality demand remains well below 2019 levels.
And while recovery in Work Furniture lags the other businesses in this segment over the two-year comparison period, we continue to see strong demand for products sold for residential use and are beginning to see some improved demand in the contract market.
Adjusted EBITDA margins in the segment increased over the two-year period, primarily from improvement in our Home Furniture business and fixed cost actions taken last year.
Overall, the fixed cost actions we took last year reduced our second quarter cost by approximately $20 million versus the second quarter of 2019.
Across all of our businesses, we are focused on controlling costs by keeping our variable cost structure aligned with demand levels and only adding fixed costs as necessary to support higher volumes and future growth opportunities.
Spring to build inventory in order to meet anticipated customer demand as foam and labor availability improves across the industry.
In the fourth quarter, we will also take our rod mill out of operation for three weeks to replace the reheat furnace.
As a result, higher levels of inventory in these businesses are expected through the remainder of the year.
The inventory build and sales will likely alter our normal seasonal cash flow cycle to some degree.
In the second quarter, cash from operations was $41 million.
Higher earnings were partially offset by planned working capital investments to build and maintain the higher inventory levels that Mitch just discussed as well as inflation in the cost of those inventories.
With the expectation of carrying higher levels of inventory through the end of the year, we have lowered our full year operating cash estimate.
We now anticipate cash flow from operations to approximate $450 million in 2021.
At the end of the quarter, adjusted working capital as a percentage of annualized sales was 12.8%.
During the first half of the year, we brought back $187 million of offshore cash and currently expect to return at least $200 million of cash for the full year.
In May, we increased the quarterly dividend by $0.02 to $0.42 per share.
At an annual indicated dividend of $1.68, the yield is 3.5% based upon Friday's closing price of $48.03, one of the higher yields among the S&P 500 dividend aristocrats.
This year marks our 50th consecutive year of annual increases.
We're proud of our dividend record, and we plan to extend it.
Our strong financial base, along with our deleveraging efforts over the last two years, give us flexibility when making capital and investment decisions.
We ended the quarter with net debt to trailing 12-month EBITDA of 2.32 times and $1.3 billion of total liquidity.
Our long-term priorities for use of cash are unchanged.
They include, in order of priority: funding organic growth, paying dividends, funding strategic acquisitions and share repurchases with available cash.
For the full year 2021, we expect capital expenditures of approximately $140 million.
Dividends should approximate $215 million and acquisition spending of approximately $150 million.
We do not expect any significant share repurchases as we continue to focus on deleveraging.
As announced yesterday, we are again increasing our 2021 sales and earnings per share guidance.
2021 sales are now expected to be $4.9 billion to $5.1 billion or up 14% to 19% over 2020, resulting from mid- to high single-digit volume growth, raw material related price increases, currency benefit and approximately 1% growth from acquisitions, net of divestitures.
The increased versus prior guidance of $4.8 billion to $5 billion reflects a combination of higher raw material related price increases and acquisition sales.
We expect continued strong consumer demand for home-related products and global automotive along with some improvements in supply chain constraints as we move through the remainder of this year.
2021 earnings per share are now expected to be in the range of $2.86 to $3.06, including $0.16 per share from the real estate gain recognized in the second quarter.
Full year adjusted earnings per share is now expected to be $2.70 to $2.90, with increase versus prior guidance of $2.55 to $2.75, primarily due to higher metal margin.
This guidance also assumes fixed cost savings as a result of actions taken in 2020 to be approximately $70 million.
Based upon this guidance framework, our 2021 full year adjusted EBIT margin range should be 11.4% to 11.6%.
Earnings per share guidance assumes a full year effective tax rate of 23%, depreciation and amortization to approximate $195 million, net interest expense of approximately $75 million, and fully diluted shares of 137 million.
In closing, we remain focused on cash generation, while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture near- and long-term growth opportunities, both organically and through strategic acquisitions.
Daryl, we're ready to start Q&A. | compname reports q2 sales of $1.27 billion.
compname reports q2 sales $1.27 billion.
q2 earnings per share $0.82.
q2 sales $1.27 billion versus refinitiv ibes estimate of $1.23 billion.
sees fy sales $4.9 billion to $5.1 billion.
sees fy adjusted earnings per share $2.70 to $2.90.
sees 2021 earnings per share of $2.86-$3.06. | 1 |
Participating on the call today are Aaron Ravenscroft, our president and chief executive officer; and David Antoniuk, executive vice president and chief financial officer.
However, actual results could differ materially from any implied or actual projections due to one or more of the factors, among others, described in the company's latest SEC filings.
During our last call, I outlined Manitowoc's three key priorities for managing through the COVID-19 pandemic, which are: one, manage the health and safety of our employees; two, strengthen our balance sheet; and three, position the company for long-term growth.
Orders for the quarter were $390 million and frankly, much stronger than we had anticipated.
This laid the groundwork for us to increase our factory production in certain facilities where we had an aggressive shutdown plan and allowed us to deliver on a strong quarter.
We generated $21 million of free cash flow during the quarter and ended the quarter with $101 million of cash on hand.
Our total liquidity of $397 million at the end of September positions us well for the cyclical nature of the Crane business and to execute on our strategic growth initiatives.
With that, I'll ask Dave to take us through the details of the financial results, and I'll close with some more color on the market outlook and our strategy.
Let's move to Slide 3.
Our third-quarter orders totaled $390 million, an increase of 10% compared to $353 million of orders last year.
The year-over-year increase was driven by improved crawler crane demand in the Americas segment, partly offset by declines in other product lines due to the continued effect of COVID-19 on our end markets.
In addition, we secured a couple of large mobile crane project orders in the MEAP segment, which contributed to the year-over-year increase.
Favorable changes in foreign currency exchange rates positively impacted our year-over-year orders by approximately $6 million.
The book-to-bill in the quarter was $1.1 million.
Our third-quarter ending backlog of $465 million was essentially flat over the prior year and up $35 million or 8% on a sequential basis.
Improved backlog in the MEAP and EURAF segments were fully offset by a decline in the Americas.
On a currency-neutral basis, backlog decreased 4% year over year.
Net sales in the third quarter of $356 million decreased $92 million or 21% from a year ago.
market for most mobile crane products during the first half of the year due to the impact from COVID-19, resulting in a lower shippable backlog entering the quarter.
Net sales were favorably impacted by approximately 2% from changes in foreign currency exchange rates.
Our aftermarket revenue in the quarter declined slightly over the prior year.
Gross profit decreased $23 million year over year, mainly driven by the lower volume in the Americas.
Gross profit percentage decreased to 140 basis points to 18% from the same period in 2019, primarily due to the impact of lower production levels.
Third-quarter engineering, selling, and administrative expenses of $50 million decreased by approximately $5 million year over year.
The decrease was primarily due to lower employee-related costs, including short-term incentive compensation costs and reduced discretionary spending.
As a result, third-quarter adjusted EBITDA amounted to $25 million or 7% of net sales.
Our flow-through on the year-over-year sales decline was approximately 19%, reflecting excellent performance in managing our costs in this uncertain environment.
Restructuring costs in the quarter totaled $4 million and were mainly due to headcount reductions in the Americas.
Our GAAP diluted earnings per share in the quarter was a loss of $0.01 per share versus income of $0.51 per share in the prior year.
On an adjusted basis, diluted earnings per share was income of $0.10 compared to $0.54 in the comparable period.
The primary driver of the lower adjusted diluted earnings per share was the impact of reduced year-over-year sales volume.
In the third quarter, we generated $28 million of operating cash flows, which was primarily driven by a reduction in working capital of $19 million.
On a currency-neutral basis, we reduced inventories by approximately $18 million during the quarter.
We continue to closely manage our working capital needs to current demand levels and remain on track to achieve our planned $80 million inventory reduction on a currency-neutral basis.
During the third quarter, total liquidity increased approximately 12% from a year ago.
In the quarter, we repaid the $50 million draw on our ABL facility and ended the period with zero borrowings on our ABL facility.
Our liquidity remains sufficient to meet our obligations for the foreseeable future.
Additionally, we do not have any significant debt maturities until 2026.
And as stated in previous calls, our 2019 debt agreement simplified and eased covenant compliance, affording us greater flexibility to access our liquidity.
Our net debt leverage ratio is 2.6 times, providing us with sufficient runway to deploy capital for growth initiatives.
Due to the significant uncertainty regarding the impact that COVID-19 would have on our end-market demand and supply chain, on March 27, 2020, we suspended guidance for 2020.
Although significant uncertainty continues to persist in the markets we serve, our line of sight to fourth-quarter results have improved.
Accordingly, our forecast for revenue is between $425 million and $450 million and between $18 million and $23 million for adjusted EBITDA.
Please move to Slide 4.
The third quarter was a refreshing recovery from the steep decline that was experienced in the first half of the year, but we are not out of the woods yet.
The COVID pandemic continues to create uncertainty and industry confidence remains weak.
In the Americas, we still face headwinds, including COVID, presidential election dynamics, challenging oil prices, and elevated dealer inventory.
Demand for crawler cranes has been better.
However, when speaking to our customers and dealers, the consensus is that we won't see a broad recovery until mid-2021 at the earliest.
In Europe, we saw good orders during the third quarter, reflecting a bounce back after business grounded to a halt in the second quarter, although looking forward we are most concerned with this region.
The recent spike in COVID cases is weighing heavily on the general sentiment, even more so than in the United States as certain countries have implemented severe lockdowns.
And if you recall, the tower crane business in this region was already cycling down before COVID hit.
In MEAP, I would describe customer sentiment as mixed.
China and South Korea have been relatively strong for us in 2020, and we've landed a couple of nice sized projects in the Middle East.
That said, we have to see structural improvements in the Middle East economies that would give us confidence that a sustainable recovery is imminent.
Southeast Asia and India remain very slow.
Lastly, while Australia has been strong throughout the summer, we have seen some signs of a slowdown as the geopolitical situation with China evolves.
There is no question that we are operating in unprecedented times.
While we continue to manage the business closely during these challenging market conditions, we are also proactively taking actions to accelerate our growth when the market recovers.
Our investment in new product development remains on track, and we are developing new strategies to get closer to our customers to grow the business.
This slide breaks down the different revenue streams that are derived from a tower crane.
Historically, we've primarily focused on the sale of new cranes, which serves us well in markets where we have strong distributors and partners.
However, there are certain geographic territories such as Germany, where some of our partners don't have the balance sheet to take advantage of rental fleet of large top-slewing tower cranes.
In addition, large international construction companies rely on crane rentals to help manage their fleet, and they are beginning to shift their preferences to rent from OEMs as part of bundled deals.
Beyond the obvious benefits of having a rental fleet to run cranes, this business model helps facilitate greater service revenue and use equipment sales.
Moreover, many customers prefer to rent a crane for two years to work down the acquisition price prior to the actual purchase.
We see this approach as an opportunity to diversify our revenue streams and generate attractive returns in markets where we have opportunity to grow our share.
We quietly trialed this initiative during 2020 with good success and intend to expand this initiative in 2021.
We will continue to share more on this initiative as it matures.
But we want to give you some insight on how we are changing our mindset around growth.
In closing, improvement in our financial performance in the current down market is proof that we have created a sustainable stand-alone crane company.
We have significantly transformed our cost structure with the implementation of the Manitowoc Way.
Over the next five years, we will need to approach growth with the same rigor that we attacked safety, quality, and cost over the last five years.
We will continue to utilize the Manitowoc Way as our platform for driving our company culture.
We believe there are plenty of opportunities for organic and inorganic growth in segments of the crane business that are less volatile and offer a better margin profile. | q1 adjusted loss per share $0.06.
q1 loss per share $0.09.
initiating full-year 2021 adjusted ebitda guidance of $90 million to $105 million. | 0 |
First, I'd like for Brian to give the safe harbor statement.
Next, I'll have some comments on our quarter and then Brian will review the details of our results.
I'll end with some additional comments, and then we'll take questions.
We would refer you to our Form 10-K and other SEC filings for more information on those risks.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise.
Our third quarter results were exceptionally strong, building on the momentum we established in the first half of the year.
This was our first full quarter including NIC's results, and it was our best quarter ever by most financial measures.
We achieved new quarterly highs in revenues, non-GAAP EPS, free cash flow, adjusted EBITDA, bookings and backlog.
Total revenues grew 60.9% with organic growth of 7.6%.
As a result of the surge in the Delta variant, NIC's COVID-19-related revenues from TourHealth and pandemic unemployment initiatives were significantly above plan at $43.3 million.
We had expected those revenues, which have relatively low margins to wind down in the second half of the year, but we now expect they will continue into the first half of 2022.
NIC's core revenues grew 5% in the quarter.
Recurring revenues comprised over 80% of our quarterly revenues for the first time and were led by 183% growth in subscription revenues.
Excluding NIC revenues, subscription revenue growth was robust at 23.9%, reflecting our accelerating shift to the cloud.
We have now achieved greater than 20% subscription revenue growth in 55 of the last 63 quarters.
Software licenses and services revenues grew 13.9% or 2% excluding NIC.
As expected, our margins compressed compared to last year's third quarter.
Some expenses like trade shows and employee health claims as well as lower margin revenues like billable travel that declined in 2020 due to COVID pandemic have begun to return this year.
Margins were also impacted by the inclusion of NIC and particularly, by the continuation of their lower-margin COVID initiative revenue.
As a result, our non-GAAP operating margin declined 330 basis points to 25.3%.
Excluding NIC's COVID initiative revenues and related costs, our non-GAAP operating margin was 26.8%.
Bookings reached a record high in the third quarter at approximately $601 million, more than double last year's third quarter.
Excluding NIC, bookings grew 51.9%, with the biggest contributor being the $63 million renewal of our fixed fee e-filing arrangement with the state of Illinois.
We're very pleased to report early success this quarter with joint sales efforts between NIC and Tyler Solutions teams.
We signed agreements with the Virginia Department of Housing and Community Development valued at approximately $24 million to provide a digital and call center solution for tenant, landlord and third-party filing of rent relief program claims.
We'll also provide administrative dashboards from our Socrata Data & Insight solutions as well as payment processing capabilities.
Our largest software deal in the quarter also came from NIC with $6.1 million SaaS contract with the West Virginia Division of Motor Vehicles for digital titling.
This new digital vehicle titling and registration management system will go beyond modernization and revolutionize how the DMV manages vehicles and interacts with businesses and citizens.
In addition to the streamlining of nearly every vehicle-related process in place today, many legacy paper processes will be fully replaced with secure digital solutions.
The solution utilizes technology to govern and secure the vehicle ownership process, adding security, reducing fraud and providing the flexibility that other state DMV's operations are lacking.
The arrangement, which leverages our state master agreement has an initial term of five years.
In addition to the SaaS fees, the agreement will generate estimated transaction revenue of more than $3 million per year.
I'd like to also highlight a few more significant deals signed this quarter.
We signed appraisal services contracts with the Delaware Counties in New Castle and Kent.
In addition, New Castle County selected our iasWorld appraisal solution under a SaaS arrangement.
The deals have a combined value of approximately $19 million.
Coupled with the appraisal services contract signed last quarter was Sussex County, Tyler will now be performing a property reassessment for the entire state.
Also for our iasWorld Property Tax and Appraisal solution, we signed SaaS arrangements with the regional municipality of Wood Buffalo in Alberta, Canada, valued at approximately $3.1 million.
Franklin County, Ohio, valued at approximately $3.5 million and Summit County, Ohio, which also includes our Data & Insights Solutions, valued at approximately $2.9 million.
Other major SaaS deals included a $4.5 million contract with Arlington Heights, Illinois for our ERP civic services and payment solutions and a $3.4 million contract with Bayer County, Texas for our Odyssey, SoftCode and Supervision Justice solutions.
Our largest perpetual license contract for the quarter was a $5.4 million contract to provide our MicroPact and entellitrak solution to manage COVID vaccination at stations for the U.S. Department of Justice.
We also signed a $2.5 million on-premises license contract with the Commonwealth of the Northern Mariana islands for our Munis ERP and Enterprise Asset Management, ExecuTime and Socrata solutions.
We also signed several significant contract renewals with existing clients, including extensions of NIC's state enterprise agreements with the states of Utah and Oklahoma, and a five year renewal of our e-filing arrangement with the state of Illinois, which was expanded to include applications from our Socrata Data and Insights platform.
On last quarter's call, we reported that NIC had been selected as one of two vendors to provide the Internal Revenue Service with a digital payment processing solution that would allow taxpayers to securely pay their federal taxes, and that revenue under that contract was expected to begin in January of 2022.
Following the award, three entities filed protest with the GAO.
Prior to any ruling on the protest by the GAO, the IRS notified the GAO that it was canceling the two awards, including the award to NIC.
While the IRS has not formally terminated NIC's contract, it has issued a stop work order under the contract.
The IRS indicated that it will either amend the current solicitation, allowing all bidders to modify their previous submissions and then reevaluate the proposals or terminate the existing solicitation and start the process over with a new procurement in the coming months.
The IRS has not yet stated which of these options it will select and we have no information regarding the potential timing of either option.
Given these recent developments, we do not expect to recognize any revenue under the IRS award in 2022.
While the specific concerns raised in the protests have not been made public and are not known by Tyler, the decision to cancel the award to NIC was not related to NIC's performance under the contract, its ability to successfully perform under the contract or any allegations of misconduct or improper behavior by NIC.
On the M&A front, we completed the acquisitions of VendEngine and Arx during the third quarter.
VendEngine is one of the fastest-growing technology companies in North America, operating in more than 230 counties and 32 states.
Its leading cloud-based platform provides a comprehensive suite of applications focused on the corrections market, including deposit technologies for commissary, ordering and warehouse management and various informational electronic communications, security, accounting and financial trust management components.
Arx is a cloud-based software platform, which creates accessible technology to enable a modern day police force that is fully transparent, accountable and a trusted resource to the community it serves.
The acquisition of Arx allows Tyler to offer a full suite of public safety solutions, including Arx Alert and Arx Community, designed to maximize efficiency and safety for law enforcement officers while increasing transparency and trust building with communities.
VendEngine and Arx have combined ARR of approximately $17.5 million and their additions further strengthen Tyler's Justice and Public Safety suites.
Now I'd like for Brian to provide more details on the results of the quarter.
Yesterday, Tyler Technologies reported its results for the third quarter ended September 30, 2021.
GAAP revenues for the quarter were $459.9 million, up 60.9%.
Non-GAAP revenues were $460.6 million, up 61.1%.
On an organic basis, GAAP and non-GAAP revenues grew 7.6% and 7.5%, respectively.
Software license revenues rose 13.7%.
Subscription revenues rose 183.3%.
Excluding the contribution from NIC, subscription revenues were still very strong, growing 23.9%.
We added 144 new subscription-based arrangements and converted 67 existing on-premises clients, representing approximately $84 million in total contract value.
In Q3 of last year, we added 114 new subscription-based arrangements and had 46 on-premises conversions, representing approximately $56 million in total contract value.
Subscription contract value comprised approximately 74% of total new software contract value signed this quarter compared to 47% in Q3 of last year, reflecting our ongoing shift to a cloud-first approach to sales.
The value weighted average term of new SaaS contracts this quarter was 3.4 years compared to 4.3 years last year.
Transaction-based revenues, which include NIC portal, payment processing and e-filing revenues and are included in subscriptions, were $171.2 million, up more than sixfold from last year.
E-filing revenues reached a new high of $17.4 million, up 15%.
Excluding NIC, Tyler's transaction-based revenues grew 24.3%.
For the third quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $1.5 billion, up 79.2%.
Non-GAAP ARR for SaaS software arrangements for Q3 was approximately $330 million, up 24.7%.
Transaction-based ARR was approximately $685 million, up 639%.
And non-GAAP maintenance ARR was flat at approximately $471 million.
Our backlog at the end of the quarter was $1.77 billion, up 14.3%.
Because the vast majority of NIC's revenues are transaction-based, their backlog at quarter end was only $27 million.
Excluding the addition of NIC, Tyler's backlog grew 12.6%.
As Lynn noted, our bookings in the quarter were very robust at $601 million, up 105.7% and includes the transaction-based revenues of NIC.
On an organic basis, bookings were strong at approximately $444 million, up 51.9% fueled by the renewal of the State of Illinois fixed e-filling filing arrangement of approximately $63 million and the addition of the two Delaware appraisal deals totaling $19 million.
For the trailing 12 months, bookings were approximately $1.6 billion, up 31.3%.
And on an organic basis, were approximately $1.4 billion, up 10.8%.
Our software subscription bookings in the third quarter added $19 million in new annual recurring revenue.
Cash from operations and free cash flow were both record highs for the third quarter at $205.4 million and $192.8 million, respectively.
Our balance sheet remains very strong.
During the quarter, we repaid the outstanding balance of $65 million on our revolver and paid down $57.5 million on our term loans for a total debt reduction of $122.5 million.
We ended the quarter with total outstanding debt of $1.428 billion and cash and investments of $348.4 million, and net leverage of approximately 2.3 times trailing pro forma EBITDA.
We expect the net leverage to be approximately two times by year-end.
We have raised our revenue and earnings per share guidance for the full year 2021 to reflect our strong year-to-date performance and our expectations for the fourth quarter.
We expect 2021 total GAAP revenues will be between $1.577 billion and $1.597 billion, and non-GAAP total revenues will be between $1.580 billion and $1.6 billion.
We expect total revenues will include approximately $72 million of COVID-related revenues from NIC's TourHealth and pandemic unemployment services that are expected to wind down in the first half of 2022.
We expect 2021 GAAP diluted earnings per share will be between $3.55 and $3.63 and may vary significantly due to the impact of stock incentive awards on the GAAP effective tax rate.
We expect 2021 non-GAAP diluted earnings per share will be between $6.94 and $7.02.
I'm extremely pleased with our third quarter results, both from Tyler's core operations and from NIC in its first full quarter as part of Tyler.
When we spoke to investors in June, we discussed four priorities around the NIC acquisition for 2021.
First, don't mess up the business; second, achieve our 2021 plans for both businesses; third, retain NIC staff and establish a long-term leadership team; and fourth, identify and launch joint strategic initiatives and get our sales teams aligned.
I'm happy to say we are executing on all of those objectives.
Both businesses are executing at a high level and are exceeding our 2021 plans.
The NIC team under the leadership of Elizabeth Proudfit is enthusiastic about the combination and the opportunities ahead with Tyler.
And we've hit the ground running, with teams actively working on integration and go-to-market strategies.
We're showcasing Tyler products to NIC's entire state general manager team, and NIC's general managers are providing detailed reviews of the NIC State Enterprise contracts and relationships for Tyler's team.
We've also established a payments technology integration plan and are in the process of finalizing the joint Tyler NIC payments organization.
We've already had some early success in joint opportunities, such as our contract with the Colorado Department of Regulatory Agencies that includes NIC payment processing, Tyler's entellitrak regulatory solutions and our Socrata Data & Insights platform, as well as the recent NIC contract with Virginia for a solution for the rent relief program, which also includes Tyler Socrata applications.
We have a current pipeline of more than 40 qualified sell-through opportunities with NIC's state enterprise market across multiple Tyler solutions and have identified Tyler sales opportunities leveraging NIC State Enterprise contracts, to speed up the time from award to contract.
We're also beginning to build our combined payments pipeline with early sales in Florida and Louisiana.
We continue to see positive trends in public sector market activity.
Indicators such as proposals, sales demonstrations and pipelines are all up significantly from 2020 and are generally at or, in some cases, above pre-COVID levels.
Our competitiveness remains strong as reflected by high win rates across our major applications.
While not yet a significant factor, we're starting to see purchasing activity that is identified as being funded through the federal stimulus under the CARES Act and American Rescue Plan.
We expect that the $350 billion of aid to state and local governments and $167 billion of aid to schools under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and potentially provide a tailwind over the next two to three years.
A survey by the National Association of CIOs indicated that most state CIOs expect that remote work will continue and the need for digital services will increase.
CIOs said they plan to modernize legacy systems in the next two years with human services and public welfare, labor and employment and health services noted as priorities.
Tyler is well positioned to help public sector leaders address those needs.
We also remain on track with our R&D projects around our cloud initiative and with our progress toward hosting new SaaS implementations and on-premises conversions in AWS.
Our cloud operations team is engaged in 2022 planning with a focus on continued product optimization, data center migration and operations maturity.
Kevin is a seasoned IT leader with experience managing technology infrastructures for corporations, statewide judicial courts, statewide executive government agencies and U.S. military organizations, most recently serving as CIO for the Idaho Judicial branch.
Kevin will work closely with our former CIO, Matt Bieri, until Matt's retirement early next year.
I'd also like to express our deep appreciation to Matt for his tremendous leadership of our IT and hosting organization over the last 11 years and wish him the best in his retirement.
With that, we'd like to open up the line for Q&A. | q1 revenue rose 6.6 percent to $294.8 million. | 0 |
With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.
If not, you can access the release on our website.
Before we get started, I would like to review World Fuel's safe harbor statement.
A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission.
We are speaking to you today for our second quarterly earnings call during the COVID-19 pandemic.
First, I want to say how proud I am and how well our global team has continued to operate our day-to-day business activities with nearly all of our employees working from home or on the frontline delivering fuel.
It is a testament to their professionalism and passion for the business.
As I've said previously, we took swift action at the beginning of the pandemic to activate our safety procedures and protocols.
And fortunately, we have had very few cases of COVID-19 among our employees.
Despite all of the continuing complexities in the world around us, we delivered a very respectable result in the second quarter.
While our aviation volumes were naturally lowered in the current environment, we delivered better-than-expected results, driven by increased cargo activity, unscheduled aircraft activity as well as historic oil price volatility during the quarter.
Global airline passenger volume, while recovering at varying cases in different parts of the world, is still far from pre-pandemic levels.
Before COVID-19 hit, the aviation industry was on a strong upswing with good passenger mile growth, consistent with a very long growth trend.
It's clear the world wants to travel by air.
That is not likely to change.
I'm optimistic that science will ultimately prevail and the airlines focus work on safety and cleanliness will bring back this industry, which is so vital to local, national and global economies and modern living.
World Fuel is fortunate to have a geographically and segment diverse portfolio of energy clients that rely on our solutions.
Our core marine activity held up as well.
While the cruise market continues to work its reentry plan with some limited cruising occurring in Asia and Europe.
We continue to be selective on marine risk as we have been over the last five years, which should position us well in today's market.
Our global land business delivered good results, boosted by seasonal strength in the U.K., which carried into April and a rebound in our North American gasoline and diesel business as many taking not taking to the skies began taking to the road.
As Ira will explain further, we have used the considerable learnings of the past four months to rethink our global work routines.
When the world does return to some steady state, we will have a more flexible and efficient hybrid workforce and workplace, with some returning to the office and some continuing to work remotely, driving both greater cost and business efficiencies and giving us the ability to access wider talent pools.
Our global team also continued to do a great job of managing cash, risk and operating expenses, with expenses down sequentially and strong operating cash flow, supporting our very healthy liquidity position.
Underwriting has always been a core competency and one of our core values to the marketplace.
Insulating buyers and sellers from a multitude of counter-party risks has been the essence of our existence for the last 35 years, and it still is.
Protecting the balance sheet and cash flow is what we have always focused on every day.
Speaking of liquidity, as announced earlier today, we have signed an agreement to sell our multi-service payment solutions business to Corsair Capital, a New York-based private equity firm.
Well, I love this business and its people, and it was certainly additive to World Fuel, focus is truly the key to success.
The sale will provide us with even more capital with which we can reinvest in our core business, enhancing our ability to drive growth, greater operating leverage and higher returns.
Ira will shortly provide you with all the related financial information timing.
So while the pandemic continues to challenge the world, we have been staying healthy and safe while serving our customers and suppliers with the same level of commitment and old-fashioned customer service excellence and operational support we always have.
Adversity often drives efficiency and productivity.
Many of the companies that come out on the other side of extraordinary events will be smarter, stronger, more efficient and poised for growth.
I am confident that we will be one of them.
The resilience of our company and commitment to best-in-class service has differentiated us as a solid counter-party with a sustainable business model for decades, and this has only been further accentuated over the past few months.
While the timing of returning to any sense of normalcy remains unclear, we remain focused on our long-term strategy, which encompasses strategic growth in our core businesses and a continual focus on cost and balance sheet management to deliver greater value for our shareholders and other stakeholders, while, of course, looking after the health and safety of all of our employees worldwide.
And now I will provide you with our financial update.
The nonoperational expenses in the second quarter principally consisted of an $18.6 million asset impairment relating to our decision to rationalize our global office footprint in light of the new world we are living in.
Some of our office locations will simply transition to a more permanent remote work environment and some will be relocated to smaller, more flexible and cost-effective locations.
Nonoperational expenses also included costs related to certain other organizational changes as well as acquisition and divestiture-related expenses.
So now let me get into some second quarter highlights.
Adjusted second quarter net income and earnings per share were $8 million and $0.13 per share.
Adjusted EBITDA for the second quarter was $57 million.
And lastly, we generated $236 million of cash flow from operations, which enabled us to continue to maintain more than $1 billion in total available liquidity, a critically important metric during this time period.
Consolidated revenue for the second quarter was $3.2 billion.
The significant year-over-year decline was driven principally by the dramatic impact of the COVID-19 pandemic on our segment volumes as well as significantly lower average fuel prices during the quarter due to the unprecedented impact of the pandemic on global demand.
Our aviation segment volume was 690 million gallons in the second quarter, representing a sequential decline slightly less than the 65% decline forecasted on last quarter's call.
Although we experienced relatively strong volumes related to cargo activity in certain business and general aviation customers, commercial passenger activity remained at levels below 25% of normal activity, and that was the principal driver of the volume decline in the second quarter.
Volume in our marine segment for the second quarter was four million metric tons, down approximately 18% sequentially, driven principally by the negative impact of the pandemic, our core reselling activity, including sales to cruise lines, experienced most of the volume decline.
We are hopeful that second quarter volumes were the low point as we are beginning to see some increased activity in certain segments of the marine market.
Our land segment volume was 1.2 billion gallons or and gallon equivalents during the second quarter.
That's a 50% decrease sequentially.
While volume declines in our land segment were not as significant as the aviation and marine segments, we did experience volume declines in our retail, commercial and industrial and connect businesses.
Consolidated gross profit for the second quarter was $214 million.
That's a decrease of 20% compared to the second quarter of 2019.
Our aviation segment contributed $92 million of gross profit in the second quarter.
That's down 35% year-over-year and basically flat sequentially, but significantly above the expectation shared on last quarter's call.
Despite the significant decline in traditional passenger activity during the quarter as well as a decline in government-related activity as a result of the ongoing drawdown of troops in Afghanistan, we did benefit from some situation-specific, nontraditional activity arising from the pandemic, such as repatriation flights and the repositioning of aircraft.
We also benefited from historic inventory volatility experienced during the quarter, whereas many of you know, crude oil prices started out at $20, then technically dropped to negative 40 and ultimately ended the quarter at just under $40.
The resulting return to a contango market following the somewhat prolonged backwardated market environment, served to contribute positively to our second quarter aviation results as well.
While we are slowly beginning to see an increase in volume during the early part of the third quarter in many parts of the world, we expect aviation gross profit in the third quarter to be generally flat sequentially due to reduced price volatility as compared to the second quarter as well as an expected further decline in activity in Afghanistan.
Obviously, with the ongoing effects of the COVID-19 pandemic globally, performance in the latter part of the year remains difficult to forecast at this stage.
The marine segment generated second quarter gross profit of $37 million, representing a slight increase year-over-year and generally in line with the guidance we provided on last quarter's call.
As we look ahead to the third quarter, we expect a modest sequential increase in marine gross profit, driven principally by seasonality and the modest volume growth in our core business mentioned earlier.
Our land segment delivered gross profit of $85 million in the second quarter, down 8% year-over-year.
Land results were actually better-than-expected at the start of the quarter as gas and diesel activity began rebounding midway through the quarter and the strength of our U.K. operations in the first quarter of this year actually continued into the early part of the second quarter.
However, many customer segments, such as the busing sector, for example, continue to be constrained until related markets reopen.
Our core operating expenses, which exclude our bad debt expense, were $154 million in the second quarter, down more than $20 million sequentially and just below the guidance provided on last quarter's call.
As mentioned last quarter, we made immediate cost-related decisions as the pandemic began impacting our business activity.
These measures included a global hiring freeze and other organizational changes, the postponement or elimination of all nonessential projects and a reduction in discretionary spending.
With the broader learnings stemming from our ability to effectively operate many functions within our business with a remote workforce, we explored the opportunity to rationalize our global office footprint, as mentioned earlier, which we expect will result in additional annualized cost reductions of close to $10 million, while ensuring a healthy and agile work environment for our employees as we look toward 2021 and beyond.
Based on the actions taken to date and our continued efforts to identify additional cost-saving opportunities, we expect core operating expenses to be in the range of $149 million to $154 million in the third quarter, representing another sequential decline in operating expenses.
Last quarter, we mentioned the likelihood that bad debt expense would increase over the balance of the year, considering the strain COVID-19 has placed on the global transportation industry and many of our customers around the world.
As a result, our bad debt expense increased to $25 million in the second quarter, principally due to the establishment of reserves related to a few notable bankruptcies in the commercial aviation market.
While our consolidated receivables portfolio was down from $2.9 billion at year-end to $1.4 billion in June and aviation's receivable portfolio is down from $1 billion to just over $400 million over the same time period, risk levels clearly remain elevated.
However, our underwriting team has done a fantastic job managing through this crisis and the challenging market conditions we've experienced since March.
Despite the historic market conditions experienced in the second quarter, we still delivered $35 million of adjusted income from operations.
I think that's another testament to the work of our team and they're laser-focused on supporting our customers through these unprecedented times while also carefully managing costs throughout the quarter.
In the second quarter, nonoperating expenses, which is principally interest expense, was $14.9 million, which is down 15% year-over-year, primarily driven by a decrease in borrowing rates.
While we have been making progress in reducing our tax rate over the past several quarters, due to the pandemic's negative impact on our profitability, most notably in the United States, as well as discrete tax items recorded during the quarter, we had an unusually high tax rate this quarter.
At this point, considering the current environment, it is difficult to forecast our effective tax rate for the second half of the year, but it is now more likely that our rate will be over 30% over the next two quarters.
Our team did a fantastic job managing working capital during the second quarter, resulting in $236 million of operating cash flow.
While prices were extremely volatile during the quarter, lower prices, combined with significant volume declines contributed to a reduction in working capital that resulted in substantial cash flow generation.
Our net debt position declined by more than $200 million sequentially to $450 million in the second quarter, again, due to our strong operating cash flow.
This resulted in a further decline in our net debt-to-EBITDA ratio to 1.2 times, and our total available liquidity remained at more than $1 billion consistent with or actually somewhat above our liquidity position at the beginning of the second quarter.
Obviously, looking forward, our available liquidity is dependent in great part upon our future performance and cash flows.
The strength of our balance sheet is a result of a phenomenal remote team effort involving our commercial business, our underwriting and collection teams and many other members of our organization.
Finally, today's announcement of the sale of our multi-service payment solutions business represents a significant step in our strategy to sharpen our portfolio of businesses.
Exiting this line of business will enable us to continue to simplify our business and focus our attention on driving growth and greater digitization in our core businesses, accelerating our ability to drive greater operating efficiencies and returns.
While the proceeds from the sale, which is expected to close within 90 days, will initially be utilized to repay outstanding debt, it also will provide us with additional capital to strategically invest in our core businesses.
In closing, like most businesses worldwide, our business has clearly been impacted by the global pandemic.
Our employees, our customers, our suppliers and even our shareholders have all been impacted.
Despite the continuing need to run our business remotely, our global team pulled together to deliver reasonably good second quarter results, given current circumstances.
While we have no direct control over the timing of a return to any sense of normalcy, we remain focused on our core priorities of keeping our employees safe, serving our customers with excellence, driving growth in our core businesses and continuing to improve our operating efficiencies, all of which should contribute positively to shareholder returns. | world fuel services q2 adjusted earnings per share $0.13.
q2 adjusted earnings per share $0.13. | 1 |
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm going to start today with the end in mind, strong quarter and a great first half of the year, giving us confidence as we target the high end of the guidance range.
Rejji will walk through the details of the quarter, and I'll share what the strong results mean for 2021 earnings.
Needless to say, I'm very pleased.
An important gene sale of EnerBank at 3 times book value, moving from noncore to the core business with a strong focus on regulated utility growth.
The sale of the bank provides for greater financial flexibility, eliminating planned equity issuance from 2022 to 2024.
And in the end, Reggie will share how we have reduced our equity issuance need for 2021 in today's remarks.
Furthermore, with the filing of our integrated resource plan, you can see the path for more than $1 billion into the utility, again, without equity issuance.
Not only is there visibility to that investment, that's certainly in the time line for review.
I'm excited about this IRP.
It's a remarkable plan.
Many have set net zero goals.
We have industry-leading net zero goals and this IRP provides a path and is an important proof point in our commitment.
We are leading the clean energy transformation.
It starts with our investment thesis.
This simple but intentional approach has stood the test of time and continues to be our approach going forward.
It is grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver on our financial objectives.
With the sale of EnerBank and the plan to exit coal by 2025, our investment thesis gets even simpler.
But now it's also cleaner and leaner.
We continue to mature and strengthen our lean operating system, the CE Way, which delivers value by reducing cost and improving quality, ensuring affordability for our customers, and our thesis is further strengthened by Michigan's supportive regulatory construct.
All of this supports our long-term adjusted earnings per share growth of 6% to 8%, and combined with our dividend, provides a premium total shareholder return of 9% to 11%.
All of this remains solidly grounded in our commitment to the triple bottom line of people, planet and profit.
As I mentioned, our integrated resource plan provides the proof points to our investment thesis, our net zero commitments and highlights our commitment to the triple bottom line by accelerating our decarbonization efforts, making us one of the first utility in the nation to exit coal or increasing our renewable build-out, adding about eight gigawatts of solar by 2040, two gigawatts from the previous plan.
Furthermore, this plan ensures reliability, a critical attribute as we place more intermittent resources on the grid.
The purchase of over two gigawatts of existing natural gas generation allows us to exit coal and dramatically reduces our carbon footprint.
Existing natural gas generation is key.
And like we've done historically with the purchases of our Zeeland and Jackson generating stations.
This is a sweet spot for us where we reduce permitting, construction and start-up risk.
It is also thoughtful and that is not a 40- to 50-year commitment that you would get with a new asset, which we believe is important, as we transition to net zero carbon.
And, yes, on other hand, our plan is affordable for our customers.
It will generate $650 million of savings, essentially paying for our transition to clean energy.
This is truly a remarkable plan.
It is carefully considered and data-driven.
We've analyzed hundreds of scenarios with different sensitivities and our plan was thoughtfully developed with extensive stakeholder engagement.
I couldn't be more proud of this plan and especially the team that put it together.
We've done our homework, and I'm confident it is the best plan for our customers, our coworkers, for great state of Michigan, of course, you, our investors to hit the triple bottom line.
The Integrated Resource Plan is a key element of Michigan's strong regulatory construct, which is known across the industry as one of the best.
It is a result of legislation designed to ensure a primary recovery of the necessary investments to advance safe and reliable energy in our state.
It enables us and the commission to align on long-term generation planning and provide greater certainty as we invest in our clean energy transformation.
We anticipate an initial order for the IRP from the commission in April and a final order in June of next year.
The visibility provided by Michigan's regulatory construct enables us to grow our capital plan to make the needed investments on our system.
On Slide six, you can see that our five-year capital plan has grown every year.
Our current five-year plan, which we'll update on our year-end call includes $13.2 billion of needed customer investment.
It does not contain the upside in our IRP.
The IRP provides a clear line of sight to the timing and composition of an incremental $1.3 billion of opportunity.
And as I shared on the previous slide, the regulatory construct provides timely approval of future capital expenditures.
I really like this path forward.
And beyond our IRP, there is plenty of opportunity for our five-year capital plan to grow given the customer investment opportunities we have in our 10-year plan.
Our backlog of needing investments is as vast as our system, which serves nearly seven million people in all 68 counties of Michigan's Lower Peninsula.
We see industry-leading growth continuing well into the future.
So where does that put us today?
The bank sale and now the IRP filing provide important context for our future growth and positioning of the business.
Let me share my confidence.
For 2021, we are focused on delivering adjusted earnings from continuing operations of $2.61 to $2.65 per share, and we expect to deliver toward the high end of that range.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
Given the strong performance we are seeing this year, the reduced financing needs next year and continued investments in the utility, there is upward momentum as we move forward.
Now many of you have asked about the dividend.
We are reaffirming again no change to the $1.74 dividend for 2021.
As we move forward, we are committed to growing the dividend in line with earnings with a target payout ratio of about 60%.
It's what you expect, it's what you own it, and it is big part of our value.
I will offer this.
Our target payout ratio does not need to be achieved immediately, it will happen naturally, as we grow our earning.
Finally, I want to touch on long-term growth rate, which is 6% to 8%.
This has not changed.
It's driven by the capital investment needs of our system, our customers' affordability and the need for a healthy balance sheet to fund those investments.
Historically, we've grown at 7%.
But as we redeploy the proceeds from the bank, we will deliver toward the high end through 2025.
I'll also remind you that we tend to rebase higher off of actuals.
We have historically either met or exceeded our guidance.
All in, a strong quarter, positioned well for 2021 with upward momentum and with EnerBank and the IRP, it all comes together nicely positioned for the long term.
Before I walk through the details of our financial results for the quarter, you'll note that throughout our materials, we have reported the financial performance of EnerBank as discontinued operations, thereby removing it as a reportable segment and adjusting our quarterly and year-to-date results in accordance with generally accepted accounting principles.
And while we're on EnerBank, I'll share that the sale process continues to progress nicely, as the merger application was filed in June with the various federal and state regulators will be evaluating the transaction for approval, and we continue to expect the transaction to close in the fourth quarter of this year.
Moving on to continuing operations.
For the second quarter, we delivered adjusted net income of $158 million or $0.55 per share, which excludes $0.07 from EnerBank.
For comparative purposes, our second quarter adjusted earnings per share from continuing operations was $0.09 above our second quarter 2020 results, exclusive of EnerBank's earnings per share contribution last year.
The key drivers of our financial performance for the quarter were rate relief, net of investment-related expenses, recovering commercial and industrial sales and the usual strong tax planning.
Year-to-date, we delivered adjusted net income from continuing operations of $472 million or $1.64 per share, which excludes $0.19 per share from EnerBank and is up $0.37 per share versus the first half of 2020, assuming a comparable adjustment for discontinued operations.
All in, we're tracking well ahead of plan on all of our key financial metrics to date, which offers great financial flexibility for the second half of the year.
The waterfall chart on Slide nine provides more detail on the key year-to-date drivers of our financial performance versus 2020.
As a reminder, this walk excludes the financial performance of EnerBank.
For the first half of 2021, rate relief has been the primary driver of our positive year-over-year variance to the tune of $0.36 per share given the constructive regulatory outcomes achieved in the second half of 2020 for electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs, such as depreciation and amortization, property taxes and funding costs at the utility.
The rate relief related upside in 2021 has been partially offset by the planned increases in our operating and maintenance expenses to fund key initiatives around safety, reliability, customer experience and decarbonization.
As a reminder, these expenses align with our recent rate orders and equate to $0.06 per share of negative variance versus 2020.
It is also worth noting that this calculation also includes cost savings realized to date, largely due to our waste elimination efforts through the CE Way, which are ahead of plan.
We also benefited in the first half of 2021 from favorable weather relative to 2020 in the amount of $0.06 per share and recovering commercial and industrial sales, which coupled with solid tax planning provided $0.01 per share of positive variance in aggregate.
As we look ahead to the second half of the year, we feel quite good about the glide path to delivering toward the high end of our earnings per share guidance range, as Garrick noted.
As always, we plan for normal weather, which in this case, translates to $0.02 per share of negative variance, given the absence of the favorable weather experienced in the second half of 2020.
We'll continue to benefit from the residual impact of rate relief, which equates to $0.12 per share of pickup.
And I'll remind you, is not subject to any further MPSC actions.
We also continue to execute on our operational and customer-related projects, which we estimate will have a financial impact of $0.21 per share of negative variance versus the comparable period in 2020 given anticipated reinvestments in the second half of the year.
We have also seen the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance, which as a reminder, now excludes EnerBank.
All in, we are pleased with our strong start to the year and are well positioned for the latter part of 2021.
Turning to our financing plan for the year.
I'm pleased to highlight our recent successful issuance of $230 million of preferred stock at an annual rate of 4.2%, one of the lowest rates ever achieved for a preferred offering of its kind.
This transaction satisfies the vast majority of funding needs of CMS Energy, our parent company for the year and given the high level of equity content ascribed to the security by the rating agencies, we have reduced our planned equity issuance needs for the year to up to $100 million from up to $250 million.
As a reminder, over half of the $100 million of revised equity issuance needs for the year are already contracted via equity forwards.
It is also worth noting that given the terms and conditions of the EnerBank merger agreement in the event EnerBank continues to outperform the financial plan prior to the closing of the transaction, we would have a favorable purchase price adjustment related to the increase in book equity value at closing, which could further reduce our financing needs for 2021 and provide additional financial flexibility in 2022.
Closing out the financing plan, I'll also highlight that we recently extended our long-term credit facilities by one year to 2024, both at the parent and the utility.
Lastly, I'd be remiss if I didn't mention that later today, we'll file our 10-Q, which will be the last 10-Q owned by Glenn Barba, our Chief Accounting Officer, who most of you know from his days leading our IR team.
Glenn announced his retirement earlier this year after serving admirably for nearly 25 years at CMS, which included him signing over 75 quarterly SEC filings during his tenure.
As we've highlighted today, we've had a great first half of the year.
We are pleased to have delivered such strong results.
We're positioned well to continue that momentum into the second half of the year as we focus on finalizing the sale of the bank and moving through the IRP process.
I'm proud to lead this great team, and we can't wait to share our success as we move forward together.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A. | reaffirms fy adjusted non-gaap earnings per share view $2.61 to $2.65 from continuing operations.
reaffirms fy adjusted earnings per share view $2.85 to $2.87.
q2 adjusted earnings per share $0.55 from continuing operations.
q2 earnings per share $0.55 from continuing operations. | 1 |
There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10-K and 10-Q filed with the SEC.
Before discussing our progress since our last call, I want to introduce our new Chief Financial Officer, Steve Coughlin.
Steve has been with AES for 14 years and has served in a variety of roles, including as Chief Executive Officer of Fluence and most recently as Head of both Strategy and Financial Planning.
I am happy to report that we are making excellent progress on our strategic and financial goals, and remain on track to deliver on our 7% to 9% annualized growth in adjusted earnings per share and parent free cash flow through 2025.
We had a strong third quarter with adjusted earnings per share of $0.50, a 19% increase versus the same quarter last year.
We expect to deliver on our full year guidance, even with a $0.07 noncash impact from an updated accounting interpretation related to the equity units of a convert we issued earlier this year.
Steve will provide more details shortly.
Today, I will discuss both the growth in our core business as well as the strategy and evolution of our innovation business called AES Next.
We see ourselves as the leading integrator of new technologies.
The two parts of our portfolio are mutually beneficial to one another and enable us to deliver greater total returns to our shareholders.
More specifically, and as we have proven, our core business platforms provide the optimal environment for exponentially growing technology start-ups.
At the same time, our AES Next businesses provide us with unique capabilities that enable us to offer customers the differentiated product they seek to achieve their sustainability goals.
Turning to Slide four.
I will provide you with an update on our core business, including our growth in renewables and an update on the overall macroeconomic environment.
We continue to see great momentum in demand overall.
As we speak, we have senior members of our team, attending the COP26 Climate Conference in Glasgow, meeting with governments, organizations and potential customers.
Since our last call in August, we have signed an additional 1.1 gigawatts of renewable PPAs, bringing our year-to-date total to four gigawatts.
Additionally, we are in very advanced discussions for another 850 megawatts of wind, solar and energy storage.
Based on our current progress, we now expect to sign at least five gigawatts this year versus our prior expectations of four gigawatts.
This represents the largest addition in our history and 66% more than in 2020.
With our pipeline of 38 gigawatts of potential projects, including 10 gigawatts that are ready to bid in the U.S., we are well positioned to capitalize on this substantial opportunity.
Our success is a result of our strategy of working with our clients on long-term contracts that provides customized solutions for their specific energy and sustainability goals.
As such, almost 90% of our new business has been from bilateral negotiated contracts with corporate customers.
This allows us to compete on what we do best: providing differentiated, innovative solutions.
One example of our work with major technology companies to provide competitively priced renewable energy netted on an hour-by-hour basis.
As we announced earlier this week, we signed a 15-year agreement to provide around-the-clock renewable energy to power Microsoft's data centers in Virginia.
Year-to-date, we have signed almost two gigawatts of similarly structured contracts with a number of tech companies, integrating a mix of renewable sources and energy storage.
Outside the U.S., we have a similar strategy of focusing on bilateral sales with corporate customers, which has enabled us to sign long-term U.S. dollar-denominated contracts with investment-grade customers.
For example, in Brazil, we see demand for more than 25 gigawatts of renewables, providing a significant opportunity to earn mid- to high-teen returns in U.S. dollars, while at the same time, diversifying our Brazilian portfolio of mostly hydro generation.
To that end, for the first time ever in Brazil, we are in very advanced negotiations to design a 300-megawatt U.S. dollar-denominated contract with a large multinational corporation for 15 years.
Turning to Slide five.
Our backlog of 9.2 gigawatts is the largest ever with 60% in the U.S. These projects represent one of the main drivers for our growth through 2025 and beyond.
With this pace of growth, we are laser-focused on ensuring that we have adequate and reliable supply chain.
For several years, we have anticipated a boom in renewable development that could potentially lead to inadequate panel supply.
And as such, we took pre-emptive measures to ensure supply chain flexibility.
Despite current challenges in the market, we have non-Chinese panels secured for the majority of our backlog, which is expected to come online through 2024.
We have benefited from a number of strategic relationships with various suppliers and a clear advantage stemming from our scale and visibility of our pipeline.
More generally, we continue to proactively manage potential macroeconomic headwinds, including inflation and commodity prices.
As part of our efforts to derisk our portfolio over the past decade, we have taken a systematic approach to risk management.
In fact, in places where we use fuel, it is mostly a pass-through and, therefore, we have limited exposure to changes in commodity prices.
Furthermore, more than 80% of our adjusted pre-tax contribution is in U.S. dollars, insulating us from fluctuations in foreign currencies.
We not only remain committed to achieving our long-term adjusted earnings per share and parent free cash flow targets, but we also continue to improve our credit metrics and are on track to achieve BBB ratings from all agencies by 2025.
Now to Slide six.
We continue to benefit from a virtuous cycle with our corporate customers, in which our ability to provide innovative solutions leads to more opportunities for collaboration and more projects.
For example, this quarter, we announced a partnership with Google to provide our utility customers cost savings and energy efficiency features as well as opportunities to accelerate their own clean energy goals through Nest thermostats.
Moving to Slide seven.
Through AES Next, we integrate new technologies to bring innovation to the industry and work with existing and new customers.
AES Next operates as a separate unit within AES where we develop and incubate new businesses, including a combination of strategic investments and internally developed businesses, representing approximately $50 million of gross capital annually.
As I mentioned, the combination of AES Next and our core business creates the optimal environment for growth, whereby we can better create solutions for customers by utilizing our industry insights and operating platforms.
One example of this mutually beneficial arrangement is in the combination of renewables plus storage.
We first combined solar and storage in 2018 in Hawaii.
And today, nearly half of our renewable PPAs have an energy storage component.
Another example is 5B, a prefabricated solar solution company that has patented technology, allowing projects to be built in 1/3 of the time and on half as much land while being resistant to hurricane force winds.
We see 5B's technology as a source of current and future competitive advantage for AES, allowing us to build more projects in places where there is a land scarcity, constraints around height or soil disruption or hurricane risk.
Likewise, 5B benefits greatly from the ability to grow rapidly on our platform, and we are currently developing projects in the U.S., Puerto Rico, Chile, Panama and India.
I am highlighting the AES Next portion of our business because it is increasingly clear that AES essentially has two distinct business models that add value to our shareholders in very different ways.
With our core business, we continue to measure our success through growth in adjusted earnings per share and parent free cash flow as well as PPAs signed.
With AES Next, these businesses contribute value creation through their extremely rapid growth in valuation with the potential for future monetization.
Nonetheless,they are a drag on AES' earnings during their ramp-up phase.
In 2021, this drag on earnings is expected to be approximately $0.06 per share.
We assume these losses from AES Next in our 2021 guidance and our 7% to 9% annualized growth rate through 2025.
Turning to Slide eight.
As you know, last week, Fluence, our energy storage joint venture with Siemens, which began as a small business within AES, became a publicly listed company with a current valuation of around $6 billion.
Similarly, early this year, another AES Next business, Uplight, received evaluation in a private transaction of $1.5 billion.
The value of our interest in these two businesses is now at least $2.5 billion or $3 per share compared to the book value of our investments of approximately $150 million.
In my view, this massive shareholder value creation more than justifies the temporary negative impact to earnings.
In summary, our strategy of being the leading integrator of new technologies on our platform has yielded great results, and we have several other innovations in development under AES Next.
As they mature, we will continue to take actions to accelerate their growth and show their value.
It's my pleasure to participate in my first earnings call as Chief Financial Officer of AES.
I have been at AES for 14 years and feel very fortunate to work at a company that is transforming the electric sector so profoundly along so many talented people in finance and throughout the company.
With our strategic and financial progress to date, AES is well positioned to continue leading this transformation.
In my previous role, I led corporate strategy and financial planning where we developed our plan to get to greater than 50% renewables at least 50% of our business in the U.S. and to reduce our coal share to less than 10% by 2025, all while growing the company 7% to 9%.
We are committed to those goals, and I look forward to continue executing toward them.
Before I dive into our financial performance, I want to discuss the adjustment to our accounting that we made this quarter relating to the treatment of the $1 billion in equity units we issued in the first quarter this year.
Our prior guidance assume that the underlying shares would not be included in our fully diluted share count until 2024 upon settlement of the equity units.
This approach was in line with industry practice and supported by our interpretation of the accounting literature and our external auditors.
However, we are now subject to an updated interpretation of these instruments, and we are adjusting to include these shares in our fully diluted earnings per share calculations.
This adjustment results in an annual impact of roughly $0.07 this year and $0.09 in 2022 and 2023 using a full year of an additional 40 million shares.
It's important to keep in mind that this adjustment has no cash impact and has absolutely no impact on our business or longer-term growth rates as we had included the underlying shares in our projections for 2024 and beyond.
Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted earnings per share guidance range, but we now expect to be at the low end of the range.
Now I'd like to cover two important topics: our performance during the third quarter and our capital allocation plan.
Turning to Slide 11.
You can see the strong performance of our portfolio in this quarter.
Adjusted earnings per share was $0.50 for the quarter versus $0.42 for the comparable quarter last year.
This 19% increase was primarily driven by improvements in our operating businesses, new renewables and parent interest savings.
These positive drivers were partially offset by lower contributions from South America, largely due to unscheduled outages in Chile.
Third quarter results also reflect an approximate $0.03 quarter-to-date impact from the higher share count due to the inclusion of 40 million additional weighted average shares relating to the equity units that I just mentioned.
Turning to Slide 12.
Adjusted pre-tax contribution, or PTC, was $428 million for the quarter, an increase of $97 million versus third quarter of 2020.
I'll cover our results by strategic business unit over the next four slides, beginning on Slide 13.
In the US and Utilities SBU, PTC increased $69 million as a result of our continued progress in growing our U.S. footprint.
The improvement was largely driven by higher contributions from Southland, which benefited from higher contracted prices, new renewables coming online at AES Clean Energy and higher availability at AES Puerto Rico.
In California, our 2.3 gigawatt Southland legacy portfolio demonstrated its critical importance by continuing to meet the state's pressing energy needs and its transition to a more sustainable carbon-free future.
In fact, as you may have heard, last month, the State Water Resource Control Board unanimously approved an extension of our 876-megawatt Redondo Beach facility for two years through 2023 to align with our remaining legacy units.
If the demand/supply situation remains tight, some of our legacy portfolio could be available to meet California's energy needs beyond 2023 if state energy officials determine a need, although we have not assumed this in our guidance.
As you can see on Slide 14, at our South America SBU, lower PTC was primarily driven by unscheduled outages in Chile due to a blade defect impacting six turbines across our fleet that has now largely been resolved.
Our third quarter results were also driven by lower hydrology in Brazil.
Before moving to MCAC, I would like to provide an update on 531-megawatt Alto Maipo hydro project, owned by a subsidiary of AES Andes in Chile.
Construction continues to go well, and generation is expected to begin in December of this year, with full commercial operation of the plant expected in the first half of 2022, in line with our expectations.
Alto Maipo is in discussions with its nonrecourse lenders to restructure its debt to achieve a more sustainable and flexible capital structure for the long term.
AES Andes has honored its equity commitment to Alto Maipo and will not be assuming any additional equity obligations.
We expect the restructuring to be completed in 2022.
And AES Andes already assumed zero cash flow from Alto Maipo, so we don't see the restructuring impacting our guidance.
Now turning back to our third quarter results on Slide 15.
The higher PTC at our MCAC SBU primarily reflects higher LNG sales in Dominican Republic and demand recovery in Panama.
And finally, in Eurasia, as shown on Slide 16, higher results reflect improved operating performance in Bulgaria.
Now to Slide 17.
To summarize our performance in the first three quarters of the year, we earned adjusted earnings per share of $1.07 versus $0.96 last year.
As I mentioned earlier, in terms of our full year guidance, we are incorporating the $0.07 per share noncash impact from the adjustment for the equity units issued earlier this year.
Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted earnings per share guidance range, but we now expect to come in at the lower end of the range of $1.50 to $1.58.
It's important to note that this adjustment does not affect our longer-term growth expectations and has no impact on our cash flow.
With three quarters of the year behind us, our year-to-go results will benefit from contributions from new renewables, continued demand recovery across our markets, reduced interest expense and our cost savings programs.
These positive drivers are offset by the impact of the higher share count and the dilution from AES Next, as Andres discussed earlier.
Now turning to our 2021 parent capital allocation on Slide 18.
Beginning on the left hand of the slide and consistent with our prior disclosure, we expect approximately $2 billion of discretionary cash this year.
We remain confident in our parent free cash flow target midpoint of $800 million and the $100 million from the sale of Itabo, and we received the $1 billion of proceeds from the equity units issued in March.
Moving over to the right-hand side.
The uses are largely unchanged from the last quarter with $450 million in returns to our shareholders this year, consisting of our common share dividend and the coupon on the equity units.
We also continue to expect almost $1.5 billion of investment in our subsidiaries, with about 60% going toward renewables globally.
Our investment program continues to be heavily weighted to the U.S. with approximately 70% targeted for our U.S. businesses.
The increased focus on U.S. investments will contribute to our goal of growing the proportion of earnings from the U.S. to at least half of our base.
Finally, as I ramp up in my new role, I've had the chance to speak with many of our internal and external stakeholders.
It's clear that AES continues to successfully execute on our strategy, and we remain resilient in the face of volatile macroeconomic conditions.
Continuing to drive the successful execution and delivering on our financial goals is my top priority.
I look forward to getting input from more of our investors and analysts and providing the information you need to understand the great future ahead for AES.
In summary, we have had a strong third quarter, with both our core business and AES Next doing well.
We are increasing our target for science renewable PPAs from four gigawatts to five gigawatts and Fluence successfully completed its $6 billion IPO.
We remain committed to delivering on our strategic and financial goals, including our 7% to 9% annualized growth rate in earnings and cash flow, and will continue to create greater shareholder value by being the leading integrator of new technologies.
With that, I would like to open up the call to questions. | aes reaffirms 7% to 9% annualized growth target through 2025; now expects to sign 5 gw of renewables under long-term contracts in 2021.
qtrly adjusted earnings per share of $0.50.
reaffirming 2021 adjusted earnings per share guidance range of $1.50 to $1.58; now expecting low end of the range. | 1 |
Joining us today will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and Chief Financial Officer.
The year is off to a great start with our core businesses achieving strong financial results.
Our outlook remains optimistic based on market trends, and we are confident that 2021 will be another good year.
Today, I'll focus my remarks on the progress we are making on a number of key strategic initiatives as well as our venture investment program.
Mark will then provide details on the first quarter results.
A transformation is well under way in the real estate sector, as paper intensive processes convert to digital.
First American is investing the time, expertise and capital to continue to lead the change within the title and settlement industry.
We continue to make significant investments in technology across all of our major businesses to enhance the customer experience through digital solutions.
Many of these efforts are now finding success in the marketplace.
In our commercial business, we've launched ClarityFirst, a platform that enables a streamlined closing process and provides greater transparency and efficiency relative to conventional methods.
We believe this is the first end-to-end digital solution for commercial real estate transactions.
Since the nationwide rollout in June, we have facilitated over 60,000 commercial transactions.
Endpoint is another example of First America's commitment to innovation.
A digital start-up that we've launched in Seattle in 2019 to reimagine the closing experience has captured a 2% market share in that area.
Encouraged by our success, we've recently entered six new markets, and we plan on growing to 20 markets by the end of the year.
In addition to providing a digital consumer experience, Endpoint is redesigning the closing process, and we anticipate significant productivity gains versus today's traditional settlement transactions.
Not only are we deploying new digital tools to reimagine the customer experience, we are accelerating our investment in data, we need to enhance our long-term competitive position.
Our data business has grown steadily over the last ten years.
Years ago, we set out to create a world-class property data company.
Today, we have the industry's most comprehensive and accurate property data, including title plant information.
In 2020, our data business exceeded $100 million of pre-tax earnings, a significant milestone.
A number of years ago, we set out to automate the manual data entry process.
We currently hold 11 patents covering OCR and data extraction, which has facilitated us to caption over 60% of our data in a fully automated manner.
We expect this percentage to continue to grow in the future.
This technology has allowed us to vastly increase the amount of data we capture.
We are currently capturing virtually every data point on 5 million documents per month.
Today, we have 500 title plants, which is the largest data repository in the industry to support title underwriting decisions.
Because of our patent extraction process, we have started the journey to add an additional 1,000 title plants on a go-forward basis.
In short, we are leading the effort when it comes to property data.
One benefit of having a strong data foundation is that it feeds automation of our title production.
Today, 96% of our Company's refinance transactions run through our automated underwriting engine.
Based on our own risk profile, we've achieved a fully automated underwriting decision on 50% of those orders, and we are semi-automated on additional 40%.
Given the success we've had with refinance automation, we have turned our attention to the purchase transactions.
All of these initiatives, whether related to closing data or title production, will improve the experience of our customers and our own productivity, which is why we have dedicated the necessary talent, capital and focus to lead the title and settlement industry in the digital era.
Turning to our venture strategy.
Since 2019, we've invested $225 million in venture-backed companies in the proptech ecosystem.
These investments give us insight into the high growth technology companies, and most of which have become strategic partners.
Not only have these investments added value from a strategic perspective, but they are providing financial upside as well, and Mark will elaborate further in his comments.
Venture investments have continued to be a component of our capital allocation strategy.
We believe the strategic and financial value of these investments to our shareholders will be attractive over the long term.
Additionally, I'm pleased to announce that we were recently named a Fortune 100 Best Company to Work For, for the sixth consecutive year.
Amid the challenges of 2020, we never lost sight of the fact that our employees are the key to our Company's success.
In closing, I'm very confident that 2021 will be another great year for First American.
We're pleased to report excellent results this quarter.
We earned $2.10 per diluted share.
Included in this quarter's results were $0.46 of net realized investment gains.
Excluding these gains, we earned $1.64 per diluted share.
I'll start with our title business.
Revenue in our Title segment was $1.9 billion, up 45% compared with the same quarter of 2020.
All three of our major markets; Purchase, Refinance and Commercial, were favorable this quarter.
Purchase revenue was up 27%, driven by a 15% increase in the number of closed orders, coupled with an 11% increase in the average revenue per order.
Refinance revenue climbed at 79% relative to last year and was flat relative to the fourth quarter, as refinance closings continued to be elevated as a result of low mortgage rates.
Notably, Commercial showed its first year-over-year revenue increase since the pandemic.
Commercial revenue was $163 million, a 2% increase over last year.
A number of large transactions closed at the end of the quarter, signaling the overall strength in the commercial environment.
On the agency side, revenue was a record $845 million, up 41% from last year.
Given the reporting lag in agent revenues of approximately one quarter, we are experiencing a surge in remittances related to Q4 economic activity.
Our information and other revenues were $275 million, up 32% relative to last year.
This line item represents revenue from a collection of business lines that are not premium or escrow related and therefore, not risk-based.
The largest component of information and other is revenue from our data and analytics business, which totaled $89 million, a 17% increase from last year.
Investment income within the Title Insurance and Services segment was $43 million, down 29%, primarily due to the impact of the decline in short-term interest rates on the investment portfolio and cash balances, partially offset by higher interest income from the Company's warehouse lending business.
In our Title segment, pre-tax margin was 17.1%.
Excluding the impact of net realized investment gains, pre-tax margin was 14.1%, a record for the first quarter.
I'll note that we've lowered the loss rate 100 basis points to 4% this quarter.
This brings our loss rate in line with where we booked prior to the pandemic.
By booking at 5% in 2020, we added $52 million to our IBNR.
Given relatively low claims activity, significant levels of home equity, rising home prices and a strengthening economy, we elected to lower the loss rate this quarter.
Turning to the Specialty Insurance segment.
Pretax earnings totaled $6 million, down from $13 million in 2020.
Our home warranty business, which accounts for 75% of the revenue for the segment, continued to see growth in the top line.
Revenue was up 11% over last year.
Importantly, revenue in our direct-to-consumer channel increased 18%.
We continue to see elevated claims largely as a result of people spending more time at home.
Our property and casualty business posted a loss of $7 million this quarter.
The wind down of our property and casualty business is progressing on schedule with policies beginning to non-renewal in May.
Based on our current plan, we expect at least 50% reduction in our policies in-force by the end of the year.
The effective tax rate for the quarter was 23.4%, in line with our normalized tax rate of 23% to 24%.
With respect to the information security incident, the SEC and New York Department of Financial Services matters remain ongoing.
We continue to believe that they, along with all other matters relating to the incident, will be immaterial from a financial perspective.
Turning to capital management, we repurchased $65 million of stock at an average price of $52.86 during the quarter.
Since March of 2020, we've repurchased $203 million of stock, which is close to the amount of our annual dividend to stockholders.
We have not repurchased shares thus far in the second quarter.
However, as we referenced on our last earnings call, we intend to be more active with share repurchases in the future.
As Dennis mentioned in his remarks, we've invested a total of $225 million in venture-backed companies.
Our largest investment was in OfferPad, an iBuyer that is now party to a merger with Supernova Partners Acquisition Company, who last month announced that the value of the aggregate equity consideration to be paid to OfferPad's stockholders and option holders will be equal to $2.25 billion.
If the transaction is consummated at that valuation, we would expect to book a gain later this year of approximately $237 million on our $85 million investment.
Additionally, this quarter, we recorded $42 million of gains related to other venture investments, including in Side [Phonetic] a real estate SaaS company that serves high-performing agents, teams and brokers.
We remain optimistic about our 2021 outlook.
Although refinance orders have declined, corresponding to an increase in mortgage rates, the purchase and commercial markets continue to grow.
Our claims experience is favorable and the general improvement in the economy to tail into our business. | q4 ffo per share $1.48.
reported same-store occupancy of 94.8% as of december 31, 2020, compared to 92.4% as of december 31, 2019.
qtrly core ffo per share $1.48. | 0 |
On the call today, we have Dun & Bradstreet's CEO, Anthony Jabbour; and CFO, Bryan Hipsher.
Our actual results may differ materially from our projections due to a number of risks and uncertainties.
Today's remarks will also include references to non-GAAP financial measures.
We are off to a strong start as we continue with our transformation and the execution of our near-term and long-term objectives.
We finished the first quarter with solid financial results and made significant progress with the integration of Bisnode.
Overall, we are pleased with the start of the year as adjusted revenues for the quarter increased 29% and adjusted EBITDA increased 37%.
Organic constant-currency revenues increased 1.3% as strength in international was partially offset by the final quarter of COVID-19 headwinds and Data.com in North America.
Total company revenue retention was 96.3% and we now have approximately 48% of our business under multiyear contracts.
The enhancements we have made to data quality and our underlying technology are resulting in positive feedback and deeper customer relationships, allowing us to have more productive conversations about cross-sell and price opportunities of both existing and new products.
As we reach the two-year anniversary of our cost savings program, we finished the quarter with $246 million of annualized run-rate cost savings.
Despite COVID-19 delaying some of our planned cost savings initiatives, we exceeded our original target by 23%, which ultimately contributed to the expansion of adjusted EBITDA margins by over 800 basis points from when we took the company private.
While this marks the completion of our formal cost savings program, we will continue to drive ongoing improvement in terms of operational efficiency through optimizing our geographic footprint, modernizing back-office technologies, and further integrating our solutions to reduce cost and complexity.
It's important to note that the cost savings figure we just discussed is a net number, meaning that while we took a significant amount of cost out of the business, we also continue to invest a significant amount in the business, primarily by enhancing and expanding our data and technology assets.
While much of the heavy lifting was completed in 2019 and 2020, our transformation is ongoing as we look to leverage the foundational enhancements we've made during that time to more rapidly and effectively deploy new and innovative solutions.
Our key priorities for 2021 are to continue to grow our share of wallet with our strategic customers; approach and monetize the SMB space in new and innovative ways; launch new products domestically; localize new and existing products globally; and lastly, to integrate the Bisnode acquisition.
We're pleased with the ongoing success we're having with our strategic clients as they renew near 100%, while continuing to expand their relationships with us.
In North America, we signed an expanded multiyear renewal with the largest online retailer to support their third-party risk management strategy.
As the client continues to expand and enhance their controls around their global supply chain, we are pleased to continue to support their growing needs.
We also signed a multiyear renewal with one of the largest multinational retail corporations, expanding their use of data across their business.
The client leverages our third-party risk and compliance solutions to mitigate risk throughout their extremely large and complex supply chain, and we are glad to extend and broaden this relationship with such a key customer.
We renewed business with another strategic client, a global property and casualty insurance firm who needed access to timely, high-quality data on their current client base to ensure proper underwriting methodologies, ongoing monitoring, as well as access to data for new customer acquisition.
The result was a multiyear deal for both core risk and marketing solutions.
In our international business, there's been significant focus on rearchitecting our go-to-market efforts to better capture the large global opportunity.
In the first quarter, we rolled out a Global 500 account program simultaneously with the close of Bisnode, prioritizing the most strategic accounts.
I'm pleased with the early traction we are seeing from these efforts demonstrated by several wins in the first quarter.
Our U.K. team is working with Generali, a Global 500 global insurance and asset management provider with a leading position in Europe and a growing presence in Asia and Latin America, to help them identify ways to improve consistency of screening across their global, corporate, and commercial businesses, as well as reduce risk.
The result is a multiyear deal for the integration of D&B Data by Direct+ and our third-party risk solution into their CRM and underwriting system to provide a flexible end-to-end solution that was fully compliant with the global requirements.
Another Global 500 company, Linde Region Europe North, member of Linde PLC, is a leading global industrial gas and engineering company that wanted to improve their credit checks and risk monitoring of B2B customers in a more data-driven way.
We are pleased they chose D&B Finance and Risk solutions, bringing us both new business and a multiyear deal.
We are pleased with the momentum we have with our growing roster of clients and expanding existing client relationships worldwide, particularly with our strategic clients.
One segment that we continue to see immense opportunity in is the small and midsized business market.
I'm excited to update you on the progress we have been making to enhance our SMB strategy through a mix of digital marketing and delivery efforts, as well as through innovative partnerships.
After a difficult 2020, the SMB market is beginning to reemerge.
As existing small businesses begin to recover from the effects of COVID-19, we are also seeing a significant rise in the formation of new businesses, especially gig economy start-ups that would benefit significantly from our self-service finance, risk, and sales and marketing solutions, along with software and services offered from our partners.
This was the driving purpose behind the first-quarter launch of our improved digital platform.
This includes personalized small business resources and offerings for each dnb.com user, driven by the utilization of our visitor intelligence solution, as well as the D&B marketplace, which makes it easier for small businesses to identify and purchase D&B solutions and those from our partners.
The marketplace has two primary sections: a product section called D&B Product Marketplace and a dataset section called the D&B Data Marketplace.
The D&B Product Marketplace includes a curated set of our solutions along with those of our partners that creates a combined set that allows a small business to operate in a much more sophisticated manner, much earlier in their stage of maturation.
But we will continue to add new D&B solutions and partners in the coming quarters.
We are mindful of keeping the number of partners limited as this is not a broad-based marketplace, but one that has preferred solutions that we believe will drive the best outcomes for our SMB customers.
A few examples of solutions that are available in the marketplace today are funds manager integrated with Plaid, CreditSignal, Credit Monitor, Email IQ, Analytics Studio, Hoovers Essentials, and D&B Connect.
We also have partner offerings such as KPMG Spark, SAP Ariba with D&B Direct+ integration, and Amazon business access with special rates.
Within the D&B Data Marketplace, users can buy a broad range of data sets from alternative data providers to help them identify opportunities and mitigate risks.
These data sets are already curated and matched to a DUNS number to make it easy to append to a client's existing D&B data.
Today, we have 22 partner datasets, including healthcare reference data from IQVIA and commercial fleet data from IHS Markit, and we're adding more partners monthly.
User feedback has been overwhelmingly positive around the power of the DUNS number and how it's the key to unlock the power of the data and it's something that meaningfully differentiates us competitively.
The D&B customer portal, also launched in the first quarter, allows existing clients to log in and access their already purchased products through a single sign-on, unified digital experience.
While inside the portal, we offer personalized offerings of our and our partner's solutions, which has already resulted in a 60% increase in cross-sells during the first quarter.
And while we continue to grow our solution set within D&B, we're also expanding our reach outside of our core ecosystem.
A great example of this is what we're doing with Bank of America.
Bank of America became the first major financial institution to offer millions of small businesses the ability to get ongoing insights into their D&B business credit score directly through their Business Advantage 360 banking platform.
This is exciting for D&B because it is driving net new paid subscriptions and increased engagement with our small business digital platform.
We also partnered with Plaid to bring their network to our solutions.
By integrating Plaid capabilities to our digital platform, small businesses can securely permission access to their bank account information for authentication purposes.
This gives them instant access to update their D&B business credit profile.
In addition, small businesses can share their bank transaction details, enabling us to explore new ways to establish business credit outside of traditional payment data, which many smaller businesses may lack.
We're really excited as this is the first of its kind in the business credit space.
In the first quarter, subscriptions to our freemium products were up 43% from the prior year.
The investments into our small business and digital go-to-market strategy, products, and groundbreaking partnerships are clear evidence of our determination to make this segment a priority and deliver more innovative solutions to our small business clients.
The third critical priority is launching new products and use cases.
Yesterday, we announced D&B Rev.
Up, a solution that simplifies and automates marketing and sales workflows by providing data, targeting, activation, and measurement in a single platform that easily integrates to a customer's existing martech or sales tech stacks through the use of open architecture integrations.
Clients can purchase the full breadth of D&B Rev.
Up capabilities or even start with a specific channel and build up from there.
We have also collaborated with Bambora and Folloze to further extend the insights and capabilities of the D&B Rev.
Up offerings by adding best-in-class intent and personalized omnichannel experiences to help increase demand generation.
In addition, we've entered into an accelerate partnership with a leading data-driven martech company in support of this platform.
This is a game-changer in how we approach account-based marketing through the integration of our solution sets along with complementary partnerships.
We look forward to providing more updates on Rev.
Up as it progresses, and it's just a great example of how we're thinking more holistically about serving clients through an integrated platform.
This is the vision behind Rev.
Up, as well as the late 2020 launches of D&B Finance Analytics, an integrated and powerful credit to cash platform; and D&B Risk Analytics, an integrated third-party risk, and compliance platform, both within our Finance and Risk business unit.
In our international segment, we continue to focus on rolling out localized solutions across our growing territories.
After 20 new product launches in 2020, we continued the momentum in the first quarter, introducing the Finance Analytics platform in the U.K., Data Vision in Greater China and India, and data blocks in three additional worldwide network partner markets.
We're also launching multiple new products in D&B Europe, which is a newly created region that describes our recently acquired Bisnode markets.
Leveraging our solutions in these markets is a key pillar of our playbook, which we're starting to execute.
Regarding the Bisnode transformation, we're leveraging the same playbook that led to the successful transformation of D&B these past two years, and we're off to a great start coming together as one D&B.
In Q1, we completed the first phase of synergy actions immediately following close, principally, senior leadership rationalization.
Overall, we have actioned approximately $12 million of annualized run-rate savings and continue to see significant efficiencies through the combination of our two companies.
We also established a new European operating model and expect this to be fully implemented during Q2, delivering a more streamlined and integrated business with corresponding operational synergies consistent with our business model.
We developed a robust product plan for D&B Europe to accelerate sales of our modern global product solutions and support the sundown of legacy Bisnode products.
Several product launches are slated for the second half, including Finance Analytics, Risk Analytics, D&B Hoovers, and data blocks, to name a few.
The team is also accelerating rollouts of several solutions Bisnode had recently launched prior to the acquisition.
Overall, we are really excited about the progress we are making and look to capitalize on the strong momentum we have built in our first quarter together.
Overall, I'm pleased with our start to 2021, and I'm excited about the progress we continue to make in terms of increasing share of wallet with strategic clients, better serving SMBs in innovative ways, developing new products domestically, and localizing them internationally and integrating Bisnode.
These, along with many other projects the teams are working on are laying the foundation for accelerated, sustainable growth throughout the remainder of 2021 and into 2022.
Today, I will discuss our first-quarter 2021 results and our outlook for the remainder of the year.
Turning to Slide 1.
On a GAAP basis, first-quarter revenues were $505 million, an increase of 28% or 27% on a constant-currency basis compared to the prior-year quarter.
This includes the net impact of a lower purchase accounting deferred revenue adjustment of $17 million.
Net loss for the first quarter on a GAAP basis was $25 million or a diluted loss per share of $0.06, compared to a net income of $42 million for the prior-year quarter.
This was primarily driven by a change in fair value of the make-whole derivative liability in connection with the Series A preferred stock in the prior-year quarter and a higher tax benefit recognized in the prior-year period due to the Cares Act.
This was partially offset by lower interest expense, preferred dividends in the prior-year period, improvement in operating income, largely due to lower net deferred revenue purchase accounting adjustments and the net impact of the Bisnode acquisition, partially offset by higher costs related to ongoing regulatory matters.
Turning to Slide 2.
I'll now discuss our adjusted results for the first quarter.
First-quarter adjusted revenues for the total company were $509 million, an increase of 28.6% or 27.7% on a constant-currency basis.
This year-over-year increase includes 22 percentage points from the Bisnode acquisition and 4.4 percentage points from the net impact of lower deferred revenue purchase accounting adjustments.
Revenues on an organic constant-currency basis were up 1.3%, driven by growth in our International segment, partially offset by the final quarter of headwinds in North America from COVID-19 and the Data.com wind down.
Excluding these headwinds, the underlying business grew approximately 3%.
First-quarter adjusted EBITDA for the total company was $186 million an increase of $50 million or 37%.
This increase includes the net impact of lower deferred revenue purchase accounting adjustment, a 15-percentage-point impact on year-over-year growth.
The remainder of the improvement is due to the net impact of the Bisnode acquisition, as well as increased revenues in international and lower net personnel expenses overall.
First-quarter adjusted EBITDA margin was 36.5%.
Excluding the impact of the deferred revenue adjustment and the net impact of Bisnode, EBITDA margin improved 220 basis points.
First-quarter adjusted net income was $98 million or adjusted diluted earnings per share of $0.23, an increase from first quarter's 2020 adjusted net income of $50 million.
Turning now to Slide 3.
I'll now discuss the results for our two segments, north America and International.
In North America, revenues for the first quarter were $339 million, an approximate 1% decrease from prior year.
Excluding known headwinds, North America grew approximately 2%.
In Finance and Risk, we continue to see strength in our government solutions and risk aversion as both private and public sector enterprises continue to need solutions to deal with a rapidly evolving global supplier landscape.
The growth in these solutions was offset by approximately $3 million of lower revenues attributable to COVID-19 and $1 million of revenue elimination from the Bisnode transaction.
For sales and marketing, we're excited to see double-digit growth in our digital solutions as customers continue to leverage more and more of our modern intent-enabled solutions.
And while data sales also had another solid quarter, the overall growth in sales and marketing was partially offset by $5 million from the Data.com wind down.
North America first-quarter adjusted EBITDA was $151 million, an increase of $7 million or 5% primarily due to lower operating costs resulting from ongoing cost management efforts.
Adjusted EBITDA margin for North America was 44.5%, up 220 basis points versus prior year.
Turning now to Slide 4.
In our international segment, first-quarter revenues increased 137% to $179 or 131% on a constant-currency basis, primarily driven by the net impact from the acquisition of Bisnode and strong growth in our sales and marketing solutions.
Excluding the impact from Bisnode, International revenues increased approximately 9%.
Finance and Risk revenues were $107 million, an increase of 83% or an increase of 78% on a constant-currency basis primarily due to the Bisnode acquisition.
Excluding the net impact of Bisnode, revenue grew 7% with growth across all markets, including higher worldwide network cross-border sales and higher revenues in Greater China from our risk and compliance solutions and newly introduced API offerings.
Sales and marketing revenues were $63 million, an increase of 382% or an increase of 359% on a constant-currency basis, primarily attributable to the Bisnode acquisition.
Excluding the net impact of Bisnode, revenue grew 18% due to new solution sales in our U.K. market and increased revenues from our worldwide network product loyalty.
First-quarter international adjusted EBITDA of $52 million increased $28 million or 114% versus first-quarter 2020 primarily due to the net impact of Bisnode acquisition, as well as revenue growth across our international businesses, partially offset by higher net personnel costs.
Adjusted EBITDA margin was 30.3% or 37.8%, excluding Bisnode, which is an increase of 430 basis points versus prior year.
Turning now to Slide 5.
I'll walk through our capital structure.
At the end of March 31, 2021, we had cash and cash equivalents of $173 million, which when combined with full capacity of our $850 million revolving line of credit through 2025, represents total liquidity of approximately $1 billion.
As of March 31, 2021, total debt principal was $3,674 million, and our leverage ratio was 4.8% on a gross basis and 4.6% on a net basis.
The credit facility senior secured net leverage ratio was 3.6%.
And finally, on March 30, we executed $1 billion floating to fixed swaps at an all-in rate of 46.7 bps.
These are three-year slots and bring our fixed floating debt ratio to approximately 50-50.
Turning now to Slide 6.
I'll now walk through our outlook for full-year 2021.
Adjusted revenues are expected to remain in the range of $2,145 million to $2,175 million, an increase of approximately 23.5% to 25% compared to full-year 2020 adjusted revenues of $1,739 million.
Revenues on an organic constant-currency basis, excluding the net impact of the lower deferred revenues, are expected to increase between 3% to 4.5%.
Adjusted EBITDA is expected to be in the range of $840 million to $855 million, an increase of 18% to 20%.
And adjusted earnings per share is expected to be in the range of $1.02 to $1.06.
Additional modeling details underlying our outlook are as follows: We expect interest expense to be $200 million to $210 million; depreciation and amortization expense of approximately $90 million, excluding incremental depreciation and amortization expense resulting from purchase accounting; an adjusted effective tax rate of approximately 24%; weighted average shares outstanding of approximately $430 million; and finally, capex, we anticipate, of around $160 million, including $7 million due to a small asset acquisition we completed in the first quarter.
Overall, we continue to see the year shaping up as previously discussed, with revenue growth accelerating throughout the year as we transition from the middle of the range in Q2 to the high end of the range in the fourth quarter.
And finally, as previously discussed, we continue to expect adjusted EBITDA for the second and third quarter to be below the low end of the range due to timing of certain expenses in the fourth quarter to be above the high end of the range of our guide.
Overall, we are pleased with the start of 2021 and look forward to continuing the strong momentum in our building both North America and international.
Operator, will you please open up the line for Q&A? | compname reports q1 loss per share $0.06.
q1 loss per share $0.06.
reiterating its previously provided full year 2021 outlook.
q1 adjusted earnings per share $0.23. | 1 |
Today, we'll update you on the company's second quarter results.
In the second quarter, we generated revenue of approximately $3 billion, the highest quarterly sales of any period in our company's history.
Our sales increased significantly over last year when the pandemic interrupted the global economy.
Our adjusted earnings per share of $4.45 was the highest on record for any quarter.
Our success is the result of the extraordinary efforts of all of our team members across the world.
They have shown their dedication and resilience to overcome the challenges that we have faced.
We greatly appreciate what they have been able to achieve.
Our second quarter results were significantly stronger than we had anticipated across all of our businesses with sales building on a momentum from our first period.
In the quarter, our operating margin expanded to their highest level in the last four years as we leveraged our operational and SG&A expenses.
The actions we have taken to simplify our product offering, enhance our productivity and restructure our costs are benefiting our results.
We've delivered almost $95 million of the anticipated $100 million to $110 million in savings for our restructuring initiatives.
Across the enterprise, we continue to respond to rising material, energy and transportation costs by increasing prices and optimizing manufacturing and logistics.
During the quarter, most of our manufacturing ran at capacity or we were limited by material supply and labor availability.
Raw material constraints and many of our operations led to unplanned production shutdowns during the period.
Overall, we've successfully managed interruptions that impeded our normal operations as well as regional manufacturing and customer closings related to COVID regulations in local areas.
Our inventory levels increased slightly in the period, primarily reflecting higher material costs.
Rising freight cost and limited shipping capacity impacted our material costs, availability of imported products, local shipments to customers and international exports.
Presently, we do not anticipate near-term abatement of these constraints.
All of our markets continue to show strength, with robust housing sales and remodeling investments across the world.
Commercial projects are increasing as the global economy improves and businesses gain confidence to expand and remodel.
Inventory levels in most channels remain low, and our sales backlogs are above our historical levels.
To improve our sales mix and efficiencies, we will introduce more new products with enhanced features and lower production complexity in the second half of the year.
To alleviate manufacturing constraints, we have approved new capital investments of approximately $650 million to increase our production, with most taking 12 to 18 months to fully implement.
In the second quarter, we purchased $142 million of our stock at an average price of $2.08 (sic) $208 for a total amount of approximately $830 million since we initiated the program.
With our strong balance sheet and historically low leverage, we're reviewing additional investments to expand our sales and profitability.
Jim will now cover the second quarter financials.
For the quarter, our sales were $2.954 million, an increase of 44% as reported and 38% on a constant basis.
All segments showed significant year-over-year growth versus Q2 of 2020, which was a period we were most impacted by the pandemic shutdowns.
Gross margin for the quarter was 30.5% as reported or 30.7%, excluding charges, increasing from 21.4% in the prior year.
The increase in gross profit was a result of higher volume and productivity, improved price/mix, reduction of last year's temporary shutdowns due to the pandemic and favorable FX, partially offset by the increasing inflation.
SG&A, as reported, was 16.9% of sales or 16.8% versus 19.7% in the prior year, both excluding charges as a result of strong leverage by the business on the sharp increase in volume.
The absolute year-over-year dollar increase was primarily due to higher volume, normal operating costs previously curtailed by the pandemic, impact of FX, increased product development costs and inflation.
Operating margin as reported was 13.7%, with restructuring charges of approximately $7 million.
Our restructuring savings are on track as we have recorded approximately $95 million of the planned $100 million and $110 million of savings.
Operating margin excluding charges, 13.9%, improving from 1.7% in the prior year.
The increase was driven by the stronger volume, improved price/mix, productivity actions, the reduction of the temporary shutdowns and favorable FX, partially offset by the higher inflation and increased product development costs.
Interest for the quarter was $15 million.
Other income, other expense was $11 million income, primarily a result of a settlement of foreign non-income tax contingency and other miscellaneous items.
Income tax rate, as reported, was 16% and 22.5% on a non-GAAP basis versus a credit of 2.5% in the prior year.
We expect the full year rate to be between 21.5% and 22.5%.
That leads us to a net earnings as reported of $336 million or an earnings per share of $4.82.
Earnings per share excluding charges was $4.45 percent -- or $4.45, excuse me.
Turning to the segments.
The Global Ceramic segment had sales of just over $1 billion, an increase of 38% as reported or 34% on a constant basis, with strong geographic growth across our business led by Mexico, Brazil and Europe.
Operating margin, excluding charges was 13.2%, a significant increase from the low point of 2020 at 0.5%.
The earnings improvement was a result of strengthening volume and productivity, favorable price/mix and a reduction of temporary shutdowns, partially offset by increasing inflation.
Flooring North America had sales of just under $1.1 billion for a 35% increase, driven by a strong residential demand with commercial channel continuing its growth versus prior year, but still below historic levels.
The segment experienced solid growth across all product lines, led by residential carpet, LVT and laminate.
Operating income, excluding charges, was 11.2% and similar to Global Ceramic, a significant increase from the 2020 margin trough.
The operating income improvement was also driven by the increase in volume, strengthening productivity, improvement in price/mix, with a reduction in temporary shutdowns, partially offset by higher inflation.
Lastly, Flooring Rest of the World with sales of just over $830 million, a 68% improvement as reported or 50% on a constant basis, as continued strength in residential remodeling and new home construction drove improvement across all product groups, led by resilient, panels, laminate and our soft surface business in Australia and New Zealand.
Operating margin, excluding charges of 19.7%, and similar to our other segments, was a significant increase from prior year's low point of 11.9%.
And again, the main drivers were consistent in that they had higher volume, favorable impact from price/mix with a reduction of temporary shutdowns, favorable FX, partially offset by increasing inflation.
Corporate and eliminations came in at $12 million and expect full year 2021 to be approximately $45 million.
Turning to the balance sheet.
Cash and short-term investments are approximately $1.4 billion with free cash flow of $226 million in the quarter.
Receivables of just over $2 billion, an improvement in DSO to 53 days versus 64 days in the prior year.
Inventories for the quarter were just shy of $2.1 billion, an increase of approximately $160 million or 8% from the prior year or increasing $85 million or 4% compared to Q1 2021.
Inventory days remain historically low at 99 days versus 126 in the prior year.
Property, plant and equipment were just shy of $4.5 billion and capex for the quarter was $113 million with D&A of $148 million.
Full year capex has been increased to approximately $700 million to strengthen future growth with full year D&A projected to be approximately $580 million.
Overall, the balance sheet and cash flow remained very strong, with gross debt of $2.7 billion, total cash and short-term investments of approximately $1.4 billion and a leverage at 0.7 times to adjusted EBITDA.
For the period, our Flooring Rest of the World segment, sales increased 68% as reported and 50% on a constant basis.
Operating margins expanded to 19.7% due to higher volume, pricing and mix improvements and a reduction of COVID restrictions, partially offset by inflation.
Flooring Rest of the World outperformed our other segments with all our major product categories significantly as residential sales expanded in all regions.
We have implemented multiple price increases in most product categories to cover inflation in materials and freight.
Raw material supplies are problematic and have impacted our LVT production and sales the most.
We anticipate material and freight challenges will continue to impact our business in the third quarter.
Sales of our high-end laminate continue to grow dramatically as our proprietary products are being widely accepted as waterproof alternative to LVT and wood.
We are beginning to introduce our next-generation of laminate at premium levels with collections featuring handcrafted visuals.
We are increasing our production in Europe, with new capacity coming online and further capacity expansion projects are being initiated.
Our laminate business in Russia and Brazil are growing strongly as we enhance our offering and expand our distribution.
We recently completed the acquisition of a laminate distributor in the U.K. that will improve our position in the market.
Our LVT sales growth was strong during the period and would have been higher if material shortages had not interrupted manufacturing.
To compensate for material inflation, we have increased prices and we expect further increases will be required as our costs continue to rise.
We are significantly expanding sales of our rigid LVT collections with our patented water-tight joints that prevent moisture from penetrating the floor.
Our manufacturing operations have made substantial progress improving throughputs, material costs and yields.
Our production in the third quarter will continue to be limited by material availability.
Our sheet vinyl sales rebounded strongly as retail stores opened in our primary markets.
Our sheet vinyl distribution in Russia has expanded, and we are maximizing production to meet the growing demand.
Our wood plant in Malaysia has been idle since the government instituted lockdowns to address surging COVID rates.
Wood is a small product category for us, so the sales impact in the third quarter will be limited.
We are awaiting permits to complete the acquisition of a plant that reduces wood veneers to lower our cost.
Our Australian and New Zealand flooring businesses delivered excellent results with sales and margins exceeding our expectations.
The residential business was strong, with hard surface products leading the growth.
Carpet sales are strengthening with our national consumer advertising, enhanced merchandising and the launch of a new high-end wool and triexta collections that improved our mix.
Most of our facilities operated at a high level with increased volumes benefiting our results.
As in all of our markets, commercial sales have not recovered to their pre-pandemic levels.
Though the Australian government has locked down specific regions to contain the spread of COVID, it has not meaningfully impacted our business.
Our European insulation sales grew even though chemical shortages limited our production.
Our margins are recovering after we implemented price increases to cover rising material costs.
We have announced an additional price increase for the third quarter to offset further raw material inflation.
We anticipate chemical supplies to remain tight and could impact our future sales.
To expand our existing insulation business in Ireland and the U.K., we have signed an agreement to acquire an insulation manufacturer, which is pending government approval.
Our panels business is running at full capacity, and so far, we've been able to manage material shortages without interruptions to our operations.
We have raised prices and improved our mix with higher value decorative products.
To enhance our results, we are expanding our offering of premium products as well as our project specification team.
To enhance our panel offering, we are commissioning a new line that creates unique surfaces and visuals to differentiate our offering in the market.
For the period, our Flooring North America segment sales increased 35%, and adjusted margins expanded to 11.2% due to higher volume, productivity, pricing and mix improvements and fewer COVID interruptions, partially offset by inflation.
Our business trends continued from the first quarter with sales growth being driven by residential remodeling and new construction.
Commercial sales continued to improve, though the channel remains below pre-pandemic levels.
Through the period, our order rate remains strong and our sales backlog remains above historical levels.
We are maximizing output at our facilities to support higher sales and improve our service.
During the quarter, our production levels were hindered by local labor shortages and material supply, particularly in LVT, sheet vinyl and carpet.
Ocean freight constraints delayed receipt of our imported products, impacting our sales, inventories and service levels.
We implemented price increases as a material and transportation cost increase and we have announced additional pricing actions as inflation continues.
Our restructuring initiatives are improving efficiencies as planned, and we should realize additional savings in the third quarter.
Our residential carpet sales continued their growth trend across all channels with consumers investing in home improvement projects.
Sales of our proprietary SmartStrand franchise expanded with our new collections being well accepted.
Our EverStrand polyester collections are expanding by providing enhanced value, styling and environmental sustainability.
Our carpet sales have been limited by personnel shortages in our operations, and we are implementing many actions to increase our staffing and productivity.
We have improved our efficiencies by rationalizing low volume SKUs and streamlining our operational strategies.
Our commercial sales have improved as businesses increased remodeling and new construction projects.
Both carpet, tile and hard surface products grew with healthcare, senior living, education and government recovering faster.
Though down slightly from record levels, the June Architecture Billing Index had a fifth consecutive month of expansion, indicating the continued strengthening of new commercial development and renovation projects.
With realistic visuals and waterproof performance, our premium laminate collections are growing substantially.
To support higher demand, we have implemented many process improvements to maximize our U.S. production and are importing product from our global operations.
Our laminate expansion remains on schedule and should be operational by the end of this year.
Our new line will produce the next-generation of RevWood which is already being introduced in Europe.
To support the growth of our laminate business, our U.S. MDF operation completed investments to increase our volume and lower our cost.
Our new waterproof Ultrawood collections are being launched as a high-performance alternative to typical engineered wood floors.
Our LVT and sheet vinyl sales continue to increase, with growth in the residential, retail and new construction channels.
Our LVT and sheet vinyl growth and plant productivity were impacted by disruptions in supply that stopped our operations and delays in imported LVT caused by transportation constraints.
We have enhanced our LVT offering with more realistic visuals, proprietary water-tight joints and improve stain and scratch resistance.
Our U.S. operations implemented process enhancements that have increased our speeds and throughput.
When material availability increases, we should see further improvements in our domestic manufacturing, which will support our recent product launches.
For the period, our Global Ceramic segment sales increased 38% as reported and 34% on a constant basis.
Adjusted margins expanded to 13.2% due to higher volume, productivity, pricing and mix, improvements and fewer COVID disruptions, partially offset by inflation.
Our ceramic businesses around the world have greatly improved with strength in the residential channel and increasing commercial sales.
All of them have low inventories, which impacted our sales growth and service levels.
We have initiated expansion plans to increase our capacity in mix in Mexico, Brazil, Russia and Europe.
Our ceramic businesses continue to raise prices to cover material, energy and transportation inflation.
Our U.S. ceramic business is strengthening, and we are implementing price increases to cover material and freight inflation.
We are improving our product mix with new shapes, sizes and service structures.
We are reengineering our products to improve material cost and productivity.
Our restructuring projects have been fully implemented and are growing the expected -- providing the expected benefits.
Our countertop sales and mix continue to improve as we expand our premium offer with new technologies.
In the period, a mechanical failure temporarily reduced production, which has been repaired.
We have initiated the expansion of our plant to further grow our countertop business.
Our Mexican and Brazilian ceramic businesses are very strong, with our residential business in both regions at historically high levels and commercial still recovering.
Due to capacity constraints, our facilities could not fulfill customer demand, so we are allocating our production.
We have executed multiple price increases to offset energy and material inflation.
We are expanding operations in Mexico this quarter, and we have initiated new investments to increase capacity in Brazil.
Our European ceramic business delivered strong sales and profitability as pricing, product mix, and productivity improved our margins.
We increased sales of our premium products, including slabs, small sizes, outdoor and antibacterial collections.
Commercial sales trends are starting to improve though they remain below historical levels.
We are selectively increasing prices to recover material, energy and freight inflation.
During the period, our operations ran at high levels with improved efficiencies and increased throughputs.
We continue to rationalize low volume SKUs to optimize our operations.
To support our sales of high-end collections, we have initiated expansion projects, some of which will take through next year to complete.
Our ceramic sales in Russia were robust across all channels with our direct sales to customers through our own stores and new construction projects outperforming.
We have announced price increases to cover rising inflation.
During the period, our manufacturing operations ran at capacity to respond to accelerated sales with inventory remaining below historical levels.
Due to present capacity limitations, we are focusing on optimizing our product mix.
We have initiated expansion plans with new production expected in the second half of next year.
Sales of our new sanitaryware products are expanding primarily through our owned and franchised retail stores as our manufacturing ramps up.
The global economy should continue to improve due to low interest rates, government stimulus and the success of COVID vaccines.
Around the world, flooring sales trends remain favorable, with residential remodeling and new construction at high levels and commercial projects strengthening.
In the third quarter, we expect our strong sale to continue, with our typical seasonal slowing from the second quarter.
We will expand the introduction of new products with additional features and increase our investments to enhance our future sales and mix.
Material, energy and transportation inflation is expected to continue and will require further pricing actions to offset.
Most of our facilities will operate at high utilization rates, though ongoing material and local labor constraints will limit our production.
Our Global Ceramic and Flooring Rest of the World segments will observe the European vacation schedules in the third quarter, which reduces production and increases cost in the period.
In many countries, future government actions to contain COVID remain a risk and could impact our business.
Given these factors, we anticipate our third quarter adjusted earnings per share to be between $3.71 and $3.81, excluding any restructuring charges.
We entered this year with uncertainty about COVID, the economic recovery, home renovation and new construction.
Our business is stronger than we had anticipated, and we are increasing investments to support additional growth and improve efficiencies.
Longer term, housing sales and remodeling are expected to remain at historical high levels.
Apartment renovation should accelerate as rent deferment expires, and investments in commercial projects should continue to strengthen.
We're expanding our operations and introducing new innovations to maximize our results.
Our balance sheet is strong, and we're exploring additional internal projects and acquisition opportunities. | q2 earnings per share $4.45 excluding items.
sees q3 adjusted earnings per share $3.71 to $3.81 excluding items.
q2 earnings per share $4.82.
longer term, housing sales and remodeling are expected to remain at a high level.
longer term, apartment renovation should accelerate as rent deferment expires.
around the world, flooring sales trends remain favorable.
material, energy and transportation inflation is expected to continue and will require further pricing actions to offset.
mohawk industries - most of our facilities should operate at high utilization rates though ongoing material, labor constraints will limit production.
expanding operations in mexico this quarter, and we have initiated new investments to increase capacity in brazil.
approved new capital investments of about $650 million to increase production with most taking 12 to 18 months to implement. | 1 |
's Second Quarter 2021 Earnings Call.
I'm Jason Bailey, Director of Investor Relations.
Bryan Buckler, our CFO, has a cold.
His voice doesn't sound great.
So Chuck Walworth, our Treasurer and Head of Financial Planning, will cover our second quarter financial results.
In addition, the conference call and accompanying slides will be archived following the call on that same website.
It's certainly great to be with you again.
While weather was $0.03 below normal for the quarter, we remain within our previously reported guidance range.
I'm proud to say we keep moving forward.
I'm so proud of everyone here and we are encouraged by our exceptional utility operations and all of our employees as they focus on energizing life for our customers and our communities.
Chuck will provide additional details when he discusses our financial results in just a moment.
As we move ahead, I'm pleased to note that in June, OGE received its 19th EEI Emergency Response awards since 1999 for our power restoration efforts during the 2020 New Year's Eve snowstorm.
We've been recognized with this highest national distinction for emergency recovery 11 times for major storms affecting our system and eight times for assisting others.
Additionally, for the third consecutive year, OGE has been recognized by S&P Global as having the lowest rates in the nation, demonstrating the affordability of our service.
Systemwide, growth in customer load is driving $75 million of increased capital investments.
Investments include substation enhancements, projects at Tinker Air Force Base and upgrades of our 69 kV line to support the load of larger and growing customers.
Construction on the five-megawatt solar farm in Branch, Arkansas, and the 5-megawatt expansion of the Choctaw Nation OGE solar farm remain on track for completion by the end of the year.
As we seek innovative ways to increase efficiency across the organization, yesterday, we announced that OGE will pilot utilizing artificial intelligence to inspect distribution poles for damage.
This technology will allow our teams to respond more efficiently and utilize a consistent approach for repair and replacement.
We will continue to leverage these results and this technology to improve the customer experience.
Our grid enhancement programs in Oklahoma and Arkansas continued to deliver.
The work we're undertaking on our substations and distribution circuits and other portions of our grid will have a significant positive impact on the reliability and resiliency of the grid for the benefit of our customers.
On Monday, we submitted our draft integrated resource plan with both the Oklahoma and Arkansas commissions, detailing our resource needs over the next several years.
As you can see on slide five, our resource needs are driven by expected load growth as well as the retirement of aging, less efficient, less reliable gas plants that were built more than 50 years ago.
We expect to retire approximately 850 megawatts over the next five to six years.
Key components of our IRP include a successful energy efficiency and demand side management program combined with replacing retired generation with a combination of solar- and hydrogen-capable combustion turbines.
We plan to execute this in 100 to 150-megawatt annual increments, beginning with solar over the next five to six years to really smooth out the customer impacts.
When complete, our overall carbon intensity will drop by more than 6% and the overall fleet efficiency will improve even more.
This plan is a significant step forward to meet our objectives of fuel diversity and provide our customers with cleaner energy solutions while maintaining our affordable rates.
We begin the stakeholder engagement process now and we'll submit the final IRP on October 1, after which we will lay out the time line for the next steps, including an RFP process.
Our securitization filing in Oklahoma is on track for recovery approximately 85% of the total cost associated with February's winter storm year.
A hearing is scheduled for October and in orders expected by the end of the year.
The Arkansas securitization statute is somewhat different from Oklahoma's, and we continue to work through that process and plan to file later this year with every expectation of a positive regulatory outcome there.
Speaking of Arkansas, we will file a formula rate update in October with rates going into effect in April of 2022.
We will also file for a five year extension of our formula rate at the same time.
We will file a rate review in Oklahoma toward the end of the year.
A significant portion of this case will involve a continuation of our grid enhancement work and the recovery mechanism that has already been established.
The process is working quite well, and we want to continue to work to enhance the resiliency and the reliability of the grid for the benefit of our customers.
And finally, we're working with the Oklahoma Corporation Commission on a three year energy efficiency filing for the years 2022 to 2024.
These efficiency programs provide energy savings and peak demand reduction for OGE customers to better manage their energy use.
We expect to achieve savings of more than 100 megawatts in demand, nearly 500,000 megawatt hours of energy saved, helping us to efficiently operate our generation fleet as we grow our customer base and maintain affordability.
So clearly, these are programs worthy of continuing into the future.
Turning to slide seven.
Recovery of our load continues.
With the first half of the year now behind us, we expect 2021 weather normalized load to be more than 2% above 2020 levels.
Chuck will give more details around the load in just a moment.
In addition, our strong customer growth of 1.3% reflects the combination of highly affordable rates and our ability to service commercial expansion in our markets, which leads me to our business and economic development activities.
Last quarter, we discussed the additional 50 megawatts of load we will add by the end of the year due to our slate of business and economic development activities at that time.
I'm pleased to say that the pace of these activities has ramped up even further, enabling us to increase that estimate up to 75 megawatts, of which 36 megawatts is already connected, and we're far from done.
Again, these are larger loads and do not reflect residential or commercial impacts, and we believe we will add to this number in the months ahead.
In addition to low growth, these projects also bring new jobs to our communities.
Through the first half of 2021, the new projects secured by our teams have helped to add more than 4,100 new jobs, all across our service territory.
One such project, Pierre Foods, is completing a 200,000 square foot regional fulfillment center in Oklahoma City, adding 10 megawatts of load and 550 jobs.
The affordability of our rates is essential to our sustainable business model as the cost of electricity is a significant factor that companies consider when deciding where to relocate.
And affordability remains a key competitive advantage, that is evident in our business and economic development activity as well as customer growth, which combined have us on track for sustained load growth of approximately 1% going forward with still many opportunities ahead.
We expect the transaction to close later this year, subject to the satisfaction of customary closing conditions, including the HSR clearance.
Our intention to prudently exit our midstream investment remains the same and we'll certainly provide information upon closing.
Before I hand the call over to Chuck, I do want to take a moment to touch on three key points.
First is that we continue to execute on our plan.
While the weather was below normal, we remain within our previously reported guidance range, and we're going to keep moving forward.
Secondly, the strength of our economies across our service territory is strong.
Oklahoma's unemployment rate in June was 3.7% compared to the national average of 5.9%.
In Oklahoma City, the largest metro area in our service territory, had a rate of just 3.7% in June, the third lowest from a large metropolitan series.
Similarly, Fort Smith, Arkansas, had a rate of 4.4% in June.
These economies are strong and continue to grow stronger.
And all this leads to the third and final point of our sustainable business model of growing revenues by attracting new customers, managing our expenses by utilizing technology.
This all helps us maintain some of the most affordable rates to nation, which in turn attracts more customers and grows our business.
Starting on slide nine.
For the second quarter of 2021, we achieved net income of $113 million or $0.56 per share as compared to $86 million or $0.43 per share in 2020.
At the utility, OGE's second quarter results were $0.03 higher than 2020 despite mild weather, primarily driven by higher revenues from the recovery of our capital investments and improved load from customer growth, partially offset by higher depreciation on a growing asset base.
OGE's core operations performed very well during the second quarter.
Our natural gas midstream operation results were $0.16 per share in the second quarter compared to $0.10 in 2020.
The increase in net income was primarily a result of higher commodity prices, improved gathering and processing volumes and a decrease in income tax expense, driven by the Oklahoma State corporate tax rate reductions impact on deferred taxes.
Turning to our economic update on slide 10.
As Sean mentioned, we are seeing outstanding employment figures in our service territory.
Once again, we are also pleased to see customer growth coming in strong at 1.3% year-over-year.
Furthermore, our commercial and industrial customer classes are showing real momentum with year-over-year load growth of approximately 12% and 9% in the second quarter more than compensating for the lower residential volumes we are experiencing as employees begin to return to the workplace.
Overall, we saw a 5.7% total load increase during the quarter, generally in line with our expectations.
For the full year, we still expect total weather normal load results to be more than 2% above 2020 levels.
Let's move now to slide 11, and where I'd like to update you on our 2021 full year earnings per share forecast.
As discussed during our Q1 call, we began the year with a midpoint earnings per share target of $1.81 per share, but immediately faced a net headwind from the February weather event of $0.07 per share.
As I'll speak to in a moment, in June, we were a net receiver of cash from the second round of SPP settlements, reducing the earnings per share impact of the Guaranteed Flat Bill program by $0.01 per share.
Thus, as of June 30, the net impact to earnings from the February weather event is $0.06 per share.
Second quarter was on plan with the exception of an additional headwind of mild early summer weather.
When you exclude the weather impact associated with the winter storm, unfavorable weather has been approximately a $0.05 loss year-to-date.
During the first and second quarters of '21, OGE's employees have worked hard to deliver for customers and shareholders.
To date, we have identified and activated $0.07 to $0.09 of mitigation initiatives, including continued O&M agility.
The company's outstanding O&M reduction efforts in '20 and '21 will help moderate future rate increases for our customers in our upcoming rate proceedings in Oklahoma and Arkansas.
Based on our progress to date, we remain within our earnings per share guidance range of $1.76 to $1.86 per share for full year 2021.
Looking more long term, a very solid start to '21 for our core operations, coupled with the capital investments we are making for our customers and communities, position our company well for sustained earnings growth into 2022 and beyond.
Our business fundamentals are strong, and we continue to have great confidence in our ability to grow OGE at a 5% long-term earnings per share growth rate through 2025.
On slide 12, I'd like to update you on the securitization process.
Following the additional SPP resettlement that took place in June, the overall impact of fuel and purchase power costs incurred have been reduced by approximately $100 million.
As of June 30, fuel and purchase power costs of approximately $850 million were recorded on the balance sheet.
In Oklahoma, $755 million has now been deferred to a regulatory asset with the initial carrying cost based on the effective cost of debt financing.
In Arkansas, the updated fuel and purchase power costs deferred are approximately $92 million.
Recall in Arkansas, we have an order that allows us to recover fuel and purchase power costs associated with the winter storm over a 10-year period while we pursue securitization and filings to be made later in the year.
In Oklahoma, we filed testimony in June, which supports our request to recover and securitize the cost associated with the extreme February weather event.
The OCC issued the procedural schedule with the hearing to begin on October 11 and a commission order expected by the end of the year.
Based on the time line in the legislation, we would expect to receive proceeds from the securitization by midyear 2022.
As we noted previously, we initially secured a $1 billion credit commitment agreement that provided short-term funding for our incurred fuel and purchase power costs.
In May, the term loan was refinanced by issuing $1 billion of senior notes to serve as a bridge until securitization takes place.
These two year notes carry an average rate of 63 basis points and are callable at par after six months, providing flexibility for early repayment depending on the timing of the securitization transactions.
As we discussed on our last call, our credit metrics are expected to weaken temporarily due to the fuel and purchase power costs incurred.
We believe our metrics will return to our targeted 18% to 20% level once securitization is complete.
Speaking in more broad terms, our balance sheet remains one of the strongest in the industry, providing the foundation for the company to continue to make important investments on behalf of our customers and communities.
Finally, we remain confident in our ability to drive long-term OGE earnings per share growth of 5% based off the midpoint of 2021 guidance of $1.81 per share, which, when coupled with a stable and growing dividend, offers investors an attractive total return proposition. | compname reports q1 earnings per share of $0.01.
q1 earnings per share $0.01.
og&e's 2021 earnings guidance remains unchanged and is between $352 million to $373 million, or $1.76 to $1.86 per average diluted share.
oge energy-is not issuing 2021 consolidated earnings guidance due to enable not issuing an earnings outlook.
oge energy-currently projects full year results in lower half of range. | 0 |
Mike Speetzen, our chief executive officer; and Bob Mack, our chief financial officer; have remarks summarized in the quarter and our revised expectations for the full year, then we'll take questions.
You can refer to our 2020 10-K for additional details regarding these risks and uncertainties.
I continue to be incredibly impressed with the dedication, commitment and execution of the Polaris team as we navigated ongoing supply chain pressures, logistical challenges and increasing input costs to deliver impressive second-quarter results.
Focused execution is our mantra and it once again paid off as the team expertly navigated the challenges to enable us to exceed expectations.
The powersports industry has experienced significant demand, and that trend continued into the second quarter.
Demand, while down from unprecedented levels in the second quarter of last year was up over prepandemic levels of Q2 2019 by 14%.
Overview market share gains continued in the second quarter with gains in both ATVs and side-by-sides.
We did, however, lose a small amount of share in India, particularly in our midsized bikes given the supply chain challenges.
That said, demand remains strong for these models, and we anticipate our share gains will resume as our vehicle supply improves.
Boats also remained strong, growing retail sales and market share during the quarter and we have a healthy and significant backlog.
Although it's off season for snowmobiles with over half our snowmobile build this year being represented by our near-record high snow check preorders, the sales cadence of our snowmobile business will be even more heavily weighted toward our fourth quarter this year given the timing variation in our component deliveries.
Our PG&A and International businesses also performed quite well.
PG&A sales were up 35% during the quarter.
I'd also note that we are experiencing an increase in the attachment rate for PG&A as more consumers look to personalize their vehicles.
Our International business continues to see strength.
We grew sales 64% as the economies outside North America continued to improve in Q2.
Our earnings outperformed expectations, demonstrating the team's ability to overcome challenges with focused execution.
Not surprisingly, production and delivery were and continue to be impacted by global supply chain and logistics challenges.
As a result of this and continued strong consumer demand, our dealer inventories are at the lowest levels in decades.
I'll talk more about this in a moment.
Given our first half results, continued strong consumer demand and our team's hard-fought ability to execute, I am pleased to report that we are again raising our full-year earnings guidance.
Bob will give more details shortly.
On a two-year basis, our retail is up 14%, reflecting continued growth in powersports, driven by strong underlying consumer demand.
As expected, our second quarter North American retail sales were down 28% from the 57% increase reported in the second quarter of 2020.
The gating factor for retail sales today compared to a year ago is low dealer inventory driven by supply chain impacts on delivery.
Retail sales would have likely been significantly higher without these impacts.
Despite the supply impacts to ORV retail sales, market share again grew during the quarter.
Our ORV business gained over 1 percentage point of market share in both ATVs and side-by-sides.
Motorcycle retail sales also continued to grow, increasing 22% during the quarter.
However, Indian lost a modest amount of share during the quarter, driven by low availability of bikes, particularly our very popular scout and chief models.
Strong boat retail also continued and remained ahead of the industry.
Dealer inventory levels ended the quarter down 57% on a year-over-year basis and were also down sequentially.
Our presold order process continues to be an effective lever that our dealers are utilizing to ensure they don't lose a sale.
And I'll go into this in more detail in the next slide.
Looking at the remainder of the year, dealer inventories are expected to remain lean into Q4, which is when we are anticipating the supply chain issues will begin to slowly improve.
Given stronger-than-anticipated demand, coupled with continued supply constraints, our expectations for dealer inventory levels to return to RFM profile levels is now sometime in late 2022 or even into 2023.
As I discussed earlier, the unprecedented demand, coupled with the supply chain constraints, has created significant disruption in our shipping cadence.
With dealer inventory at record lows, the most effective, efficient way for our customers to secure the product they want, and for our dealers to maximize retail and profitability is through our presold order process.
The advantage to consumers is that orders placed in the presold system received priority in our production and shipping schedule.
In addition, dealers and consumers can receive PG&A priority is placed at the time of the vehicle order.
As a result, presold orders have increased significantly since the pandemic began.
Pre-pandemic presold orders accounted for roughly 3% of our retail.
Exiting Q2, ORV presold orders were approximately 80% of retail.
While there have been some reports that the presold order process can be misused, our audits have found that not to be the case.
We regularly audit the system looking for a name change from the presold order at the time of registration.
These audits have found less than 1% where the names changed at registration and where there were changes, the majority had valid reasons for the change.
I'd also point out that the presold order cancellations remain at low single-digit percent, which is similar to pre-pandemic levels.
Lastly, we have analyzed shipping patterns to our dealers by tiers, volumes and regions and were all within 1% of pre-pandemic levels.
The bottom line is that there's high confidence in the presold order process, which is why it continues to be a competitive advantage in this very tight inventory environment.
Our manufacturing plants are operating at peak supply chain constrained capacity.
Our manufacturing, supply chain and logistics teams continue to execute at a very high level, managing the ever-changing production schedules driven by component availability with a singular focus to meet the demand of our consumers and dealers with high-quality vehicles and components.
Despite our efforts, we couldn't meet all the demand during the quarter.
As I indicated earlier, our presold order levels have increased significantly, and it appears those customers are waiting for the high-performing high-quality vehicles we produce.
I'd like to be able to say today that we see the light at the end of the tunnel.
But given the ongoing heightened demand for our vehicles and supplier challenges, it appears we, along with the entire powersports industry will be in a period of tight vehicle supply for the remainder of the year.
Our teams are doing impressive work to keep the flow of products moving, including expediting components, adjusting build schedules, substituting materials were appropriate and buying select materials on the spot market.
Focused execution and teamwork will ensure we win the competitive battle.
As indicated in our last call, we are also adding capacity later this year and into 2022 that will bring on 30% more production capability between ORV boats and motorcycles.
This capacity is needed to meet demand, fill the dealer channel and allow for the addition of some very exciting new products coming next year.
One of the drivers behind the unprecedented demand has been new customers coming into powersports.
New customer growth in the first half of 2021, while down slightly from the robust rates in the first half of 2020 remains comfortably ahead on a comparable two-year pre-COVID basis with approximately 300,000 new customers coming into the Polaris family over the first half of 2021.
The mix of new to existing customers has remained high at over 70% of the total customers for ORV, motorcycles, snowmobiles and boats.
Our existing customers continue to grow at a healthy rate.
And lastly, it's exciting to see the diversity of our customers also grow, led by Hispanic and female riders joining the Polaris family.
Overall customer demand in total remains very strong.
We track repurchase rates for our customers, which are increasing on a year-over-year basis.
This provides us with the confidence that our customers intend to remain with the sport.
The Polaris team is battling each day for the components needed to meet the strong demand of our consumers.
And as our results this quarter indicate, we are winning many of those battles.
Second-quarter sales were up 40% on a GAAP and adjusted basis versus the prior year.
Shipments and sales improved considerably across all segments ORV, motorcycles, adjacent markets, aftermarket and boats.
Second-quarter earnings per share on a GAAP basis was $2.52.
Adjusted earnings per share was $2.70, which was up 108% for the quarter, exceeding our expectations.
This strong performance was driven by a combination of revenue growth, lower promotional costs, increased pricing and operating expense leverage during the quarter partially offset by higher input costs.
Adjusted gross margins were up approximately 310 basis points year over year, primarily due to lower promotional and floor plan financing costs driven by low dealer inventory and strong demand, which requires minimal promotional dollars to drive retail.
This was muted somewhat by higher input costs associated with supply chain constraints, including logistics, commodity and labor cost pressures.
Operating expenses were down considerably due to the goodwill and intangible asset impairments recognized in Q2 2020.
Adjusted operating expenses were up 33% in the quarter relative to Q2 2020, which was heavily impacted by short-term cost actions taken to offset COVID-19 shutdowns.
Q2 2021 operating expenses grew sequentially versus the prior quarter due to the timing of legal, sales and marketing and engineering expenses along with staffing additions.
Operating expenses are expected to be down slightly versus the Q2 run rate in the second half of 2021.
Foreign exchange also had a positive impact on our quarterly results, primarily driven by the Canadian dollar.
From a segment reporting perspective, all segments reported increased sales for the quarter driven by strong demand.
ORV/Snowmobile segment sales were up 38%.
Motorcycles were up 50%, Adjacent markets increased 98%, Aftermarket was up 15% and Boats increased 49% during the second quarter relative to Q2 2020, which was adversely impacted by COVID-19 closures.
Average selling prices for all segments were up, ORV increased about 13%, Motorcycles were up approximately 8%, Adjacent markets increased 10% and Boats were up 14% for the quarter.
All segments benefited from continued lower promotional costs given high demand and the lack of product in the channel.
Pricing actions taken in the quarter and model mix also had a favorable impact.
Our International sales increased 64% during the quarter, with all regions and segments growing sales as the heavily pandemic impacted countries began to open their economies again.
Currency added 15 percentage points to the International growth for the quarter.
And lastly, our parts, garments and accessories sales increased 35% during the quarter, driven by increased demand across all segments and categories of that business.
Moving on to our guidance for 2021.
Given the stronger-than-anticipated performance in the second quarter, we are increasing our full-year adjusted earnings per share guidance for 2021 and now expect earnings to be in the range of $9.35 to $9.60 per diluted share.
The increase is driven by the expectation that the even lower promotional environment we experienced in the second quarter will continue through the second half as demand is expected to remain high and dealer inventory levels low for the remainder of the year.
Additionally, we expect price increases and surcharges for the upcoming model year to provide incremental benefit in the fourth quarter.
These benefits are partially offset by the escalating input costs, particularly component cost increases driven by both the global supply chain shortage and higher commodity prices, along with the increased cost from manufacturing inefficiencies, increased expedites and higher logistics costs.
Overall, for the full year, we are pleased that our product pricing and promotional cost reductions are offsetting the expected annualized incremental cost headwinds on a dollar basis.
We are narrowing our total company sales growth guidance by holding the upper end of our sales guidance range at 21% and raising the lower end of the range to 19% given our sales growth performance to date.
Our dealers have ample presold orders in hand that combined with additional product would typically allow us to increase the top end of our sales guidance range.
However, given the uncertainty around component supply, we are leaving the upper end of our sales guidance unchanged at this time.
Moving down to P&L.
Adjusted gross profit margins are now expected to be down in the range of 40 to 70 basis points.
This is an improvement from our previously issued guidance and primarily due to the higher-than-expected margins in the second quarter which was driven largely by lower current quarter promotional costs and the timing of promotions accrual adjustments as dealer inventory continued to decline.
Adjusted operating expenses are now expected to improve 90 to 120 basis points as a percentage of sales versus last year given the higher sales growth expectations.
Income from financial services is now expected to be down in the mid-20s percent range driven by the historically low dealer inventory levels, as well as lower retail financing income due to lower penetration rates of our retail providers as more customers are buying with cash and/or have more time to shop their financing needs with other financing sources given the delays in delivery.
Guidance for the remainder of the P&L items remains materially unchanged from our previously issued guidance.
While our full-year earnings guidance improved as a result of our year-to-date performance, and the pricing actions being implemented at the upcoming model year changeover, our second half performance is expected to be down compared to the second half of 2020 and sequentially from our reported first half results.
Let me give some clarity on the second half cadence for earnings.
Our first half 2021 earnings per share finished at $4.99, a 228% increase over the first half of 2020.
Given our full-year revised guidance, the second half earnings per share equates to a range of $4.36 to $4.61 per diluted share, a decrease of 26 to 30% on a year-over-year basis and an 8 to 13% decline on a sequential basis from the first half of 2021.
This reduction in earnings per share on a sequential basis is driven by a number of positive and negative factors, including increases in input costs in the second half of the year, principally commodities, labor, expedite and rework costs related to supply chain shortages, as well as unprecedented ocean and truck transportation rates and the timing of operating expense spend.
These costs are expected to be partially offset by increased product pricing through both low promotions, higher base prices and surcharges.
On a two-year basis, our second half earnings per share results at the high end of the range are expected to be up over 30% compared to the second half of 2019.
I would also add that the quarterly cadence for earnings per share in the second half of 2021 is more heavily weighted toward the fourth quarter with approximately 60% of our second half earnings per share occurring in Q4.
This is driven by a couple of key factors: First, the majority of our high margins, no Check snowmobiles won't ship until Q4 as compared to a stronger Q3 shipping quarter in 2020.
Second, while we are increasing selling prices and adding surcharges to offset a portion of the cost increases.
These increases do not take effect until late Q3, thus having a larger impact in Q4.
Let me quickly cover our sales expectations by segment.
ORV snowmobile sales guidance remain unchanged at up high teens percent.
The only modification is the timing of shipments, as indicated earlier, with more snowmobiles being shipped in the fourth quarter of 2021 versus prior year, given the supply chain disruptions and the timing of our pricing actions hitting Q4 more heavily than Q3.
Motorcycle sales are anticipated to be up low 30%, down slightly from prior guidance.
While we continue to expect our motorcycle business to grow and take share for the year, supply chain challenges are impacting production enough to possibly shift to some shipments into 2022.
In the remaining segments, Global Adjacent Markets, Aftermarket and Boats, we are increasing our sales expectations given the sales growth realized through the first half of 2021.
Year-to-date second quarter operating cash flow finished at 196 million, down 37% compared to the same period last year, driven by an increase in factory inventory due to the supply chain inefficiencies.
Our expected full-year cash flow performance remains unchanged at down mid-30% compared to last year.
During the second quarter, we spent $111 million on share repurchases.
We will continue to prioritize organic investments in our business, along with share buybacks throughout the remainder of the year, subject to market conditions.
This quarter's results demonstrated the drive and determination of the Polaris team in the face of ongoing challenges.
We will continue to effectively manage a challenging environment to meet consumer demand.
The underlying earnings power of the company remains strong as does our financial health.
Demand for our products remains robust, and we do not see that changing in the medium to long term.
Our supply chain remains the top challenge for the company with component supply not expected to improve until sometime late 2021 or even early 2022.
And as a result, dealer inventories are not expected to return to normalized levels until sometime in late 2022 or even early 2023.
While much of the focus has been on the supply chain, innovation continues to be the lifeblood of Polaris, and we have a number of new products coming, including the all-new electric RANGER, along with exciting model year 2022 launches.
Let me close by reiterating that we're winning in a challenging environment, and we remain focused on navigating through the current supply chain challenges and rising input costs to deliver products our customers are demanding while at the same time, delivering improved results and value to our shareholders. | q4 adjusted earnings per share $2.55.
sees fy 2021 earnings per share $7.41 to $8.41. | 0 |
Joining me on the call today are Dale Gibbons and Tim Bruckner, our Chief Financial Officer and Chief Credit Officer.
I will provide an overview of our quarterly results and how we are managing the business in this current economic environment and then Dale, will walk you through the Bank's financial performance.
I like to focus on three trends that define our third quarter results and will continue into the future; robust balance sheet growth, provision reflecting asset quality and consensus outlook and strong net interest income and PPNR that continue to build capital.
The combination of these variables generated record net income of $135.8 million and earnings per share of $1.36, each up more than 45% versus the prior quarter and exceeding our pre-pandemic performance in 2019.
The flexibility of Western Alliance's diversified business model was again demonstrated this quarter as our deep segment and product expertise enable us to actively adapt our business in response to the changing environment and continue to achieve industry-leading profitability and growth, while maintaining prudent credit risk management.
Total loans grew $985 million for the quarter to $26 billion and deposits increased $1.3 billion to $29 billion, reducing our loan to deposit ratio to 90.2%.
Our loan growth continues to be concentrated in low-loss asset classes such as warehousing lending, which accounted for over 100% of the loan growth and 56% of the deposit growth and $267 million in capital call lines where the risk-reward equation is heavily skewed in our favor.
The impact of this strategy will be seen near term in our reduced provisioning expense and longer term in lower net charge-offs.
We are encouraged by our expanding pipeline as clients have applied lessons learned from prior recessions to right-size cost structures and to begin to plan for future opportunities.
In the quarter, high average interest earning assets of $1.9 billion were offset by lower rates, substantial liquidity build and a one-time adjustment to PPP loan fee recognition to reflect modification and extension of the CARES Act forgiveness timeframe, which pushed our net interest margin downward to 3.71%, as net interest income declined $13.7 million from the second quarter to $285 million, but improved $18.3 million from a year ago period.
Excluding the impact of PPP loans, net interest income would have only fallen by $4 million, which was largely the impact of interest expense on our new subordinated debt issued in middle of the second quarter.
We believe approximately 21 basis points of this compression is transitory in nature and NIM is expected to rise as excess liquidities put to work through balance sheet growth, deposit seasonality and warehouse lending, driving balances lower and PPP loan forgiveness assumptions normalize.
Given these margin trends and balance sheet growth, we believe Q4's net interest income performance returns to Q2 levels and PPNR rises above Q3.
Provision for credit losses was $14.7 million in the third quarter considerably less than the $92 million in the second quarter, which was primarily attributable to stable to modest improvements in macroeconomic forecast assumptions, loan growth in low-risk asset classes and limited net charge-offs of $8.2 million or 13 basis points of average assets.
Dale, will go into more detail on the specific drivers of our provision but our total loan ACL to funded loans ratio now stands at 1.37% or $355 million and 1.46%, excluding PPP loans, which are guaranteed by the CARES Act.
If macroeconomic trends remain stable or begin to improve, future provision expense will likely mirror net charge-offs and reserve levels could decline.
Loan deferrals trended lower for the quarter as many of our clients have returned to paying as agreed following their deferral period.
As of Q3, $1.3 billion of loans are on deferral or 5% of the total portfolio, which represents a 55% decline from Q2.
We expect $1.1 billion of loan deferrals will expire next quarter, which will continue to drive down our outstanding modifications.
Our quarterly efficiency ratio improved to 39.7% compared to 43.2% from the year ago period, becoming more efficient during the economic uncertainty provides the incremental flexibility to maintain PPNR.
Finally, Western Alliance continues to generate significant excess capital, which grew tangible book value per share to $29.03, or 4.3% over the previous quarter and 13.4% year-over-year.
Supported by our robust PPNR generation, capital rose $121.6 million with a CET1 ratio of 10%, supporting 15.6% annualized loan growth.
Dale, will now take you through our financial performance.
Over the last three months Western Alliance generated record net income of $135.8 million or $1.36 per share, which was up 46% on a linked-quarter basis.
As Ken mentioned, net income benefited reduction in provision expense for credit losses to $14.7 million, primarily driven by stability and the economic outlook during the quarter in a release of specific reserves associated with the fully resolved credit.
Net interest income grew 1$8.3 million year-over-year to $284.7 million but declined $13.7 million during the quarter, primarily result of changes in prepayment assumptions on PPP loans that impacted fee accretion recognition.
The SBA's interim final rule published in August more than doubled the amount of time that people have to receive forgiveness on their loans and coupled with the systems delay in forgiving -- forgiveness request processing, we now expect that forgiveness processes to be elongated and the average time the loans will be outstanding is projected to double as well.
As a result, using the effective interest method, we reversed out $6.4 million of the fees recognized in Q2 and overall PPP fee recognition has been extended.
This is purely a change in timing, impacting NIM but with no change to cumulative fee revenue ultimately recognized from this program.
The $43 million, we are to receive will be simply be booked to income more slowly than our original expectations.
Net interest income was impacted in Q3, as a result of this timing change by $10.6 million.
Non-interest income fell $700,000 to $20.6 million from the prior quarter.
We benefited from a recovery of an additional $5 million mark-to-market loss on preferred stocks that we recognized in the first quarter.
Over the last two quarters, we recovered 80% of that $11 million original loss.
Finally, non-interest expense increased $9.3 million, as the deferral of loan origination cost fell, as PPP loan originations dropped, as well as an increase in incentive accruals as our third quarter pandemic -- as our third quarter performance exceeded our original third quarter budget, which was established before the pandemic.
Strong ongoing balance sheet momentum coupled with diligent expense management drove pre-provision net revenue to $181.3 million, up 13.5% year-over-year and consistent with our overall growth trend from the first quarter, as the second quarter benefited from one-time PPP recognition of BOLI restructuring in FAS 91 loan cost deferrals.
Turning now to net interest drivers.
Investment yields decreased 23 basis points from the prior quarter to 2.79% and fell 29 basis points from the prior year due to the lower rate environment.
Loan yields decreased 35 basis points following declines across most loan types, mainly driven by changing loan mix and in the reduction of PPP loan fees, resulted in lower PPP loan yield during the quarter.
Notably, for both investments and loans, spot rates as of September 30, are higher than the third quarter average yields.
Costs of interest bearing deposits was reduced by 9 basis points in Q3 to 31 basis points with an end of quarter spot rate of 0.27% [Phonetic], as we continue to lower posted deposit rates and push out higher cost exception price funds.
The spot rate for total deposits, which includes non-interest bearing deposits was 15 basis points.
When all of the company's funding sources are considered, total funding costs declined by 2 basis points with an end of quarter spot rate of 0.25%.
Unlike last quarter where spot rates indicated a likely margin compression in the third quarter, these rates appear to demonstrate that the margin will improve as both earning asset yields will rise and funding cost will fall in the fourth quarter.
Additionally, in October, we called $75 million of subordinated debt that has diminishing capital treatment with the current rate of 3.4%.
Despite the transition to a substantially lower rate environment during 2020, net interest income increased 6.9% year-over-year to $284.7 million.
As mentioned earlier, during Q3, our extraordinary build and liquidity and adjustments to PPP loan fee recognition compressed our net interest margin of 3.71%, as net interest income declined $13.7 million.
However, the majority of these reduction drivers are transitory.
PPP loans reduced our NIM during the quarter by 13 basis points.
This changes to prepayment assumptions, reduced SBA fees recognized resulting in PPP loan yield of 1.76%.
Excluding this timing difference, net interest income declined only $4 million quarter-over-quarter, primarily due to interest expense on the new subordinated debt that we issued last May, resulting in a net interest margin of 3.84%.
Referring to the bar chart on the lower left section of the page, of the $43 million in total PPP loan fees net origination costs that we received, only $3.3 million was recognized in the third quarter.
The recognized reversal of PPP was $6.1 million in Q3 and expect fee recognition to be approximately $6.9 million in the fourth quarter and taper off as prepayments and forgiveness are realized.
In reality, these assumptions are dependent on actual forgiveness from the SBA.
Additionally, average excess liquidity relative to loans increased $1.3 million in the quarter, the majority of which are held at the Federal Reserve Bank earning minimal returns, which impacted NIM by approximately 21 basis points in aggregate.
Given our healthy loan pipeline and ability to deploy these funds to higher yielding earning assets, we expect this margin drag to dissipate in the coming quarters.
Regarding efficiency, on a linked-quarter basis, our efficiency ratio increased to 39.7%, as we continue to invest in our business to support future growth opportunities.
As described earlier, the non-interest expense increase was largely related to a net increase in compensation costs, as we now have greater confidence in our ability to execute on our pre-pandemic budget and are no longer benefiting from deferred costs for PPP loan originations.
Excluding PPP, net loan fees and interest, the efficiency ratio for the quarter would have been 40.7%, which as we indicated last quarter should be moving closer to our historical levels in the low-40s.
Return on assets increased 44 basis points from the prior quarter to 1.66%, while provisions fell.
PPNR ROA decreased 47 basis points to 2.22%, as attractive decline in margin from the prior quarter.
This continued strong performance in capital generation provides us significant flexibility to fund ongoing balance sheet growth, capital management actions or meet our credit demands.
Our strong balance sheet momentum continued during the quarter as loans increased $985 million to $26 billion and deposit growth of $1.3 billion brought our deposit balance to $22.8 billion at quarter-end.
Inclusive of PPP, both loans and deposits grew approximately 29% year-over-year with our focus on loan loss segments and DDA.
The loan to deposit ratio decreased to 90.2% from 90.9% in Q2, as our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs.
Our cash position remains elevated at $1.4 billion at quarter-end compared to $2.1 billion quarterly average, as deposit growth continues to outpace loan originations.
While this does impair margin near term, we believe it provides us inventory for selective credit growth this demand resumes.
Finally, tangible book value per share increased to $1.19 over the prior quarter to $29.03, an increase of $3.43, or 13.4% over the past 12 months.
The vast majority of the $985 million in loan growth was driven by increases in C&I loans of $892 million, supplemented by construction loan increases of $103 million.
Residential and consumer loans now comprise 9.3% of our portfolio, while construction loan concentration remains flat at 8.8% of total loans.
Within the C&I growth for the quarter and highlighting our focus on low-risk assets that Ken mentioned, capital call lines grew $267 million, mortgage warehouse loans grew over $1 billion and corporate finance loans decreased $141 million this quarter.
Residential loan originations were offset by higher prepayment activity leaving the balanced fairly flat.
We continue to believe our ability to profitably grow deposits as both a key differentiator and a core value driver to our firm's long-term value creation.
Notably, year-over-year deposit growth of $6.4 million is higher than the annual deposit growth in any previous calendar year.
Deposits grew $1.3 billion or 4.7% in the third quarter, driven by increases in non-interest bearing DDA of $777 million, which now comprise over 45% of our deposit base plus growth in savings in money market accounts of $752 million.
Market share gains and mortgage warehouse and robust activity in tech and innovation continue to be significant drivers of deposit growth.
As we initially described on our Q1 earnings call, while unique credit risk management strategy is focused on establishing individual borrower level strategies and direct customer dialog to develop long-term financial plans.
Our approach to payment deferral requests is to look for resourceful ways to partner with our clients along with assessing their willingness in capacity to support their business interests.
We ask our clients to work with us hand-in-hand whereby our clients contribute liquidity, capital or equity as an inaugural component to modified prepayment plans.
Our approach collectively uses the resources of the borrower, government and the bank's balance sheet to develop solutions that extend beyond the six-month window provided for in the CARES Act.
By quarter-end, deferrals had declined by $1.6 billion or 55%, reducing total loan deferrals from 11.5% in Q2 to 5%.
Excluding the hotel franchise finance segment in which we executed a unique sector specific to hurdle strategy, the bank wide deferral rate is approximately 1.6%.
We have received minimal additional request for further deferrals and 98% of clients with expired deferrals are now current in payments.
We expect $1.1 billion of loan deferrals will expire in the current quarter, which will substantially drive down outstanding modifications.
Consistent with this trend, as of yesterday deferrals are down $420 million in October, bringing the current total to $880 million.
Regarding asset quality, our non-performing assets and OREO to loan ratio remained flat at 47 basis points to total assets, while total classified assets increased to $28 million or 4 basis points to 98 basis points to total assets.
Classified accruing loans rose by $21 million, explainable by a few loans 90 days past due as of September 30.
All of these loans are now current.
Special Mention loans increased $81 million during the quarter to 1.83% of funded loans, which is a result of our credit mitigation strategy to early identify, elevate and apply heightened monitoring to loans and segments impacted by the current COVID environment.
Over 60% of the increase in Special Mention loans are from previously identified segments uniquely impacted by the pandemic, such as the hotel portfolio and a component of our corporate finance division credits determined to have some level of repayment dependency on travel, leisure or entertainment.
As we have discussed in the past, Special Mention loans are not predictive of future migration to classified or loss, since over the past five years, less than 1% has moved through charge-offs.
If borrowers do not have through cycle liquidity and cash and capital plans, we downgrade to substandard immediately to remediate.
Our total allowance for credit losses rose a modest $7 million from the prior quarter due to improvement in macroeconomic forecasts and loan growth in portfolio segments with lower expected loss rates.
Additionally, we covered $8.2 million of net charge-offs.
The ending allowance related to loan losses was $355 million.
For CECL, we are using a consensus economic forecast outlook of blue chip -- blue chip forecasters as it tracks management's view of the recession and recovery.
The economic forecast improved during the quarter, which would have implied a reserve release.
However, given the still unknown time horizon of COVID impacts, political uncertainty and the unknown status of further stimulus, we adjusted our scenario weightings to a less optimistic outlook.
In all, total loan allowance for credit losses to funded loans declined a modest 2 basis points to 1.37% or 1.46%, when excluding PPP loans.
On a more granular level, our loan loss segments account for approximately one-third of our portfolio and includes mortgage warehouse, residential and HOA lending, capital call lines and resort lending.
When we exclude these segments, the ACL to funded loans on the remainder of the portfolio is 2%.
Provision expense decreased to $14.7 million for Q3, driven by loan growth in lower loss segments and improved macroeconomic factors, while fully covering charge-offs.
Net credit losses of $8.2 million or 13 basis points of average loans were recognized during the quarter compared to $5.5 million in Q2.
Relative to other banking companies our lower consumer exposure continues to result in much lower total loan losses.
We continue to generate significant capital and maintain strong regulatory capital ratios with tangible common equity to total assets of 8.9% and a Common Equity Tier 1 ratio of 10, a decrease of 20 basis points during the quarter due to our strong loan growth.
Excluding PPP loans, TCE to tangible assets is 9.3%, a modest decline of 10 basis points from the first quarter.
Inclusive of our quarterly cash dividend payments of $0.25 per share, our tangible book value per share rose $1.19 in the quarter to $29.03, up 13.4% in the past year.
We continue to grow our tangible book value per share rapidly as it has increased three times that of the peers over the last 5.5 years.
I would now like to briefly update you on our credit risk mitigation efforts and the current status of a few exposures to industries generally considered to be the most impacted by COVID- 19 pandemic.
Throughout the quarter, Tim Bruckner and the credit administration team led ongoing focus portfolio reviews by risk segments to monitor credit exposures and performance against cash budgets, operating plans through the liquidity trough.
We are not waiting for deferrals to run out to make great changes or effect remediation strategies.
If borrowers are non-performing against defined operating plans or determined to not have a sufficient through cycle liquidity, we downgrade them now to substandard and enact remediation strategies to ensure the best outcomes.
We do not hold loans in SM, the Special Mention for a time to eventually downgrade.
And as a result, Special Mention graded loans slowly migrate to classified or substandard.
These facts and daily conversations with our people and our clients help me feel confident that our credit mitigation strategy and early approach to proactively manage our risk segments is bearing fruit and puts Western Alliance in a strong position to come out on the other side of the pandemic in better shape than our peers.
In our $500 million gaming book focused on all strip, middle market gaming-linked companies, total deferrals were reduced from 37% of the portfolio to only 4% and as of today, it's zero, as our clients are now open for business and are performing at or above their reopening plans.
The $1.3 billion investor dependent portion of our Technology and Innovation segment has continued to benefit from significant sponsor support for technology firms best positioned to succeed in this COVID environment and an active fund raising environment as well.
Since March 2020, 65 of our clients have raised over $1.7 billion in capital, resulting in 87% of borrowers with greater than six months remaining liquidity, up from 77% in Q1.
Our CRE retail book of $674 million focus on local personal services based retail centers with no destination mall exposure, continues to modestly exceed national trends that shows rent collections rising from 50% in May to 80% in August.
Similarly, the portfolio's deferrals have fallen from $176 million to $31 million.
Lastly, our $2.1 billion Hotel Franchise Finance business focused on select service hotels with greater financial flexibility and LTVs at origination of approximately 60% continues to trend toward stabilization.
Occupancy rates are tracking national averages, currently around 50%, which have tripled from April lows.
At approximately 55% occupancy, select service hotels are estimated to cover amortizing debt service, so a typical hotel is operating at break even.
Furthermore, we have seen deferrals declined from 83% of the portfolio to 44% of the portfolio and currently, we do not anticipate granting any additional deferrals in the hotel portfolio.
We are proactively engaging with hotel sponsors to validate ongoing support and hotel performance against operating plants.
As mentioned earlier, we are not waiting for deferrals to end before migrating to ensure remediation options.
With strong sponsor support the worst a great hotel typically receives is SM or Special Mention.
Let me just finish up with our management outlook.
We believe that our third quarter performance is the baseline for future balance sheet and earnings growth.
With this record quarter, we beat our quarterly budget that was established pre-pandemic.
Our pipelines are strong and we expect loan growth to return to previously anticipated levels of $600 million to $800 million for the next several quarters in low risk asset classes.
However, there will be some offsets as PPP loans pay-off or are forgiven.
Depending on the timing of the realized PPP forgiveness, organic loan growth should be -- should more than offset PPP run-off.
In Q4, we expect to see the seasonal declines associated with our mortgage warehouse clients.
Therefore, deposit growth will be at the lower end of the target range, reducing our excess liquidity.
To supplement our residential lending initiative, we acquired Galton Funding, a residential mortgage platform that specializes in the acquisition of prime non-agency residential home loans.
The acquisition is a low risk, low cost entry point to build a meaningful residential mortgage business line at an accelerated timeframe with over 100 additional mortgage originator relationships.
We anticipate that the Galton team will be fully integrated by the end of October and be contributing to loan growth by the end of the year.
As Dale mentioned, our current spot rates indicate that the net interest margin pressure experienced this quarter will subside and net interest margin will trend upwards toward 3.9% in Q4.
We expect net interest income to rise in Q4, aided by both an increased NIM and higher end of quarter loan balances compared to the quarterly average.
Additionally, it is expected that PPP fee income will pick up next quarter as forgiveness is granted.
This will however, abate during 2021 PPNR is expected to increase as net interest income growth will more than offset any increase in non-interest expense.
Looking ahead, we will continue to invest in new product offerings and infrastructure to maintain operational efficiency but Q2 and Q3 efficiency ratios are temporary and will eventually return to sustainable level in the low-40s.
Our long-term asset quality and loan loss reserves are informed by economic consensus forecast, which is consistent going forward, could imply reserve releases in the coming quarters.
We believe that the provisions in excess of charge-offs year-to-date are more than sufficient to cover charge-offs through the cycle as we do not see any indicators that imply material losses are on the horizon.
Finally, Western Alliance is one of the most prolific capital generators in the industry.
Our strong capital base and access to ample liquidity will allow us to take advantage of any market dislocations to maintain leading risk adjusted returns to address any future credit demands, all while maintaining flexibility to improve shareholder returns.
Operator, if you want to open up the line. | western alliance bancorp q1 earnings per share $1.90.
q1 earnings per share $1.90.
q1 revenue fell 0.5 percent to $337 million.
net interest income was $317.3 million in q1 2021, an increase of $2.5 million from $314.8 million in q4 2020. | 0 |
With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Kevin Ozan.
As the largest restaurant business in the world our size and scale are competitive advantage that we've built and nurtured for over six decades.
Our 40,000 restaurants in over 100 countries are predominantly run by local owner operators, connecting the business to the 40,000 communities in which we operate.
These local connections and better level of agility that complements our size and scale, enabling local teams to adapt and adjust to operating conditions that vary by country, community and even restaurant in real time.
It's what makes McDonald's special.
It's also how we're able to use the scale and agility.
How we can be both big and nimble to achieve something truly unique.
From restrictions driven by new COVID variance, to supply chain pressures and labor shortages across industries, to any other unknown, unknowns.
We're approaching the one-year anniversary of Accelerating the Arches, which took shape in response to changing customer needs early in the pandemic.
Rooted in the inherent strengths of the McDonald's system and brand, it's proving to be the right strategy with the right focus at the right time.
We're evolving the customer experience in ways both large and small to meet changing customer needs and maintain our market leadership.
Our three growth pillars known as our MCDs marketing core menu and the 3Ds of digital, delivery and drive-thru guide our business.
This includes amplifying contactless channels like delivery and drive-thru and creating digital experiences that are seamless personalized and easy to use.
Our third quarter topline results represent a continuation of our broad-based business momentum around the world with global comp sales, up nearly 13% or 10% on a two-year basis.
Our International Operated Markets have continued to recover accelerating two-year comp trends in the third quarter to nearly 9% as most markets operated with fewer government restrictions.
There is still varied performance across the big five markets within the IOM segment ranging from strong double-digit two-year growth in the UK and Canada to low single-digit two-year growth in Australia, Germany and France.
As those countries have been slower to recover from the pandemic.
The UK continue to leave the segment in the third quarter, driven by growth in delivery and digital channels, as well as strong menu and marketing promotions like monopoly.
In Canada, the strong two-year comp momentum was driven by successful marketing activity, including core extensions like the Grand Mac and Spicy Nuggets and growth in the 3Ds of drive-thru delivery and digital.
Even as dine-in restrictions have lifted.
In France and Germany, comp sales exceeded 2019 levels for the first time in the third quarter.
Germany's positive performance was supported by expanded deployment of delivery.
The national launch of our loyalty program My McDonald's rewards and a taste of McDonald's promotion featuring value offerings like McChicken.
France benefited from continued strength in delivery and strong menu and marketing promotions with a focus on family.
Market conditions are challenging with the adoption of vaccine past restrictions for both customers and crew in France and several other countries.
Performance in Australia was impacted by significant stay at home restrictions affecting over half of the restaurants for nearly the entire quarter.
While comp sales were relatively flat for the quarter, the market was positive on a two-year basis and continued to grow its delivery channel achieving record delivery sales for the quarter.
As we look ahead to the fourth quarter, we expect the IOM segment to maintain a relatively similar two-year comp trend as Q3.
In the US, we maintained our momentum with Q3 comp sales, up nearly 10% or 14.6% on a two-year basis.
We continue to see positive comps across all day-parts on a two-year basis with sustained double-digit comps at dinner and breakfast.
At the same time franchisees continue to achieve record high restaurant cash flow.
Our US franchisees have never been better positioned to weather the labor and inflation pressures, while still investing in growth.
Performance in the US remains driven by strong average check growth reflecting larger order sizes and menu price increases.
The big bets we've made during the pandemic are paying dividends across the business and enabling us to maintain our QSR leadership.
Menu and marketing efforts with products like the Crispy Chicken Sandwich and successful Famous Orders like the Saweetie Meal have elevated our brand and help drive underlying sales growth across the business.
The launch of our loyalty program in the US has exceeded expectations and is driving increased digital adoption.
In just a few short months, we already have over 1 million members enrolled with over 15 million active loyalty members earning rewards, and we expect that number to continue to grow.
Chris will share more loyalty headlines in a few minutes.
We've reopened nearly 80% of our dining rooms in the US, roughly 3,000 dining rooms remain closed in high risk COVID areas, as we continue to prioritize the health and safety of our customers and crew.
In restaurants where we have reopened dining rooms front counter in kiosk sales remain below pre-pandemic levels, but we're seeing that even modest increases in these channels help to relieve operational pressure in the drive-thru.
The strong performance in the US has continued into October, we're currently seeing low double-digit comps on a two-year basis and we expect that to continue through the rest of the fourth quarter.
Turning to the International Developmental Licensed segment.
Comp sales were up nearly 17% for the quarter, or about 5% on a two-year basis.
Performance was largely driven by positive results in Japan and Latin America, partly offset by negative comps in China.
Japan maintained momentum in Q3 with comps, up 13% achieving an impressive six consecutive years of quarterly comp sales growth, despite restaurants operating with government restrictions.
The market's performance is being driven by a continued commitment to serve customers safely and conveniently through our drive-thru and digital channels, as well as strong marketing and limited time promotions.
China continues to be impacted by both COVID resurgences, which restarted in June and lasted throughout the quarter and a softening economy.
While comps for the quarter were negative, the market continues to build its digital presence as they now have over 100 million active digital members.
In addition, we've accelerated new restaurant growth in China, with over 500 new restaurants already opened this year, we now expect to open roughly 650 restaurants for the year, exceeding our original plan.
China remains a critically important market for us and one where we have confidence in the long-term opportunity.
So we plan to get even more aggressive in opening new restaurants in this market.
With our strong overall sales performance for the first three quarters of the year, we now expect systemwide sales to be up in the high teens in constant currencies for the full-year.
Our results are a testament to the focus of our teams on driving growth through our MCDs and we're confident that momentum will continue.
After playing a pivotal role in building out our fan truth strategy in the US, we're going to slightly as transitioning into the role of Global Chief Marketing Officer.
Following the instantly iconic global campaign Morgan developed with BTS, Famous Orders again cross-borders with both Russia and Spain launching successful campaigns with local celebrities in the third quarter.
These markets leaned into the idea that truly no matter how big or famous you are or where you are in the world, everyone has their go to McDonald's order.
I've known Tariq for many years and I'm confident Tariq will maintain our marketing momentum in the US.
Behind our marketing success as McDonald's craveable core menu.
In the US Crispy Chicken Sandwich sales continue to exceed expectations.
This translated into significant growth in QSR Chicken market share as we continue to support the Crispy Chicken Sandwich platform with culturally relevant marketing.
In the UK, we launched our McSpicy sandwich, which generated the market's best Chicken promotional results on record.
And in Canada, our Spicy McNuggets promotion had a halo effect on McNuggets sales.
This quarter, we introduced the McPlant team, which in Austria and the Netherlands as a limited time offer.
And both the UK and Ireland launched the McPlant in a limited number of restaurants.
With a goal to rollout nationwide in January.
McPlant is available for other markets to pull down based on customer demand.
As always we'll do what McDonalds does best, listen to our customers, when people are ready for the McPlant will be ready for them.
Being customer driven is about more than just menu items.
It's also about delivering feel good experiences when and where our customers want McDonald's, so we can bring the Golden Arches to as many customers as possible.
That means continuing to increase our engagement across drive-thru, digital and delivery.
As we do that, we're seeing an increase in sales mix across these channels.
In our top six markets over 20% of sales or about $13 billion year-to-date came through digital channels, whether it was through our app, kiosk in our restaurants or delivery.
Our loyalty program has been an instant fan favorite and delivers great value to our most loyal customers.
It also creates another touch point to increase engagement and take our relationship with customers to more responsive, more personalized places.
We're already seeing increased customer satisfaction and higher frequency among digital customers, compared to non-digital.
In September, we launched our loyalty program in Germany quickly amassing millions of active reward to customers.
And we're on track to bring MyMcDonald's Rewards to Canada by the end of the year and the UK and Australia in the first half of 2022, which means that by mid-2022 loyalty programs will be in our top six markets inclusive of France, which has had a strong loyalty program for many years.
Delivery is another bet we made long before COVID and one that we believe will continue to be a staple for consumers for years to come.
Over the past five years, our delivery footprint has grown from just 3,000 of our restaurants to more than 32,000 restaurants across 100 countries.
As the needs of our customers who continue to change delivery has enabled us to increase our reach and gross sales around the world.
We're actively engaged in discussions with our largest delivery providers to support the extraordinary growth in our delivery business.
We look forward to sharing more information on these global partnership soon, but this is yet another example of where our scale confers upon us competitive advantages.
Lastly, our drive-thrus, with the drive-thru presence that is second to none, our drive-thru sales across our top six markets continue to stay elevated versus pre-pandemic levels even as dining rooms reopened.
We previously shared that we have been testing automated order-taking in the drive-thru at several restaurants in the US.
This was enabled by our acquisition of Apprente now known as McD Tech Labs in 2019.
These tests have shown substantial benefits to customers and the crew experience.
To enable development and scale deployment of this program, McDonald's has now entered into a strategic relationship with IBM.
In my mind, IBM is the ideal partner for McDonald's given their expertise in building AI powered customer care solutions and voice recognition.
IBM will now acquire McD Tech Labs to further accelerate the development of automated order taking.
We're in a strong position today, focused on executing our plan, running great restaurants and taking advantage of our unique size and scale to feed and foster communities.
Our strong performance for the quarter resulted in adjusted earnings per share of $2.76, which excludes the gain as we completed the partial divestiture of our ownership in McDonald's Japan.
Our strong sales generated an increase in restaurant margins of about $500 million for the quarter.
G&A increased about 20% in constant currencies for the quarter, driven by higher incentive-based compensation expense as a result of company performance exceeding our plan this year.
We still expect G&A to be about 2.4% of systemwide sales for the full-year.
Year-to-date adjusted operating margin was 44.3%, reflecting the improved restaurant margins across all segments and higher other operating income, compared to last year.
Foreign currency translation benefited Q3 results by $0.04 per share.
Based on current exchange rates, we expect currency to have a minimal impact on fourth quarter EPS, with an estimated full-year benefit of $0.21 to $0.23.
As usual, this is directional guidance only as rates will likely change as we move through the rest of the year.
And finally in September, our Board of Directors approved a 7% dividend increase to the equivalent of $5.52 annually.
This marked 45-years of increasing our dividend for shareholders, further reinforcing our confidence in accelerating the Arches.
We also announced the resumption of our share repurchase program.
As a reminder, we had suspended share buybacks at the beginning of the pandemic as we took on additional debt to provide liquidity support to the McDonald's System.
Since then, we've been focused on returning to pre-COVID debt ratios that support our strong investment grade credit rating.
Going forward, we're confident that our operating performance will continue to fuel growth in our already strong free cash flow profile.
As a result, we're committed to our historical capital allocation priorities: first, to invest in new restaurants, existing restaurants and opportunities to grow the business.
Then we expect to return all free cash flow to shareholders through a combination of dividends and share repurchases over time.
We've accomplished so much the past 20-months and even though the pandemic has greatly altered so much in our business and our world, it hasn't changed the simple fact that we're better together than we are apart.
For a long time we had a bridge physical separation with technology and new ways of working, but as vaccines have reached critical mass of people in the US and some places around the world, we're beginning to see a different future taking shape.
Finally, we're coming together again in our communities and cities around the world are beginning to open up and get back to a new normal.
The same is true for our global McFamily, after being closed for over a year and a half the McDonald's headquarters reopened on October 11th and it was inspiring to see teams collaborating again in person.
To protect the health and safety of our staff, we required all US-based corporate employees to get vaccinated.
And we're continuing to monitor local data and seek guidance from public health officials.
Even though we've only been back for a few short weeks, we have found that working in the office together spurs a level of collaboration, creativity, and connectedness that simply could not be replicated from behind our screens.
And we're going to be doing the same thing with our global system soon.
Next April in Orlando franchisees, suppliers and employees will convene for our worldwide convention in person for the first time in four years.
It's already shaping up to be an experience unlike any other.
Together we'll showcase McDonald's bright future, we'll demonstrate the power of technology for our restaurants, learn how innovation is enhancing the customer experience and discuss plans in the pipeline to drive our Accelerating the Arches Growth plan.
As I've said before, it's not only important that we grow, it's equally important that we grow sustainably and in ways that positively impact the communities we serve.
Driving climate action has been a centerpiece of our long-term strategy for a while now.
And our focus has sharpened.
In fact in 2014, we established public commitments intended to make our entire system more sustainable by 2020.
Among our goals were to sustainably source 100% of key ingredients, including coffee and beef.
Looking back this was just the beginning of what would become a much bolder agenda that we are pursuing with urgency.
As the threats to our planet have grown, we are responding with a more ambitious plan for ourselves and for the entire industry.
We achieved many of our 2020 goals ahead of schedule and we built upon that momentum to set new ambitious targets.
Just this past September, we announced that we would reduce the use of conventional virgin plastics and Happy Meal Toys by 90% by 2025.
We recently announced our ambition to achieve net zero emissions across global operations by 2050 and we joined the UN Race to zero.
And I look forward to sharing more of our sustainability story with climate delegates at the United Nations Climate Change Conference known as COP26 in Glasgow next week.
We believe we have both a privilege and a responsibility to help lead on issues that matter most and communities.
And there is no issue more globally important and locally impactful than protecting our planet for generations to come.
This is why I continue to remain optimistic about what lies ahead for McDonald's.
Accelerating the Arches fortified by our purpose and guided by our values makes me confident, not just in the future success of our business, but also for the future of the communities that we serve.
With that, we'll begin Q&A. | mcdonald's - qtrly earnings per share $2.95; qtrly adjusted earnings per share $2.37.
mcdonald's - crispy chicken sandwich, bts famous order promotion, growth in delivery, digital platforms contributed to qtrly u.s. comparable sales growth.
mcdonald's - for international operated markets, qtrly results reflected strong positive comparable sales in the u.k. and france.
mcdonald's - foreign currency translation benefited earnings per share by $0.13 for quarter. | 0 |
Our call today will be led by our CEO, Cindy Taylor; and Lloyd Hajdik, Oil States' executive vice president and chief financial officer.
To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law.
Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings.
First, I would like to extend my sincere hope that all of you have been able to safely navigate the horrendous weather that we've had over the last week, along with the associated power outages and impacted water supplies.
Our prayers are extended to you for a speedy return to normalcy.
December 31st marked the end of the year that will go down into the record books for the oil and gas industry.
Energy companies face the dawning challenges of excess supply, a demand crisis triggered by COVID, an OPEC supply management problem, and investor apathy toward the sector.
Already six years into an extended downturn, the industry took a notable turn for the worst in 2020 with the onset of the COVID-19 pandemic, leading to epic levels of demand destruction for crude oil and associated products.
With commodity prices in dangerous territory, coupled with deteriorating activity and financial results, energy companies had to respond quickly.
Rig counts and customer CAPEX spending collapsed in the second and third quarters of 2020.
In response to these events, we took immediate action to shore up liquidity and stabilize cash flows.
We will update you on these matters, give you our thoughts on near-term market conditions, and summarize our continued efforts to mitigate costs, both capital and operating as we navigate the early stages of a U.S.-led market recovery.
shale-driven activity, while at historic low levels, was improving as we entered the fourth quarter with stronger crude oil prices.
Activity in the U.S. shale basins has historically been the first market to decline in a downturn, but it is also the first to recover.
completion activity steadily improved during the fourth quarter, albeit off a low base, ending the quarter up 67% sequentially in terms of the average frac spread count as reported by primary vision.
Our fourth-quarter results reflected 2% sequential growth in revenues and a significant 55% improvement in gross profits before DD&A, reflecting the cost mitigation measures implemented earlier in the year.
Partially offsetting these benefits was $2.7 million of severance and restructuring charges.
During the fourth quarter, our well site services revenues were up 3% sequentially, and adjusted segment EBITDA margins improved.
Our completion services incremental adjusted EBITDA margins came in at 89%.
In our downhole technologies segment, revenues continued their recovery and were up 24% sequentially, with adjusted segment EBITDA margins also up nicely.
In contrast, revenues in our offshore/manufactured products segment, which is a later-stage business, decreased 4% sequentially due primarily to weaker connector product sales.
Segment backlog at December 31, 2020, totaled $219 million, a decrease of 4% sequentially.
Our segment bookings totaled $65 million for the quarter, yielding what appears to be an industry-leading book-to-bill ratio of 0.9 times for the fourth quarter and 0.8 times for the year.
During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs.
To that end, we had an exceptional year in 2020, generating $133 million of cash flow from operations.
With our significant free cash flow, we materially delevered during the year, reducing our total net debt by $128 million.
In addition, despite capital being extremely tight in the U.S. for banks lending to the industry, we successfully syndicated a new four-year asset-based credit facility with our key banking relationships last week.
Lloyd will review additional details with you shortly.
We believe that we have managed the company effectively during a very difficult period, and we'll continue to closely manage our debt, working capital, and cash flow generation in the quarters to come.
Lloyd will now review our consolidated results of operations and financial position in more detail before I go into a discussion of each of our segments.
During the fourth quarter, we generated revenues of $137 million, while reporting a net loss of $19 million, or $0.31 per share.
Our revenues increased 2% sequentially, and our adjusted consolidated EBITDA improved significantly due to better cost absorption in our U.S. businesses.
After generating significant free cash flow in prior quarters, we were essentially cash flow-neutral after CAPEX during the fourth quarter.
For the fourth quarter of 2020, our net interest expense totaled $2.6 million, of which the majority are $1.8 million was noncash amortization of debt discount and debt issue costs.
At December 31, our net debt-to-book capitalization ratio was 12.8%, and our total net debt declined $128 million during 2020 through opportunistic open-market purchases of our convertible senior notes and repayments of borrowings outstanding under our revolving credit facility.
As Cindy mentioned, on February 10, we announced that we had entered into a new $125 million asset-based revolving credit agreement with a group of our key commercial relationship banks.
Our existing revolving credit facility was terminated upon entering into the new asset-based revolving credit facility.
Borrowing availability under the new facility is based on a monthly borrowing base on eligible U.S. customer accounts receivable and inventory.
The maturity date of the revolving credit facility is February 10, 2025, as Cindy mentioned, a four-year credit facility.
With a springing maturity 91 days prior to the maturity of any outstanding debt with a principal amount in excess of $17.5 million.
Excluding the seller promissory note associated with our acquisition of GEODynamics.
Borrowings outstanding under the new revolving credit facility will bear interest at LIBOR plus a margin of 2.75% to 3.25% based on our calculated availability under the facility with a LIBOR floor of 50 basis points.
We must also pay a quarterly commitment fee of 0.375% to 0.5% on the unused commitments.
At the closing of the new facility, we had approximately $29 million available, which was net of $12 million in outstanding borrowings and $29 million of standby letters of credit.
Together with $72 million of cash on hand at the end of December, pro forma liquidity would have been approximately $101 million.
At December 31, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $215 million.
In terms of our first-quarter 2021 consolidated guidance, we expect depreciation and amortization expense to total $23 million; net interest expense to total $2.1 million, of which approximately $1 million is noncash; and our corporate expenses are projected to total $8.4 million.
In this environment, we expect to invest approximately $15 million in total CAPEX during 2021, which is essentially flat when compared to 2020 spending levels.
In our offshore/manufactured products segment, we generated revenues of $76 million and adjusted segment EBITDA of $7.5 million during the fourth quarter.
Revenues decreased 4% sequentially due primarily to continued slow connector product sales.
Adjusted segment EBITDA margin of 10% compared to 12% margins achieved in the third quarter, reflecting lower revenues and reduced cost absorption.
As I mentioned earlier, orders booked in the fourth quarter totaled $65 million with a quarterly book-to-bill ratio of 0.9 times.
At December 31, our backlog totaled $219 million.
For over 75 years, our offshore/manufactured products segment has endeavored to develop leading-edge technologies, while cultivating the specific expertise required for working in highly technical, deepwater, and offshore environments.
Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers going forward.
We continue to bid on potential award opportunities supporting our traditional subsea, floating, and fixed production systems, drilling, and military clients, while experiencing an increase in bidding to support multiple new clients actively involved in subsea mining, offshore wind developments, and other alternative energy systems globally.
While our 2020 bookings were lower than the levels achieved in 2019, our book-to-bill ratio for the year averaged 0.8 times, providing visibility as we progress into 2021.
In our downhole technologies segment, our revenues accelerated for the second quarter in a row, increasing 24%, while generating incremental adjusted segment EBITDA margins of 68% sequentially due primarily to cost savings measures implemented at the segment level.
Sales trends for our STRATX integrated gun systems and addressable switches continue to gain improved customer acceptance, and we experienced a 49% sequential improvement in international sales of our traditional perforating products.
We also continue to focus on the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology.
Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality, and increased performance, while ensuring the highest level of safety and reliability.
In our well site services segment, we generated $39 million of revenue with sequentially increasing adjusted segment EBITDA.
land completion activity in the quarter but was partially offset by seasonal fourth-quarter declines in operator spending in the Northeastern United States.
Excluding the Northeast region, revenues increased 20% sequentially.
International and U.S. Gulf of Mexico market activity comprised 26% of our fourth-quarter completion service business revenues.
We remain focused on streamlining our operations and pursuing profitable activity in support of our global customer base.
We will continue to focus on core areas of expertise in this segment and are actively developing and conducting field trials of selected new proprietary service offerings to differentiate Oil States' completions business.
Moving on to outlook.
COVID-19 disruptions continue to hamper activity in domestic and international markets.
The fourth-quarter 2020 U.S. rig count average was 311 rigs, which was up 22% sequentially.
As we are now a month and a half into the first quarter of 2021, the average frac spread count has increased by about 26 spreads or roughly 20% since the fourth quarter.
This increase gives us optimism that the first quarter is setting up more favorably for our U.S. shale-driven product and service offerings.
Given improvements in the frac spread count over the last several months, we expect our well site services and downhole technologies segments to grow sequentially in 2021, with increasing EBITDA contributions.
Revenues in our offshore/manufactured products segment will continue to lag into the first half of 2021 until our book-to-bill ratio exceeds one-time and our short-cycle product demand improves.
Our outlook for 2021 suggests that our consolidated revenue will be flat or declined modestly, given this very strong first quarter of 2020, which, of course, was pre-pandemic, with EBITDA growth resulting from cost mitigation efforts.
We expect 2021 full-year consolidated EBITDA of $35 million to $40 million, with roughly 60% of the total generated in the second half of 2021.
The first quarter will undoubtedly be the weakest quarter of 2021, given the impact of severe weather that has gripped the nation this week.
Record-breaking temperatures and dangerous conditions have limited our field operations and manufacturing locations for several days.
Now I would like to offer some concluding comments.
We believe that we made substantial progress in 2020 in terms of shoring up our liquidity with exceptionally strong free cash flow generation coupled with associated debt reduction initiative.
As I mentioned earlier, we stabilized the company during a very difficult period and have managed our debt, working capital, and cash flow generation throughout the period.
Oil States will continue to conduct safe operations and will remain focused on providing technology leadership in our various product lines with value-added products and services to meet customer demands globally as we recover from the harsh effects of the COVID-19 pandemic, which dramatically reduced travel and business activity, thereby depressing global oil demand and correspondingly, demand for our products and services.
That completes our prepared comments. | q1 loss per share $6.79.
compname says reduced capital spending plans for 2020 by approximately 70%.
compname says expect to receive u.s. income tax refunds of about $41 million in 2020 under provisions of cares act. | 0 |
I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Before we begin, please note that we've posted schedules under the Financial Information tab in the Investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of gross and operating margins.
Please limit yourself to one question.
If you have more than one, please ask your most pressing question first and then reenter the queue.
In what remains a highly dynamic environment, our first-quarter results show promising signs that a broader recovery is on the horizon.
We're encouraged by early results in markets where mobility is on the rise.
Then I'll hand over the call to John to discuss the financial details of the quarter and how we'll continue to deliver on our objectives over the course of the year.
In the first quarter, we positioned our business for recovery while executing against our emerging stronger agenda, equipping our system to win.
At the start of the year, pandemic-related lockdowns were still impacting many markets.
We moved quickly as conditions changed, improving along the way, and getting better at managing each wave and its resulting lockdowns.
During the quarter, we saw mobility increase in some parts of the world where lockdowns eased and vaccinations accelerated.
Leveraging our learnings, we drove sequential improvement in our business throughout the quarter.
And while we saw mid-single-digit volume declines through mid-February, trends have improved since then.
We're pleased to say that March marked a return to volume levels seen in March of 2019 prior to the pandemic.
We continue to see ongoing strength in at-home channels, offset by away-from-home trends which have improved sequentially but remain pressured relative to pre-pandemic levels.
We're working with our customers and bottling partners to sustain at-home momentum and capture improving away-from-home demand.
For example, in Latin America, our Prospera program with our bottlers helps the traditional trade thrive through assistance with their marketing efforts, resulting in outperformance in this critical channel.
In Great Britain, we launched Open, a business accelerator program to support pubs, bars, and cafes.
In North America, our use of mail bundles is driving incidents in pickup and delivery transactions with food service customers.
In 2020, we gained underlying share in both at-home and away-from-home channels, offset by negative channel mix.
This continues to be the dynamic affecting our share year to date.
Through our ongoing initiatives and as away-from-home demand improves over the course of the year, we'll seek to build on these wins in 2021.
There are clear opportunities to reaccelerate share positions as the recovery plays out and we'll invest to drive momentum with focus and flexibility.
In market at the forefront of the recovery, we've seen early signs that our actions taken during the pandemic are helping us outpace recovery.
It's important to note that the path to a full recovery remains asynchronous around the world.
Many markets haven't yet turned a corner and are still managing through the restrictions.
Looking around the world, in Asia Pacific, China continues to lead the recovery with volume in the first quarter ahead of 2019 results and foot traffic almost back to pre-pandemic levels.
Strong performance in India and Southwest Asia was driven by effective marketing across brands, affordable solutions, and distribution expansion with 250,000 new outlets and 45% more new coolers.
Despite the unexpected state of emergency earlier in the year, Japan expands its successful RGM initiatives geographically and across brands to help drive improvements later in the quarter.
In EMEA, vaccine rollout in Europe has been slower than anticipated and many countries have been impacted by ongoing lockdowns.
In Eurasia and the Middle East, brand Coke recruited 4.4 million consumers through affordability packages and a focus on at-home occasions.
New marketing campaigns drove improvement in flavored Sparkling soft drinks, and Fuze Tea reached an all-time-high value share in Turkey.
In Africa, mass vaccination is expected to take longer than the developed markets.
And despite ongoing volatility, Africa worked closely with our bottlers to deliver volume growth that by stepped-up execution through cooler placement and affordability packs like returnable glass bottles.
In North America, the year is off to a good start.
Ongoing strength in at-home channels was driven by core brands in our Sparkling portfolio, as well as Simply, fairlife, and Gold Peak all with encouraging results.
Away-from-home began to approve in March as vaccinations and mobility picked up.
In Latin America, we leveraged our core brands, digital initiatives, and refill packages to recover ahead of the economy and our industry despite ongoing restrictions.
While from away-from-home continues to be impacted by lockdowns, we are expanding the at-home consumption opportunity, leveraging consumer dynamics like indulgence of single-serve multi-packs.
Global Ventures continue to be impacted by lockdowns in the U.K.
But as restrictions loosen, we're focusing on driving digital engagement and traffic back to the cost of the stores.
Cost of express machines continue to deliver strong performance.
Turning our transformation, our operating units are up and running and also a very good start in the rollout of our new model.
Across markets, our newly networked organization has us working more collaboratively with the overall enterprise in mind.
Our operating unit and category leadership teams are working together to identify the most promising combinations across the industry based on economic outlook, consumer trends, channel dynamics, and execution imperatives.
We're using more disciplined resource allocation to capture the biggest opportunities, while making ongoing portfolio decisions faster and at scale.
We're focused on our streamlined growth portfolio, actively and thoughtfully transitioning brands to more powerful trademarks using a phased approach to bring the consumer with us on the journey.
And we're maximizing shelf space with new product launches and higher-velocity products to drive higher-quality growth.
As we discussed at CAGNY, we're focusing on what we do best: marketing our loved brands in more efficient and effective ways.
campaign kicked off in markets from Asia to Africa to Latin America, the message is resonating with consumers with impressions, views, and engagement levels above last year, and intent-to-purchase metrics showing promising signs.
This campaign aligns with our transition to a more sustainable clear bottle, which is important in helping us achieve our World Without Waste goals.
Our media and creative agency reviews are progressing and we're also executing more targeted opportunities in addition to the big strategic shifts.
For instance, we've taken a scaled, digitized approach to buying trade materials resulting in up to 15% cost reduction and improved user experience, all while offering more consistent, better quality, and sustainable alternatives.
We've extended this pool buying opportunity to our bottlers, many of whom are already on board to share the benefits systemwide.
Our more disciplined innovation approach is yielding results as we balance big bets with intelligent experimentation.
Using our networked approach, we are scaling our best innovations quickly and effectively, while being disciplined with those that don't get the traction required for further investment.
Local experiments like Aquarius with functional benefits and Ayataka Cafe Matcha Latte in Japan, Fanta's exciting mystery flavor innovation in Europe, and package innovations like the 13.2-ounce recycled PET bottle in North America could all be lifted and shifted globally over time.
It's similar to what we're doing this year with our half-flavored Sparkling water.
Our big bets for 2021 include ongoing work to scale our coffee platform under Costa.
We're expanding ready-to-drink coffee in China and taking a portfolio approach to complement our powerful Georgia coffee brand in Japan.
We're also rolling out an enhanced formula and package designed for Coca-Cola Zero Sugar this month in Europe, in Latin America, and across markets globally later this year.
The improved recipe brings its taste even close to that of the iconic Coca-Cola original taste.
This was influenced by consumer insight and our focus on constant improvement.
And despite this enormous success, Coca-Cola Zero sugar still represents a relatively small percentage of the trademark.
And we continue to respond to consumer desires for lower-sugar options and the rollout will be supported by global, occasion-based marketing campaign.
Finally, it's early days but we're excited to come back and report on our expanded experimentation in flavored alcoholic beverages with Topo Chico hard seltzer in Latin America, Europe, and most recently, the U.S.
We also continue to rapidly digitize our ecosystem.
For example, a champ born in South Africa engages with consumers on social media to increase away-from-home transactions.
In China, we've used digital campaigns to harness consumer data to drive traffic and incidents leading to incremental growth.
We're using machine learning and AI tools to stay on top of a rapidly evolving consumer trends and identify emerging needs.
Our dedicated digital transformation structure is leading to strong online to offline growth.
We've seen e-commerce share gains in a key advanced markets like North America, Japan, and Great Britain.
And in markets like Turkey, where the channel is still developing with more than tripled sales and gained almost 10 points of share versus last year.
As always, we're supporting these initiatives with strong revenue growth management and execution.
Through RGM, we continue to capture at-home occasions with multi-pack options in both premium and affordable segments, while expanding distribution of smaller packaging like our sleek cans in China.
And we have affordability plays like our successful refillables in Latin America, the Philippines, and now Africa.
As part of our new organization, we're dedicating more resources to RGM, continuing to raise the bar to even higher standards.
In many markets, we're working with our bottling partners to optimize cooler placement, driving incremental volume through outstanding customer service, our cooler productivity, and innovation.
Our bottling partners are executing strongly.
And together, we are working on initiatives across the enterprise to identify more efficiencies.
We're operating in a networked way, leveraging our platform services organization to scale our collective data, marketing, digital, and supply chain capabilities.
Our system continues to evolve as shown by the pending combination of Coca-Cola European partners and Coca-Cola Amatil.
I'm especially proud of how we are delivering on our purpose as a company.
Every action is guided by our ambition to create a more sustainable business and better shared future that makes a difference in people's lives, our communities, and the planet.
Throughout the pandemic, we've focused on helping communities through relief funds from the company and the Coca-Cola Foundation.
In this next phase, we are supporting vaccination efforts in regions where distribution has been slower.
For instance, in Brazil, our system has partnered with the country's Ministry of Health to co-create a vaccine awareness campaign.
We're using our network to deliver 700,000 doses with vaccine information to more than 350,000 mom-and-pop stores.
Tomorrow, we'll release our 2020 business and ESG report, where we will highlight last year's progress.
While 2020 was a milestone year in terms of meeting and exceeding some previous goals like women's empowerment and global water replenishment, we continue to work toward an even more ambitious agenda.
This includes our 2025 and 2030 packaging goals, our 2030 climate goal, and our new 2030 water security strategy with more details to come later this year.
In conclusion, we're optimistic about the future and bullish about our ability to continue to deliver on the objectives we laid out at the height of the crisis: more consumers, more share, better system economics, and a positive stakeholder impact.
Today, I will highlight our first-quarter performance and go over our top-line and earnings guidance, which we are reiterating.
Then I'll provide a progress update on working capital, our ability to manage through the current commodity environment, and other factors that may impact our outlook.
2021 is off to a good start, with the quarter showing steady sequential monthly improvement.
We're leveraging our learnings and strategic initiatives from 2020 and leaning into growth in a thoughtful way.
Our Q1 organic revenue was up 6%, driven by concentrate shipments up 5% and price/mix improvement of 1%.
While shipments benefited from certain timing impacts and the five additional days this quarter versus last year, unit case volume was flat versus the toughest quarterly compare of 2020, and March volume was in line with 2019 levels, largely driven by strength in Asia Pacific.
Comparable gross margins, although still down year over year, improved sequentially, driven by less pressure from channel and package mix.
While currency was still somewhat of a drag, it was less of a headwind than prior quarters.
Comparable operating margin expanded through ongoing disciplined cost management.
We continue to reintroduce marketing spend in a targeted way, particularly as we ramp up investments in markets that are seeing recovery.
First-quarter comparable earnings per share of $0.55 is an increase of 8% year over year and was driven by top-line growth, margin improvement, and some contribution from equity income, offset by currency headwinds.
Regarding our ongoing tax case with the IRS, there are no material updates since our last report.
Our decisions and actions from last year certainly were not easy, but we are seeing the results of our efforts start to come through, and our organization is embracing the changes as we move forward into the recovery phase.
We stayed very focused on driving a healthy top line, and we remain on a journey to maximize returns, including strong cash flow generation.
We never relented on our cash flow goals and, indeed, have had an even sharper focus on managing capital spend and working capital.
Since we embarked on a journey toward best-in-class working capital performance, we've made great strides in extending our payment terms, generating a working capital improvement of more than $1 billion over two years.
In the same vein, we are implementing accounts receivables factoring programs, which are rolling out across a number of markets, and also looking at initiatives to better manage inventory days.
At the center of these efforts is a robust digitization and automation agenda.
In addition, and you've heard us talk conceptually about the network model, this is a great example of the network in action.
And when you put the right people from different parts of the organization against key initiatives, it delivers a step-change in performance.
Last quarter, we said that despite a rising commodity environment, we expected a relatively benign impact in 2021 given our hedged positions.
While this continues to be the case, we're closely monitoring upward pressure in some inputs such as high-fructose corn syrup, PET, metals, and other packaging materials as they impact us, as well as our bottling partners.
Given the environment, we'll continue to benefit from revenue growth management initiatives.
Through an intelligently diverse price pack architecture, we can produce a range of options that meet the needs of consumers across the income spectrum while also capturing value for customers.
2020 provided great learnings on how to be more logical and data-driven in our promotions, and we'll continue to be purposeful in our approach, driven by the consumer and the strength of our brands.
We'll also continue to pursue productivity across the supply chain, pushing all levers at our disposal.
And as we noted in our release, we now expect currency to be a tailwind of approximately 1% to 2% to the top line and approximately 2% to 3% to comparable earnings per share in 2021 based on current spot rates and our hedge positions.
For the full year, we now expect an underlying effective tax rate of 19.1%.
Putting it all together, our quarterly performance and the momentum we saw in March give us confidence in our ability to achieve our 2021 guidance.
We expect high single-digit organic revenue growth and high single-digit to low double-digit growth in comparable earnings per share.
We still expect recovery to be asynchronous and to see signs of a return to normal in more markets later in 2021.
We are preparing our end-to-end supply chain for stronger demand and will fuel the momentum in recovering markets as they emerge from the pandemic by accelerating investments in our brands.
There's no doubt that uncertainty remains.
Europe continues to see challenges.
Many countries in regions like Latin America and Africa expect further waves and slower vaccine distribution.
And India is seeing a surge in cases and responding with localized lockdowns.
But as we begin to lap the most difficult periods from last year, we feel good about our position and our ability to navigate the environment as a company and as a system.
Based on the lessons we've learned and the agility provided by our new network organization, we remain confident that our actions and the progress we've made will enable us to deliver 2021 earnings at or above 2019 levels.
With that, operator, we are ready to take questions. | total net production in q4 of 2021 averaged approximately 70,000 boepd.
kosmos expects to spend approximately $700 million in capital expenditures in 2022. | 0 |
I'm joined today by Ron Tsoumas, our Chief Financial Officer.
Let's begin with the business highlights on Slide 4.
Our sales for the quarter were $288 million.
Excluding favorable currency translation, our organic growth was up 45% from the prior year.
However, it should be noted that our prior year first quarter was significantly impacted by the pandemic.
In this year's first quarter, our team faced customer demand fluctuations and supply chain challenges.
These included the ongoing semiconductor chip shortage, pandemic-related supply chain disruptions and port congestion, all of which created both sales and margin pressure.
Once again, our team worked diligently to mitigate many of these challenges and we were able to deliver results within our guidance ranges for the quarter.
However, these demand fluctuations and supply chain disruptions continued to require remedial actions, such as expedited shipping and premium component pricing.
As of today, our expectation is that these conditions will last at least until the end of the calendar year.
While we have reaffirmed our guidance for the full year, persistent headwinds could cause our performance to be below the midpoint of the ranges as the situation is very fluid and will remain very challenging.
The sales growth that we realized in the first quarter was due to increased demand across most of our businesses, but was especially focused on the auto and commercial vehicle markets.
We also realized growth in our Dabir business.
However, that business is still being hampered by the pandemic, thus limiting our production or product evaluation opportunities in hospital operating rooms and ICUs.
On an order basis, we had solid awards for EV, cloud computing and e-bike applications.
Focusing on EV, last quarter, we reported that sales into EV applications were 13% of consolidated sales.
This quarter, EV sales were 16% of consolidated sales and we continue to expect that number to be in the mid-teens for fiscal 2022.
Methode's combination of user interface, LED lighting and power distribution solutions is a winning formula in EV.
In the quarter, we further reduced debt, generated positive operating cash flow and continued to return capital to our shareholders.
We have ample liquidity, which also allows us to execute our stock buyback program, under which we purchased $7.6 million of shares in the quarter, and to pay our dividend, which rose from $0.11 to $0.14 per share in the quarter.
We continued to allocate capital per our balanced approach.
Moving to Slide 5.
Methode had another solid quarter of business awards.
These awards continue to capitalize in key market trends like vehicle electrification and cloud computing.
The awards identified here represent some of the key businesses -- business wins in the quarter and represent over $30 million in annual business at full production.
In vehicle electrification, we won awards for power distribution and LED lighting programs.
We continue to win programs with OEMs globally in both auto and commercial vehicle applications.
In non-EV automotive, we were awarded programs for power, lighting and traditional switch applications.
In cloud computing, we saw demand for our power distribution and transceiver products and data center applications.
Lastly, we continue to participate in the growth of e-bikes, which utilizes our proprietary magneto elastic sensor technology.
Building on the prior year, our business awards are delivering on our strategic priority to drive both customer and geographic diversity.
Turning to Slide 6.
As I've mentioned in recent quarters, our business awards over the last couple of years have put us on track in aggregate to replace the sales from the roll off of our largest auto program.
As such our customer and program diversity continues to improve.
Our EV, as well as our commercial vehicle and cloud computing businesses have helped drive our customer diversification.
While GM and Ford have been and are expected to continue to be good customers that have fueled Methode's historical growth, in recent years, we have strategically and systematically broaden our customer base.
Our business outside of GM and Ford grew to two-thirds of our fiscal 2021 total sales.
To conclude, despite the ongoing demand fluctuations and supply chain challenges, we are still in a position to deliver strong organic growth for fiscal 2022.
First quarter sales were $287.8 million in fiscal year '22 compared to $190.9 million in fiscal year '21, an increase of $96.9 million or 50.8%.
The year-over-year quarterly comparisons include a favorable foreign currency impact on sales of $10.3 million in the current quarter.
The increase was mainly due to lower sales in the prior year quarter from the impact of the COVID-19 pandemic and to higher sales of electric and hybrid electric vehicles, which amounted to 16% of sales in the first quarter of fiscal year '22, which was in line with our previous communication that electric vehicles and hybrid electric vehicle sales would comprise mid teens of our fiscal year '22 consolidated sales.
In addition, stronger commercial vehicle sales contributed to the robust sales growth.
First quarter net income increased $8.4 million to $29.1 million or $0.76 per share diluted from $20.7 million or $0.54 per diluted share in the same period last year.
Net income benefited from increased sales and favorable currency translation, partially offset by higher income tax expense, higher costs from supply chain disruption, higher selling and administrative expenses and lower other income.
First quarter gross margins were higher in fiscal year '22 as compared to fiscal year '21, mainly due to increased sales, partially offset by higher material costs, higher logistic costs, including freight and supply chain shortages.
Fiscal year '22 first quarter margins were 24.9% as compared to 23.6% in the first quarter of fiscal year '21.
The negative impact of the supply disruption and higher logistics costs, including freight, on the first quarter of fiscal year '22 gross margin was nearly 300 basis points.
These higher costs that were experienced in the first quarter are expected to continue further in fiscal year '22.
In addition, we anticipate a degree of cost inflation in the remainder of the current fiscal year.
First quarter selling and administrative expenses as a percentage of sales decreased to 11.4% compared to 13.9% in the fiscal '21 first quarter.
The fiscal year '22 first quarter percentage decrease was attributable to increased sales related to the negative impact of COVID-19 pandemic on fiscal '21 sales, partially offset by higher stock-based and performance-based compensation expenses.
The first quarter of fiscal year '22 selling and administrative expenses percentage was in line with our historical norm, which should yield an efficient flow-through from gross margin to operating income.
In addition to the gross margin and selling and administrative items mentioned above, two other non-operational items significantly impacted net income in the first quarter of fiscal year '22 as compared to the comparable quarter last fiscal year.
First, income tax expense in the first quarter of fiscal year '22 was $5.7 million or 16.4% as compared to a net tax benefit of $5.1 million in the first quarter of fiscal year '21.
The effective tax rate was lower in the first quarter of fiscal year '21 due to discrete tax benefits of $7.8 million in the quarter or $0.20 per diluted share.
Without the discrete tax benefits, the effective rate would have been 17.2%.
The year-over-year tax expense increase was $10.8 million.
Second, other income net was lower by $1.6 million, mainly due to lower international government assistance between the comparable quarters.
Shifting to EBITDA, a non-GAAP financial measure.
Fiscal year '22 first quarter EBITDA was $48.5 million versus $29.3 million in the same period last fiscal year.
EBITDA was positively impacted by higher operating income, partially offset by lower other income.
Free cash flow, a non-GAAP financial measure, is defined as net cash provided from operating activities minus capex.
For fiscal year '22 first quarter free cash flow was a negative $6.2 million as compared to a positive $4.8 million in the first quarter of fiscal year '21.
The decrease was mainly due to negative working capital changes, especially inventory, resulting from difficult logistics and higher capital expenditures.
While we experienced negative free cash flow in the first quarter of fiscal year '22, we expect improvement the remainder of the fiscal year.
We anticipate continuing our proven history of consistently generating reliable cash flows, which allow for ample funding of future organic growth, inorganic growth and return of capital to shareholders.
In the first quarter of fiscal year '22, we invested approximately $15.9 million in capex as compared to $11.6 million in the first quarter of fiscal year '21.
The higher first quarter capex is in line with our expectation that capex in fiscal year '22 would be higher than the investment in the prior year estimated to be in the range of $53 million to $57 million.
We have a strong balance sheet and we'll continue utilizing it by continuing investment in our businesses to grow them organically in the future.
In addition, we continue to actively pursue opportunities for inorganic growth and have a measured return of capital to the shareholders.
In the first quarter of fiscal year '22, we reduced gross debt by $4.7 million.
Since our acquisition of Grakon in September 2018, we reduced gross debt by nearly $123 million.
Regarding capital allocation, we recently announced two initiatives.
First, on March 31st, we announced the $100 million share repurchase program, which we executed $7.6 million of repurchases during the first quarter of fiscal year '22.
Since the authorization's approval, we have purchased $15.1 million worth of shares at an average price of $46.45.
In addition, we increased our quarterly dividend from $0.11 to $0.14 per quarterly share, an increase of 27%.
We ended the first quarter with $207.9 million in cash.
As Don mentioned in his remarks, we reaffirmed our previously issued guidance and earnings per share annual guidance.
External events and their related potential impact on our financial results remain an ongoing challenge.
While we have reaffirmed our guidance for the full year, persistent headwinds could cause our performance to be below the midpoint of the ranges as the situation is fluid and will likely remain very challenging.
The revenue range for the full fiscal year '22 is between $1.175 billion to $1.235 billion.
Diluted earnings per share range is between $3.35 to $3.75 per share.
The range is due to the uncertainty from the supply chain disruption for semiconductors and other materials on both Methode and its customers.
From a sales perspective, lower sales could result from the supply disruption to us and/or our customers, which could result in lesser demand for our products or our ability to meet customer demand.
Continued supply chain disruption would also negatively impact gross margins due to additional costs incurred from premium freight, factory inefficiencies and, to a lesser extent, tariffs and other logistic factors, including port congestion.
Higher costs for materials, freight and labor are a constant and dynamic battle, and we are uncertain as to when things will stabilize.
Don, that concludes my comments.
Ken, I believe we're ready to take questions. | compname reports q1 earnings per share $0.54.
q1 earnings per share $0.54.
q1 sales $190.9 million versus $270.2 million.
sees q2 sales $230 million to $250 million.
not providing annual guidance due to mid-term market uncertainty as a result of ongoing pandemic. | 0 |
I'm Steven Sintros, UniFirst's President and Chief Executive Officer.
Actual future results may differ materially from those anticipated, depending on a variety of risk factors.
I want to start the call by saying that our thoughts go out to all the individuals and businesses, continuing to be impacted by the coronavirus pandemic.
This is an unprecedented time for our company, the country and the world, and first and foremost, our thoughts are for the safety and well-being of all those dealing with the impact of this virus.
It goes without saying that the company's focus in the third quarter centered around our pandemic response efforts, including our top priority of ensuring the safety of our Team Partners, while continuing to provide our value-added services to the many essential businesses in our communities.
We as a company as well as our customers continue to adapt to the practical challenges of operating in this ever changing environment.
During the quarter, our results were most impacted by customer closures, primarily the result of state mandated shutdowns of non-essential businesses.
In addition, we have been dealing with higher than normal reductions of wearers and customers who have remained open or recently reopened.
Part of this impact has been driven by the decline in the demand of oil and the corresponding reduction in business activity in the energy dependent markets that we service.
During the quarter, customer closures peaked in mid-April, causing the weekly revenues of our core laundry operations to be down about 18% at that time, from the weekly revenue run rate in the weeks of February and March immediately preceding the disruption.
From that point in April until last week, revenues have been steadily -- have steadily recovered to the point where last week's revenues were down about 8% from pre-pandemic run rates.
This recovery was primarily fueled by the reopening of businesses.
In addition, we have also benefited from the increase in sale of personal protective equipment, primarily face masks and hand sanitizers and soaps.
Of the revenue shortfall that remains, businesses that remain closed or limited, such as restaurants, business services, hotel, schools and entertainment are prominently represented.
As I'm sure you can appreciate, it remains a fluid environment with many states recently reporting increases in many of the metrics that you're using to measure the status of the virus spread.
As a result of the evolving nature of the pandemic and its impact on our communities, our ability to assess the financial impact on our -- the ability to assess the financial impact on our business continues to be limited.
As a result, we are not providing guidance for the remainder of fiscal 2020.
With respect to the third quarter results.
Consolidated third quarter revenues were $445.5 million, a decrease of 1.8% over the same quarter a year ago.
The overall shortfall in revenue was mitigated by a large direct sale of $20.1 million to a large healthcare customer as well as strong revenues from our First Aid segment.
Our consolidated operating margin was 6.2%, and was impacted by the revenue shortfall in our US and Canadian laundry operations as well as numerous costs related to our COVID-19 response efforts.
For example, we instituted certain compensation programs to mitigate the impact of our revenue decline on our service teams' wages as well as to show appreciation to all of our front-line workers for their continued dedication and commitment during the early months of the pandemic.
These programs are temporary in nature and we currently expect that they will begin to phase out in the fourth quarter.
Shane will take you through the details of our financial results shortly.
Although we instituted some reduction in labor and cost containment during the quarter, based on the evolving situation with our customers, our financial strength and our desire to support our employees during these difficult times, we were patient in our approach.
We will continue to be patient as we work to get our arms around the longer term impact of this pandemic.
In the meantime, we will continue to support our employees, our customers, and make decisions in line with improving our business in the long run.
Despite all of the events of the quarter, we continue to generate positive free cash flows and ended the quarter with $421.3 million in cash and cash equivalents on hand and no debt on our books.
As a result, we believe we are well positioned to deal with the adversity that we are facing related to the coronavirus pandemic.
In addition, the pandemic has clearly highlighted the essential nature of our products and services.
We believe the need in the demand for hygienically clean garments in work environments positions our company well to support the evolving economic landscape.
Like many businesses, we expect the quarters ahead to be uneven in bumpy, but we are confident in the company's position to weather the storm and take advantage of a broad economic recovery.
As Steve mentioned, consolidated revenues in our third quarter of 2020 were $445.5 million, down 1.8% from $453.7 million a year ago.
And consolidated operating income decreased to $27.7 million from $60.2 million or 54%.
Net income for the quarter decreased to $21.3 million or $1.12 per diluted share from $47.2 million or $2.46 per diluted share.
Our Core Laundry Operations revenues for the quarter were $388.4 million, down 2.8% from the third quarter of 2019.
Core Laundry organic growth, which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was negative 3.2%.
During the quarter, our revenues were mostly impacted by customer closures related to the coronavirus pandemic as well as related reductions in workforce for customers who remained open.
The company was able to partially offset these declines with a $20.1 million direct sale to a large healthcare customer as well as increased safety and PPE sales.
The result of our customers increased focus on maintaining a hygienically clean and safe work environment for their employees and patrons.
Core Laundry operating margin decreased to 5.1% for the quarter or $19.7 million from 13.4% in prior year or $53.4 million.
The segment's profitability was affected by many items, including the impact of the decline in rental revenues on our cost structure, a higher cost of revenues related to the large $20.1 million direct sale and additional costs the company incurred related to the pandemic.
Some of the more notable items include merchandise amortization, which is expense that is recognized related to rental merchandise that has been placed in service, was up significantly as a percentage of revenues.
This is because our merchandise in service is amortized on a straight-line basis over the estimated service lives of the related merchandise, which average approximately 18 months.
Although our new garment additions into service were down significantly in the quarter, the amortization expense was little changed because of the amortization of prior period expenditures.
As Steve discussed, our number one priority during the quarter was the safety of our employees.
And we sourced a significant amount of safety supplies for internal use.
Over the last few months these products were in high demand and prices were significantly higher than they had been prior to the pandemic.
These prices have recently started to normalize and as a result, we expect that the costs we will incur in subsequent periods will be dramatically less than our current quarter.
We incurred additional costs related to certain employee compensation programs we instituted during the quarter, also discussed by Steve, and some of these programs will continue into the fourth quarter of 2020.
As of last week, our weekly revenues were down about 8% from pre-pandemic run rates, primarily related to customer locations that remained closed.
During the quarter, the company recorded additional reserves for uncollectible accounts receivable, primarily due to the increased risk that these customers will be able to pay their outstanding balances.
These items were partially offset by lower incentive compensation due to revised expectations of the company's growth and profitability in fiscal 2020 as well as lower healthcare, energy, and travel related costs as a percentage of revenues.
Energy costs decreased to 3.4% of revenues in the third quarter of 2020 from 4.2% in prior year.
Revenues from our Specialty Garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, decreased to $36.2 million from $37.3 million in prior year or 3.1%.
This decrease was largely due to lower direct sale activity in the quarter, partially offset by growth in our cleanroom and European nuclear operations.
The segment's operating margin increased to 17.6% or $6.4 million from 14.4% or $5.4 million in the year ago period.
This increase was primarily due to bad debt recovery from a customer in bankruptcy and lower travel-related costs.
These items were partially offset by higher merchandise expense and costs incurred responding to the pandemic, including employee compensation and amounts paid for internal use safety supplies.
As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services.
Our First Aid segments revenues increased to $20.9 million from $16.6 million in prior year or 26%.
This increase was primarily due to increased demand for the segment safety and PPE offerings.
Operating margin decreased to 7.8% from 8.4%, primarily due to higher merchandise costs as a percentage of revenues.
We continue to maintain a solid balance sheet and financial position, with no long-term debt and cash, cash equivalents and short-term investments totaling $421.3 million at the end of our third quarter of fiscal 2020.
Cash provided by operating activities for the first three quarters of the fiscal year was $205.4 million, an increase of $6.0 million from the comparable period in prior year.
For the first three quarters of fiscal 2020, capital expenditures totaled $91.2 million.
We continue to scrutinize our capital expenditures due to ongoing uncertainty related to COVID-19.
As we move through the remainder of our fiscal year, we will continue to evaluate the timing of our growth-related capital expenditures, taking into consideration the revenue recoveries that we continue to see.
During the quarter, we capitalized $3.3 million related to our ongoing CRM project, which consisted of license fees, third-party consulting costs, and capitalized internal labor costs.
In the first three quarters of our fiscal year, we have capitalized a total of $9.9 million related to this project.
During the third quarter of fiscal 2020, we repurchased 46,667 shares of common stock for a total of $7.5 million under our previously announced stock repurchase program.
The company has not repurchased any additional shares since early in this fiscal quarter, due to the uncertainty related to COVID-19.
As of May 30, 2020, we had repurchased a total of 314,917 shares of common stock for a total of $52.3 million under the program.
And we would now be happy to answer any questions that you may have. | q3 earnings per share $1.12.
q3 revenue $445.5 million versus refinitiv ibes estimate of $382.5 million.
continue to believe that ability to assess financial impact on business remains limited.
not providing guidance for remainder of our fiscal 2020. | 1 |
We have adapted procedures with the safety of our employees and customers in mind, while also continuing to serve our residents and customers in a difficult environment.
We have seamlessly transitioned to work-from-home in our corporate and regional offices.
The effort and dedication that our teams have shown during these past five weeks is admirable.
We have successfully navigated through new regulatory protocols and operating environments at an impressive pace, while maintaining our high quality standards.
I am proud of our team.
Our first quarter was strong with an NOI growth rate of 5.2%.
We saw strong demand on the MH side of the business, with a 4.9% increase in rental revenue.
We wrapped up our snowbird season and have a total RV revenue growth rate of 4.8%.
The drivers in that revenue were a 7.4% growth rate in annual revenue, a 7% growth rate in seasonal revenue and a 7.6% decline in transient revenue.
Let me first address our MH business.
Since the middle of March, we have taken steps to increase social distancing, include closing the common area amenities and opening our offices by appointment only.
We have been and remain focused on ensuring the health and well-being of our employees, residents, members and guests.
Our customers have appreciated the importance of these steps and have followed the new guidelines.
We have an occupancy rate of 95% in our core portfolio.
We have often focused on the occupancy rate, but at this time, I think it's important to focus on the quality of our resident base.
Our residents are homeowners who have generally paid cash for their home.
Our residents are committed to their communities, they care about the community and they actively display a pride of ownership in their homes.
Our overall occupancy consists of less than 6% renters.
We see our renters as future owners.
In 2019, 33% of all home sales were the result of a renter conversion.
In April, we saw continued strength in MH platform, with 96% of our residents paying us timely.
We have a deferral plan in place for April rental payments for those residents facing financial hardship due to the impact of COVID-19.
Moving to our RV business, we have had an acquisition strategy over the years of buying RV resorts that are heavily focused on annual and seasonal revenue streams.
80% of our RV revenue is longer term in nature and 20% come from our Transient customers.
Our properties have been impacted by local shelter and place orders which call for reduced or eliminated travel activity inside a jurisdiction.
Our RV annual customer generally has developed roots at the community.
The annual customer tends to own a park model, resort cottage or has an RV on the site that has add-ons that create a more permanent footprint.
For the first quarter, the annual revenue grew by 7.4%, comprised of 5.8% rate and 1.6% occupancy.
Our northern RV resorts generally open in April.
Our annual customers at these locations pay a deposit in advance and then complete their payment when they arrive for the season.
These are summer homes and weekend getaways for our customers.
This year the opening of 46 of our RV resorts has been delayed until at least the end of April.
While we have begun collecting the annual rent due, the delay in opening has caused a change in the normal payment pattern for these customers.
Our seasonal revenue stream comes from customers who have a reservation of 30 days or more.
Our seasonal revenue primarily comes from our sunbelt locations with 70% of the revenue generated between November and March.
The first quarter, which represents half of the full year anticipated seasonal revenue grew by 7%.
The second quarter seasonal revenue is generally our slowest quarter with approximately 15% of the overall seasonal revenue in 2019, occurring in the second quarter.
Our transient business represents under 6% of our total revenue.
We have always said that this piece is the most difficult to forecast.
Our transient customer stays with us an average of three nights.
The transient business serves an important role for us as we seek to convert that transient customer to a seasonal or annual customer.
Most of our RV resorts have a small portion of their overall revenue stream focused on the transient business, which becomes a lead generator for the rest of the business.
Towards the end of March, we stopped accepting transient reservations for the remainder of March and all of April.
As a result, the following shelter-in-place orders, we reduced activity to protect our employees and residents from any potential risks associated with transient traffic.
At this point, the shelter-in-place orders are limiting our ability to accept transient reservation.
With respect to our membership business, we have seen strong demand from the members during this pandemic.
As shown in our supplemental, cash receipts are similar to this year to last year at this time.
We made the decision to withdraw guidance because we are operating under unprecedented conditions and thought it would be more meaningful for us to provide an outlook when there are updates to regulatory protocol.
Our business has held up extremely well during these circumstances.
We are seeing the best of humanity from our employees, residents, guests and members.
We have often described a sense of community at our properties and we have seen these in full display over the past month.
We see neighbors caring for neighbors, working together to support the greater community.
The demand is high for our property that is seen by our April results.
Based on feedback that we have received, our customers are very much looking forward to enjoying the outdoors lifestyle at our properties this season.
The ELS team has reacted to an evolving climate in an impressive manner, and for that I'm grateful.
I will provide an overview of our first quarter results, highlight operating performance in April, including the results of our recent annual property and casualty insurance renewal and discuss our balance sheet and liquidity position.
For the first quarter we reported $0.59 normalized FFO per share.
Our results reflect the initial impact of COVID-19, which primarily affected our transient RV business.
Core MH rent growth of 4.9% includes 4.4% rate growth and approximately 50 basis points related to occupancy gains.
Core RV rental income from annuals and seasonals outperformed expectations for the quarter.
Our transient revenues, which were pacing ahead of guidance through February ended the quarter down 7.6% compared to last year.
As Marguerite mentioned, we began closing our reservation grid to incoming customers in mid-March.
First quarter membership dues revenue, as well as the net contribution from upgrade sales were higher than guidance.
Dues revenues increased 6.1% as a result of rate increases and an increase in our paid member count of 4.3%.
During the quarter we sold approximately 3,200 Thousand Trails camping passes.
We upgraded 727 members during the quarter, 15% more than the first quarter last year.
Core utility and other income was in line with guidance for the quarter and includes the year-over-year increase in real-estate tax pass-throughs resulting from the Florida reassessments we discussed in January.
First quarter core property operating maintenance and real-estate tax expenses were unfavorable to forecast, mainly as a result of higher than expected R&M expenses.
We incurred expenses to recover from storms in California and certain northern properties.
In summary, first quarter core property operating revenues were up 5.4% and core NOI before property management increased 5.2%.
Property operating income from the non-core portfolio, which includes our Marina portfolio, as well as assets acquired during 2019 was $2.8 million in the quarter.
Overall, the acquisition properties continue to perform in line with expectations.
Property management and corporate G&A were higher than guidance in the quarter because of the timing of expenses related to certain administrative matters.
Other income and expenses generated the net contribution of $1.4 million for the quarter.
Ancillary, retail and restaurant operations were impacted by COVID-19 and were lower than expected.
Interest and related amortization was $26.1 million and includes the impact of the refinancing we completed during the quarter.
I'll provide some detail on this transaction shortly when I discuss our balance sheet.
In addition to describing our operational response to the pandemic, the update highlights cash collections and liquidity as indicators of April performance.
In our MH properties, we've collected 96% of April rent.
The collection rate is net of approximately $180,000 of rent deferral requests we've approved.
Our largest population within the MH portfolio age qualified properties have the highest collection rate at 97% collected.
Our renter population, while a very small portion of our portfolio, has the lowest rate of collection with approximately 91% collected.
At this time of the year, our RV collection efforts are focused on the northern resorts, annual customers as they typically are returning to begin their season of camping.
As detailed in the update, 46 of these properties have delayed openings, which has affected typical payment patterns.
To-date, we have collected approximately 61% of the April and May annual RV renewals as compared to 71% collected at this time last year.
Our seasonal revenue in April was impacted by cancellations as certain customers chose to leave early.
However, we also saw customers extend their stays and are currently showing a revenue decline of 12% in April.
Our last update relates to our recent property and casualty insurance renewal.
On April 1st, we completed the renewal of our property general liability, workers comp and other ancillary insurance programs.
While terms and conditions are substantially similar to the expiring policies, adverse market conditions resulted in a higher than expected premium increase of 27%.
The resulting insurance expense for the remainder of the year is approximately $1.1 million higher than our expectation.
Now, I'll discuss our refinancing activity in the first quarter, highlight current secured debt market conditions and provide some comments on our balance sheet, including our current liquidity position.
During the quarter, we closed a $275.4 million secured facility with Fannie Mae.
The loan is a fixed interest rate of 2.69%.
which is the lowest coupon we've seen on a secured 10-year deal in the MH, RV space.
With the proceeds, we've repaid our secured debt maturing in 2020, which carried a weighted average interest rate of 5.2% and the outstanding balance in our line of credit.
The remaining proceeds funded working capital, primarily our expansion activity.
As I provide an update on the secure debt market, bear in mind that the current environment is quite volatile.
Conditions have been changing rapidly and we anticipate they'll continue to do so for some time.
That said, current secured financing terms available for MH and RV assets range from 55% to 75% LTV, with rates from 3% to 3.75% for 10-year money.
As we've seen in challenging times in the past, sponsor strength is highly valued by lenders and ELS continues to be highly regarded.
High quality aged qualified MH will command preferred terms from participating lenders.
In these uncertain times, we decided it was prudent to increase our available cash balance.
As noted on our COVID-19 update page, we have a current available cash balance of $126 million with no debt maturing in 2020.
We continue to place high importance on balance sheet flexibility and we believe we have multiple sources of capital available to us.
Our debt to EBITDA and our interest coverage are both around 4.9 times.
The weighted average maturity of our outstanding secured debt is almost 13 years. | withdrawing our full year 2020 guidance.
qtrly normalized funds from operations $0.59 per common share. | 1 |
Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website.
I'm going to start today with the end in mind, strong quarter and a great first half of the year, giving us confidence as we target the high end of the guidance range.
Rejji will walk through the details of the quarter, and I'll share what the strong results mean for 2021 earnings.
Needless to say, I'm very pleased.
An important gene sale of EnerBank at 3 times book value, moving from noncore to the core business with a strong focus on regulated utility growth.
The sale of the bank provides for greater financial flexibility, eliminating planned equity issuance from 2022 to 2024.
And in the end, Reggie will share how we have reduced our equity issuance need for 2021 in today's remarks.
Furthermore, with the filing of our integrated resource plan, you can see the path for more than $1 billion into the utility, again, without equity issuance.
Not only is there visibility to that investment, that's certainly in the time line for review.
I'm excited about this IRP.
It's a remarkable plan.
Many have set net zero goals.
We have industry-leading net zero goals and this IRP provides a path and is an important proof point in our commitment.
We are leading the clean energy transformation.
It starts with our investment thesis.
This simple but intentional approach has stood the test of time and continues to be our approach going forward.
It is grounded in a balanced commitment to all our stakeholders and enables us to continue to deliver on our financial objectives.
With the sale of EnerBank and the plan to exit coal by 2025, our investment thesis gets even simpler.
But now it's also cleaner and leaner.
We continue to mature and strengthen our lean operating system, the CE Way, which delivers value by reducing cost and improving quality, ensuring affordability for our customers, and our thesis is further strengthened by Michigan's supportive regulatory construct.
All of this supports our long-term adjusted earnings per share growth of 6% to 8%, and combined with our dividend, provides a premium total shareholder return of 9% to 11%.
All of this remains solidly grounded in our commitment to the triple bottom line of people, planet and profit.
As I mentioned, our integrated resource plan provides the proof points to our investment thesis, our net zero commitments and highlights our commitment to the triple bottom line by accelerating our decarbonization efforts, making us one of the first utility in the nation to exit coal or increasing our renewable build-out, adding about eight gigawatts of solar by 2040, two gigawatts from the previous plan.
Furthermore, this plan ensures reliability, a critical attribute as we place more intermittent resources on the grid.
The purchase of over two gigawatts of existing natural gas generation allows us to exit coal and dramatically reduces our carbon footprint.
Existing natural gas generation is key.
And like we've done historically with the purchases of our Zeeland and Jackson generating stations.
This is a sweet spot for us where we reduce permitting, construction and start-up risk.
It is also thoughtful and that is not a 40- to 50-year commitment that you would get with a new asset, which we believe is important, as we transition to net zero carbon.
And, yes, on other hand, our plan is affordable for our customers.
It will generate $650 million of savings, essentially paying for our transition to clean energy.
This is truly a remarkable plan.
It is carefully considered and data-driven.
We've analyzed hundreds of scenarios with different sensitivities and our plan was thoughtfully developed with extensive stakeholder engagement.
I couldn't be more proud of this plan and especially the team that put it together.
We've done our homework, and I'm confident it is the best plan for our customers, our coworkers, for great state of Michigan, of course, you, our investors to hit the triple bottom line.
The Integrated Resource Plan is a key element of Michigan's strong regulatory construct, which is known across the industry as one of the best.
It is a result of legislation designed to ensure a primary recovery of the necessary investments to advance safe and reliable energy in our state.
It enables us and the commission to align on long-term generation planning and provide greater certainty as we invest in our clean energy transformation.
We anticipate an initial order for the IRP from the commission in April and a final order in June of next year.
The visibility provided by Michigan's regulatory construct enables us to grow our capital plan to make the needed investments on our system.
On Slide six, you can see that our five-year capital plan has grown every year.
Our current five-year plan, which we'll update on our year-end call includes $13.2 billion of needed customer investment.
It does not contain the upside in our IRP.
The IRP provides a clear line of sight to the timing and composition of an incremental $1.3 billion of opportunity.
And as I shared on the previous slide, the regulatory construct provides timely approval of future capital expenditures.
I really like this path forward.
And beyond our IRP, there is plenty of opportunity for our five-year capital plan to grow given the customer investment opportunities we have in our 10-year plan.
Our backlog of needing investments is as vast as our system, which serves nearly seven million people in all 68 counties of Michigan's Lower Peninsula.
We see industry-leading growth continuing well into the future.
So where does that put us today?
The bank sale and now the IRP filing provide important context for our future growth and positioning of the business.
Let me share my confidence.
For 2021, we are focused on delivering adjusted earnings from continuing operations of $2.61 to $2.65 per share, and we expect to deliver toward the high end of that range.
For 2022, we are reaffirming our adjusted full year guidance of $2.85 to $2.87 per share.
Given the strong performance we are seeing this year, the reduced financing needs next year and continued investments in the utility, there is upward momentum as we move forward.
Now many of you have asked about the dividend.
We are reaffirming again no change to the $1.74 dividend for 2021.
As we move forward, we are committed to growing the dividend in line with earnings with a target payout ratio of about 60%.
It's what you expect, it's what you own it, and it is big part of our value.
I will offer this.
Our target payout ratio does not need to be achieved immediately, it will happen naturally, as we grow our earning.
Finally, I want to touch on long-term growth rate, which is 6% to 8%.
This has not changed.
It's driven by the capital investment needs of our system, our customers' affordability and the need for a healthy balance sheet to fund those investments.
Historically, we've grown at 7%.
But as we redeploy the proceeds from the bank, we will deliver toward the high end through 2025.
I'll also remind you that we tend to rebase higher off of actuals.
We have historically either met or exceeded our guidance.
All in, a strong quarter, positioned well for 2021 with upward momentum and with EnerBank and the IRP, it all comes together nicely positioned for the long term.
Before I walk through the details of our financial results for the quarter, you'll note that throughout our materials, we have reported the financial performance of EnerBank as discontinued operations, thereby removing it as a reportable segment and adjusting our quarterly and year-to-date results in accordance with generally accepted accounting principles.
And while we're on EnerBank, I'll share that the sale process continues to progress nicely, as the merger application was filed in June with the various federal and state regulators will be evaluating the transaction for approval, and we continue to expect the transaction to close in the fourth quarter of this year.
Moving on to continuing operations.
For the second quarter, we delivered adjusted net income of $158 million or $0.55 per share, which excludes $0.07 from EnerBank.
For comparative purposes, our second quarter adjusted earnings per share from continuing operations was $0.09 above our second quarter 2020 results, exclusive of EnerBank's earnings per share contribution last year.
The key drivers of our financial performance for the quarter were rate relief, net of investment-related expenses, recovering commercial and industrial sales and the usual strong tax planning.
Year-to-date, we delivered adjusted net income from continuing operations of $472 million or $1.64 per share, which excludes $0.19 per share from EnerBank and is up $0.37 per share versus the first half of 2020, assuming a comparable adjustment for discontinued operations.
All in, we're tracking well ahead of plan on all of our key financial metrics to date, which offers great financial flexibility for the second half of the year.
The waterfall chart on Slide nine provides more detail on the key year-to-date drivers of our financial performance versus 2020.
As a reminder, this walk excludes the financial performance of EnerBank.
For the first half of 2021, rate relief has been the primary driver of our positive year-over-year variance to the tune of $0.36 per share given the constructive regulatory outcomes achieved in the second half of 2020 for electric and gas businesses.
As a reminder, our rate relief figures are stated net of investment-related costs, such as depreciation and amortization, property taxes and funding costs at the utility.
The rate relief related upside in 2021 has been partially offset by the planned increases in our operating and maintenance expenses to fund key initiatives around safety, reliability, customer experience and decarbonization.
As a reminder, these expenses align with our recent rate orders and equate to $0.06 per share of negative variance versus 2020.
It is also worth noting that this calculation also includes cost savings realized to date, largely due to our waste elimination efforts through the CE Way, which are ahead of plan.
We also benefited in the first half of 2021 from favorable weather relative to 2020 in the amount of $0.06 per share and recovering commercial and industrial sales, which coupled with solid tax planning provided $0.01 per share of positive variance in aggregate.
As we look ahead to the second half of the year, we feel quite good about the glide path to delivering toward the high end of our earnings per share guidance range, as Garrick noted.
As always, we plan for normal weather, which in this case, translates to $0.02 per share of negative variance, given the absence of the favorable weather experienced in the second half of 2020.
We'll continue to benefit from the residual impact of rate relief, which equates to $0.12 per share of pickup.
And I'll remind you, is not subject to any further MPSC actions.
We also continue to execute on our operational and customer-related projects, which we estimate will have a financial impact of $0.21 per share of negative variance versus the comparable period in 2020 given anticipated reinvestments in the second half of the year.
We have also seen the usual conservatism in our utility non-weather sales assumptions and our nonutility segment performance, which as a reminder, now excludes EnerBank.
All in, we are pleased with our strong start to the year and are well positioned for the latter part of 2021.
Turning to our financing plan for the year.
I'm pleased to highlight our recent successful issuance of $230 million of preferred stock at an annual rate of 4.2%, one of the lowest rates ever achieved for a preferred offering of its kind.
This transaction satisfies the vast majority of funding needs of CMS Energy, our parent company for the year and given the high level of equity content ascribed to the security by the rating agencies, we have reduced our planned equity issuance needs for the year to up to $100 million from up to $250 million.
As a reminder, over half of the $100 million of revised equity issuance needs for the year are already contracted via equity forwards.
It is also worth noting that given the terms and conditions of the EnerBank merger agreement in the event EnerBank continues to outperform the financial plan prior to the closing of the transaction, we would have a favorable purchase price adjustment related to the increase in book equity value at closing, which could further reduce our financing needs for 2021 and provide additional financial flexibility in 2022.
Closing out the financing plan, I'll also highlight that we recently extended our long-term credit facilities by one year to 2024, both at the parent and the utility.
Lastly, I'd be remiss if I didn't mention that later today, we'll file our 10-Q, which will be the last 10-Q owned by Glenn Barba, our Chief Accounting Officer, who most of you know from his days leading our IR team.
Glenn announced his retirement earlier this year after serving admirably for nearly 25 years at CMS, which included him signing over 75 quarterly SEC filings during his tenure.
As we've highlighted today, we've had a great first half of the year.
We are pleased to have delivered such strong results.
We're positioned well to continue that momentum into the second half of the year as we focus on finalizing the sale of the bank and moving through the IRP process.
I'm proud to lead this great team, and we can't wait to share our success as we move forward together.
This is an exciting time at CMS Energy.
With that, Rocco, please open the lines for Q&A. | compname announces first quarter earnings results of $1.21 per share, reaffirms 2021 guidance.
q1 adjusted earnings per share $1.21.
q1 earnings per share $1.21.
compname says reaffirmed its guidance for 2021 adjusted earnings of $2.83 - $2.87 per share. | 0 |
I'm pleased that you're joining us for DXC Technology's first-quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our executive vice president and CFO.
In accordance with SEC rules, we provided a reconciliation of these measures to their respective and most comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
Today's agenda will begin with a quick update on our solid Q1 performance, which continues to show that revenue, adjusted EBIT margin, book-to-bill and non-GAAP earnings per share all have a positive trajectory compared to past quarters.
During our Investor Day in June, we gave you additional insights into the steps of our transformation journey, and those steps are: inspire and take care of our colleagues, focus on our customers, optimize costs, seize the market and build a strong financial foundation.
I will give updates on each step, and then hand the call over to Ken to share our Q1 financial results, guidance and more details on how we are building a strong financial foundation.
Regarding our Q1 performance, our revenues were $4.14 billion, and our adjusted EBIT margin was 8%.
This represents the fourth straight quarter of both revenue stabilization and sequential margin expansion, and we expect both trends to continue in Q2.
Book-to-bill for the quarter was 1.12.
This is the fifth straight quarter that we delivered a 1.0 or better book-to-bill, and we expect our success of winning in the market to continue in Q2.
Our non-GAAP earnings per share was $0.84 in the quarter, which is up 300%, as compared to $0.21 that we delivered in Q1 of FY '21.
The positive trajectory of all four of these numbers gives us confidence that our playbook is working.
As a refresher, our playbook has three phases.
The stabilization phase was completed in FY '21.
This phase enabled us to make great progress with our colleagues, customers, on revenue, margin, book-to-bill and reducing our debt.
We are now focused on the foundation phase.
This phase focuses on the steps that will allow us to deliver growth.
The goals of this phase are: first, continue to increase our employee engagement, all while we attract and retain highly talented colleagues; second, stabilize year-on-year organic revenue; third, expand adjusted EBIT margins; fourth, consistently deliver a book-to-bill number of 1.0 or greater, with a nice mix of new work and renewals; and finally, under Ken's leadership, deliver a financial foundation that increases discipline and improves our cash flow and earnings power.
Now I will discuss the good progress we are making on each step of our transformation journey, beginning with inspire and take care of our colleagues.
We are executing a people-first strategy.
Attracting and retaining talent is fundamental to enable our growth.
Our refreshed leadership team has deep industry experience and is delivering.
Brenda, who is our chief marketing officer, is our newest addition.
Brenda is a strategic results-oriented leader who brings deep marketing experience to DXC.
75% of our leadership team is now new to DXC and bringing in talent based on their personal credibility as talent follows talent.
What the team is finding is that the new DXC story is resonating in the market, and new-hires are wanting to join DXC because they see the opportunity to progress their careers with a company that's on the right trajectory.
We mentioned during our investor call that nearly 50% of our vice presidents across the company are new to DXC within the last 22 months.
Also, we are investing in our people.
This quarter, we rewarded high performance by paying annual bonuses that benefited roughly 45,000 of our colleagues.
In Q2, we are planning merit increases that will benefit roughly 77,000 of our colleagues.
In addition to these investments, we are doing a great job of taking care of our colleagues and their families during the pandemic.
This focus on our colleagues is unique and builds trust with them, increases employee engagement, allows us to compete for talent and enables us to deliver for our customers.
Focus on our customers is the second step of our transformation journey.
Our investment in our customers is the primary driver of revenue stabilization.
It was clear from their comments that the new DXC story is resonating with them because we are delivering.
These are all large global companies, and they are saying that their IT estates are important.
In fact, they use the word critical.
Our strategy of delivering ITO services builds customer intimacy and develops trust that when our customers want to further transform their business, they turn to us, and allows us to move them up the enterprise technology stack.
Additional evidence that our strategy is working is the nice progress we have made on our GBS business, along with the cloud and security layer of our GIS business.
All of this gives us confidence that we will deliver on our financial commitments.
Now let me turn to our cost optimization program.
We continue to do well, optimizing our costs and delivering for our customers without disruption.
These levers have helped us expand our margin going from 7.5% last quarter to 8% this quarter.
You will hear from Ken that we expect to continue to expand margins in Q2.
Next, seize the market is where we are focused on cross-selling to our existing customers and winning new work.
The 1.12 book-to-bill that we delivered this quarter is evidence that our plan is working.
In Q1, 57% of our bookings were new work and 43% were renewals.
You will see that we are running specific sales campaigns.
An example of these campaigns is ITO modernization, which is focused on improving the performance of our customers' IT estates.
Another example is our campaign to show our customers how to think about cloud, which combines on-prem, private cloud and public cloud technology.
Our ability to deliver a consistent book-to-bill of 1.0 in each of the last five quarters is evidence that these sales campaigns are working and that we can win in the IT services industry.
This momentum and success in the market gives us confidence that we will deliver another book-to-bill of 1.0 or greater in Q2.
Turning to our financial performance on Slide 12.
For the quarter, DXC exceeded the top end of our revenue, margin and earnings guidance, and continued to deliver a strong book-to-bill.
GAAP revenue was $4.14 billion, $10 million higher than the top end of our guidance range.
Adjusted EBIT margin was 8% in the quarter, an improvement of 380 basis points as compared to the prior quarter.
In Q1, bookings were $4.6 billion for a book-to-bill of 1.12, the fifth straight quarter of a book-to-bill greater than one.
Moving on to Slide 13.
Our Q1 non-GAAP earnings per share was $0.84 or $0.08 higher than the top end of our guidance, benefiting $0.05 from a lower tax rate.
Restructuring and TSI expenses were $76 million, down 58% from prior year.
Free cash flow was a use of cash of $304 million, as compared to a use of cash of $106 million in the prior year.
We expect free cash flow to improve significantly as the year progresses.
As the next slide shows, our Q1 FY '22 performance continues our trajectory as we deliver on our transformation journey.
Starting with organic growth progression, we went from approximately 10% decline in the first three quarters of FY '21 to down 6.5% in the fourth quarter and now down to a decline of 3.7%.
This is a 40% improvement from the prior quarter.
Our previous organic revenue growth calculation was not performed in this manner.
As a result, we have revised the organic growth rates for the prior-year periods in our earnings deck and have further supplemented our organic calculation to include all the information to support the calculation, providing you complete transparency.
This change does not yield a meaningful difference to our historically reported organic revenue growth rates, trajectory or guidance.
Adjusted EBIT margin expanded 380 basis points.
Excluding the impact of dispositions, margin expanded almost 600 basis points.
We continue to market with five consecutive quarters of a book-to-bill greater than one, and lastly, non-GAAP earnings per share quadrupled.
Now moving to our GBS business, composed of analytics and engineering, applications and business process services.
Revenue was $1.9 billion in the quarter.
Organic revenue growth was positive 2% as compared to prior year.
In terms of quarterly progression, organic revenues declined about 6% to 7% in the first three quarters of FY '21, declined 3.4% in the fourth quarter and turned to positive 2% this quarter.
GBS segment profit was $272 million with a 14.4% profit rate, up 450 basis points from the prior year.
GBS bookings for the quarter were $2.4 billion for a book-to-bill of 1.29.
As you have seen for a number of quarters, the demand for our GBS offerings, the top half of our technology stack have been quite robust and now yielding positive organic revenue growth.
Turning to our GIS segment, consisting of IT outsourcing, cloud and security, and modern workplace.
Revenue was $2.3 billion, down 9.1% year over year on an organic basis.
We are seeing the rate of decline moderate this quarter despite the headwinds from our modern workplace business.
GIS segment profit was $131 million with a profit margin of 5.8%, a 480-basis-point margin improvement over the prior-year quarter.
GIS bookings were $2.2 billion for a book-to-bill of 0.97, compared to 0.77 in the prior year.
It is safe to say revenues continue to stabilize and demonstrate that with improved customer intimacy and delivery, our revenue is not running away, allowing us to build our growth foundation.
Now I will break down our segment results, GBS and GIS, into the layers of our enterprise technology stack, starting with GBS.
Analytics and engineering revenues were $482 million, up 12.9% as compared to prior year.
We continue to see high demand for our offerings with a book-to-bill of 1.32 in the quarter.
Applications also continued to demonstrate solid progress with revenue of $1.246 billion, growing organically almost 1%.
Applications also continues its strong book-to-bill at 1.32.
Business process services revenues were $118 million, down 13% compared to the prior-year quarter with a book-to-bill of 1.13.
Cloud and security revenue was $549 million, up 4.9% as compared to the prior year.
The cloud business is benefiting from increased demand associated with our hybrid cloud offerings.
Book-to-bill was 0.85 the quarter.
IT outsourcing revenue was $1.13 billion, down 9% as compared to prior year.
To put this decline in perspective, last year, this business declined almost 20% year over year.
We expect this momentum to continue and organic declines to further abate as the year progresses.
Modern workplace revenues were $577 million, down 19.7% as compared to prior year.
Book-to-bill was 1.0 in the quarter.
As you may recall, modern workplace was part of our strategic alternatives and was not part of our transformation journey until recently.
As a result, we previously disclosed that the performance would be uneven as we invest in the business, enhancing our offerings and innovating the end-user experience.
As our transformation journey takes hold, we expect modern workplace performance to improve similar to the trend we have seen with our ITO business.
One of our key initiatives to drive cash flow and improve earnings power is to wind down restructuring in TSI costs.
We expect to reduce this from an average of $900 million per year over the last four years to $550 million in FY '22 and about $100 million in FY '24.
On Slide 19, we detail our efforts to strengthen our balance sheet.
We are proud of what we achieved on this front, reducing our debt by $7 billion, while improving our net debt leverage ratio to 0.9 times.
Further, we have reached our targeted debt level of $5 billion with relatively low maturities through FY '24.
From our improved balance sheet, let's move to cash flow for the quarter.
First-quarter cash flow from operations totaled an outflow of $29 million.
Free cash flow for the quarter was negative $304 million.
As you likely realize, with Mike's leadership, we will continue to make decisions to better position the company for the longer term, creating a sustainable business.
Certain of these decisions impacted cash flow this quarter.
As our guidance anticipated, we plan to take certain actions that impacted the Q1 cash flow.
We remain on track to deliver our full-year free cash flow guidance of $500 million.
Let's now turn to our financial priorities on Slide 21.
We are working to build a stronger financial foundation and use that base to drive the company forward in a disciplined and rigorous fashion, unleashing DXC's true earnings power.
Our second priority is to have a strong balance sheet.
We achieved our targeted debt level.
We are encouraged by our almost 50% year-over-year interest expense reduction.
We continue to focus on reducing interest expense and are evaluating refinancing options given the advantageous interest rate environment.
Third, we will focus on improving cash flow.
During the quarter, we paid $88 million to draw to conclusion a long-standing $3 billion take-or-pay contract for IT hardware.
These types of contracts are not efficient, and we are reducing our exposure.
Additionally, we paid down $300 million of capital leases and asset financing in order to allow us to dispose of IP hardware purchased under the previously mentioned take-or-pay arrangement and realizing tax deduction once we dispose of the unutilized assets.
Given our relatively low borrowing cost, it makes less sense to enter into capital leases as the borrowing costs are higher and creates other complexities.
We continue to reduce capital lease and asset financing origination from approximately $1.1 billion in FY '20 to $450 million in FY '21 and believe that we will remain at that level or lower for FY '22.
As we continue to curtail capital lease origination, our average quarterly lease payment will reduce from about $230 million a quarter in FY '21 to about $170 million near term.
Our efforts to limit capital leases does create upward pressure on capital expenditures.
Though, on balance, we expect to reduce cash outflows for both capital leases and capital expenditures over time.
Lastly, we terminated our German AR securitization program, negatively impacting cash flow by $114 million for the quarter.
Going forward, this will result in interest savings, strengthen our balance sheet, but more importantly, it will bring us closer to our customers as cash collections is tied to their success.
Fourth, we will reduce restructuring and TSI expense, improving our cash flow.
Fifth, as we generate free cash flow, we will appropriately deploy capital to invest in our business and return capital to our shareholders, all the while continuing to maintain our investment-grade credit profile.
During the quarter, we executed $67 million of stock buybacks to offset dilution, taking advantage of what we believe was an attractive valuation in the market.
I should note, we continue to make progress with our efforts to optimize our portfolio, unlocking value as we divest noncore assets, including both businesses and facilities.
We expect to continue these efforts.
Our results today include the benefit from the sale of assets, partially offset by other discrete items, and the headwind of 30 basis points of margin associated with the disposition of our healthcare provider software business.
Moving on to second-quarter guidance on Slide 22.
Revenues between $4.08 billion and $4.13 billion.
This translates into organic revenue declines of down 1% to down 3%.
Adjusted EBIT margins of 8% to 8.4%.
Non-GAAP diluted earnings per share in the range of $0.80 to $0.84.
As we look forward to the rest of the year, I would note that we expect $175 million of tax payments in Q2 related to the gains on dispositions.
We also updated our FY '22 interest guidance to approximately $180 million, a $20 million improvement; and reduced our full-year non-GAAP tax rate by 200 basis points to 26%.
As noted on Slides 23 and 24, we are reaffirming our FY '22 and longer-term guidance.
Lastly, we expect to see further improvement in the quarterly year-over-year organic revenue growth rates as we move through the year.
Let me leave you with three key takeaways.
First, I couldn't be more pleased with the trajectory of the business.
Our improvement in revenue, margins and earnings per share is evident, and we expect this success to continue.
Second, we have momentum and continue to win in the market.
We expect our progress in driving a book-to-bill of over 1.0 to continue.
Third, our financial foundation is coming together nicely under Ken's leadership.
We have made great progress on debt reduction, reducing our restructuring and TSI expense, and delivering on our capital allocation priorities.
These three key takeaways show that we have good momentum, we are building the foundation for growth, and we are confident that we will deliver on our financial commitments. | qtrly total revenue of $105.5 million, an increase of 34%.
sees q1 revenue of $89 to $91 million, a year-over-year increase of 33% at midpoint.
sees q1 adjusted ebitda in range of $21 to $23 million, representing a 24% margin at midpoint.
sees 2022 revenue of $429 to $437 million, a year-over-year increase of 30% at midpoint.
sees 2022 adjusted ebitda in range of $126 to $134 million, representing a 30% margin at midpoint. | 0 |
Matt will then review our fourth-quarter results in some detail, then Rusty will conclude with comments on our outlook for the first half of fiscal 2022.
On our April investor call, we referenced rising inflation across our P&L at structurally high single digits with some select spikes of 150% to 200%.
Someone in our call today thought that by now raw material costs and availability would have gotten better to the point of pressure from some customers to give back price.
That was wrong in April and way wrong today.
Raw material costs have increased to levels on average in the high teens.
More importantly, certain critical raw material shortages across our industry are negatively impacting our ability to produce and meet market demand.
In Q4, this raw material availability cost us an estimated $100 million in revenue.
It's likely to cost us more in Q1 and we anticipate having more raw material availability lost production days in Q1 this year than we had from the impact of COVID shutdowns in Q1 last year.
Our full-year consolidated sales increased 11% to $6.1 billion, our EBIT margin increased by 150 basis points, and adjusted EBIT was up 26.5%.
Operating cash flow climbed nearly 40% to a record $766.2 million, and our adjusted EBIT margin climbed to 12.8%, which was also a record.
Our MAP to Growth program has been the principal driver of this strong financial performance.
The successful execution of our MAP to Growth operating improvement plan, especially in light of the incredible disruptions caused by the COVID pandemic and more recently by unprecedented supply chain challenges, is a true testament to the dedication and resilience of the RPM associates worldwide.
At the program's onset, we recognized that RPM had reached the point where a center-led approach in selected areas of the business was required to take it to the next level of growth.
In manufacturing, we formed a center-led team that has created a lasting culture of manufacturing excellence and continuous improvement disciplines across the organization.
This team launched our MS-168 manufacturing system, which is allowing us to produce better products more quickly, more cost-effectively, and more sustainably.
In addition, we reduced our global manufacturing footprint by 28 facilities, consolidating production to more strategically advantageous plants.
Our original target was 31 plants but consolidation efforts were slowed by the COVID pandemic.
We expect to exceed the original target in the coming year.
We also created a center-led procurement team that has consolidated material spending across our operating companies, negotiated improved payment terms with our supplier base, and has helped us reduce working capital.
These initiatives have created millions of dollars in cost savings.
With stronger supplier partnerships, longer-term contracts, we are in a much better position to secure necessary raw materials and control costs through the current raw material supply shortages than we would have been just three years ago.
Additionally, we took significant steps to streamline many of our administrative functions.
Through our financial realignment, we consolidated 46 accounting locations, improved controls, developed more effective and efficient accounting processes, and reduced costs.
Similar initiatives were undertaken in our IT infrastructure as we have migrated 75% of our organization to one to four group-level ERP platforms.
Additionally, we have reduced the number of data centers we manage by shifting systems and hardware to the cloud, and we are creating a number of platforms for centralized data-driven decision making.
Over the course of the three-year MAP to Growth program, we have returned $1.1 billion of capital to shareholders through a combination of cash dividends and share repurchases.
Aside from a significantly improved profit margin profile and stronger cash generation, as reflected in the cumulative total return generated by RPM, which has exceeded our peer group over the three years of the MAP to Growth program, the lasting legacy of our MAP to Growth operating improvement plan is the revolutionary change in how people work together at RPM.
Our operating company leadership is managing today with a broader view of RPM as a whole, allowing us to better leverage resources.
Another permanent change has been the operational disciplines we developed that will continue to generate improvements in profitability, cash flow, and operating efficiency well into the future.
Perhaps more significant has been our ability to maintain our unique entrepreneurial growth-oriented culture, evidenced by the fact that our revenues continue to grow at or above industry averages throughout the MAP to Growth program.
The real heroes behind the MAP to Growth success were our associates worldwide, particularly our frontline workers who kept our manufacturing and distribution centers operating during the COVID pandemic.
We also owe a debt of gratitude to my good friend and one of RPM's great operating leaders, Steve Knoop, who is the architect of the MAP to Growth program and passed away prematurely in 2019.
Additionally, I'd like to recognize Mike Sullivan, vice president of operations and chief restructuring officer; Tim Kinser, vice president of operations procurement; and Gordy Hyde, vice president of operations, manufacturing, who successfully executed the program with an intense focus and strong leadership that were integral to delivering these results and instilling a permanent focus on operating efficiency and continuous improvement into our culture.
While we have reached the 2020 MAP to Growth conclusion, there will be some runoff from the MAP to Growth program in fiscal '22, during which we expect to capture approximately $50 million in incremental savings.
We will also be leveraging the lessons learned from this program to chart a course for 2025.
Over the next six to 12 months, we will be working on a MAP 2.0 program in conjunction with our operating leaders.
We remain fully committed to achieving our long-term goal of a 16% EBIT margin, and we will be sharing more information about our progress for a new program in the coming quarters.
Please keep in mind that my comments will be on an as-adjusted basis.
For the fourth quarter, we generated consolidated net sales of $1.74 billion, an increase of 19.6%, compared to the $1.46 billion reported in the year-ago period.
Sales growth was 13.9% organic, 2.2%, the result of recent acquisitions, and 3.5% due to foreign currency translation tailwinds.
We are very pleased with this strong top-line growth in light of raw material shortages and supply chain disruptions.
Adjusted diluted earnings per share increased 13.3% to $1.28, compared to $1.13 in the fiscal 2020 fourth quarter.
Our adjusted EBIT was $236.2 million, compared to $213.6 million during the year-ago period, which was an increase of 10.6%.
Keep in mind that last year's fourth quarter was impacted by the pandemic's onset, which created the extraordinary situation where our non-operating segment reported a profit due to lower medical expenses, incentive reversals, and other factors.
On the other hand, during this year's fourth quarter, we experienced higher insurance costs due to business interruptions created by hurricanes and the winter storm Uri as well as higher incentives tied to improve performance.
If you exclude the impact of our nonoperating segment from both years, our four operating segments combined generated impressive sales growth of 19.6% and adjusted EBIT growth of 27.5% as they overcame margin pressures and supply availability challenges.
Turning now to our segment performance for the quarter.
Our construction products group generated record results.
Construction, maintenance, and repair activity accelerated in the U.S. during the quarter and even more so in international markets.
Construction products group net sales were a record $629.4 million during the fiscal 2021 fourth quarter, which was an increase of 33.2%, compared to fiscal 2020 fourth-quarter net sales of $472.4 million.
Organic growth was 28.4% and foreign currency translation provided a tailwind of 4.8%.
Leading the way for the segment were our businesses in North America that provided commercial roofing materials and concrete admixtures and repair products as well as our European businesses, all of which generated record sales.
Demand for our Nudura Insulated Concrete Forms remained at elevated levels due to the relatively low installed cost, in addition to the environmental and structural benefits as compared to traditional building methods.
Adjusted EBIT was a record $110.4 million, compared to adjusted EBIT of $77.3 million reported during the year-ago period.
This represents an increase of 42.7%.
The bottom line was boosted by volume leveraging, savings from our MAP to Growth program, and higher selling prices.
Our performance coatings group also benefited from the release of pent-up demand for the construction, maintenance, and repair of structures in the U.S. and abroad, which has leveraged into strong financial results.
The segment's net sales were $283.3 million during the fiscal 2021 fourth quarter, which was an increase of 20.5%, compared to the $235.1 million reported a year ago.
Organic sales increased 12.9% and acquisitions contributed 2.9%.
Foreign currency translation increased sales by 4.7%.
This segment had been particularly challenged through the pandemic because of its greater exposure to international markets and the oil and gas industry as well as a greater reliance on facility access to apply its products.
Points of strength in the performance coatings group were its businesses providing commercial flooring systems and North American bridge and highway products as well as recovery in its international businesses.
Adjusted EBIT was $31 million during the fourth quarter of fiscal 2021, compared to $23.7 million during the year-ago period, representing an increase of 31.2%.
Segment earnings increased due to higher sales volumes, the MAP to Growth program, and pricing, which helped to offset raw material inflation.
Our consumer group reported record net sales of $628.9 million during the fourth quarter of fiscal 2021, an increase of 2%, compared to net sales of $616.2 million reported in the fourth quarter of fiscal 2020.
Organic sales decreased 3.8% since this was the first quarter in which we comped against the surge in demand at the beginning of the pandemic.
Acquisitions contributed 3.8% to sales.
Foreign currency translation increased sales by 2%.
During the first three quarters of this fiscal year, our consumer group sales and earnings have grown rapidly as it served the extraordinary demand for DIY home improvement products by consumers who were homebound during the pandemic.
As more Americans became vaccinated and were no longer confined to their homes, DIY home improvement activity began to slow from its torrid pace during the quarter, though the pace of sales remained higher than the pre-pandemic levels.
In international markets, many of which still have stay-at-home orders in place, they remain quite strong.
Fiscal 2021 fourth-quarter adjusted EBIT was $93.6 million, a decrease of 10.4%, compared to adjusted EBIT of $104.5 million reported during the prior-year period.
Helping to partially offset the cost pressures were selling price increases and savings from our MAP to Growth program, some of which was invested in advertising programs to promote new products.
The specialty products group reported record net sales of $202.8 million during the fourth quarter of fiscal 2021, which increased 49.9%, compared to net sales of $135.2 million in the fiscal 2020 fourth quarter.
Organic sales increased 46.2% while acquisitions contributed 0.7% to sales and foreign currency translation increased sales by 3%.
For the second quarter in a row, our specialty products group generated the highest organic growth among our four operating segments.
Its results have improved sequentially over the past three quarters, with excellent top- and bottom-line results by nearly all of its businesses, including those providing coatings for recreational watercraft, OEM equipment, wood, food, and pharmaceuticals as well as cleaning and restoration equipment and chemicals.
Adjusted EBIT was a record $36.3 million in the fiscal 2021 fourth quarter, an increase of 395%, compared to adjusted EBIT of $7.3 million in the prior-year period.
Its record results were driven by recent management changes, increased business development initiatives, and improving market conditions.
Lastly, I have a few comments on our liquidity.
Our fiscal 2021 cash flow from operations, as Frank mentioned, was a record $766.2 million, compared to last year's record of $549.9 million.
This is primarily due to continued good working capital management and margin improvement initiatives from our MAP to Growth program.
At year end, our total liquidity was $1.46 billion and included $246.7 million of cash and $1.21 billion in committed available credit.
Our net leverage ratio, as calculated under our bank agreements, was 2.17 as of May 31, 2021.
This was an improvement, as compared to 2.89 a year ago.
With a healthy balance sheet, we continue to use some of our record cash flow to reduce debt.
Total debt at the end of fiscal 2021 was $2.38 billion, compared to $2.54 billion a year ago.
And as Frank mentioned, we are also investing more aggressively in growth initiatives, including advertising, operating improvements and acquisitions, plus we are rewarding our shareholders through our cash dividend and our stock repurchase program.
Since the beginning of the fourth quarter, we repurchased approximately 38 million of stock.
As we discussed last quarter, various macroeconomic factors are creating inflationary and supply pressures on some of our product categories.
As a result of the lag impact from our FIFO accounting methodology, we expect that our fiscal 2022 first-half performance will be significantly impacted by inflation throughout our P&L, which is currently averaging in the upper teens.
We are working to offset these increased costs with incremental MAP to Growth savings and commensurate selling price increases, which we will continue to implement as necessary.
More importantly, the limited availability of certain key raw material components is negatively impacting our ability to meet demand.
Our most significant challenge for the first half of fiscal 2022 will be in our consumer group.
Several factors are compressing margins in this segment.
First, selling price negotiations took place last spring, and material costs have rapidly risen further since then.
Secondly, insufficient supply of raw material, several of which are severely constrained due to trucking shortages or force majeure being declared by suppliers, has led to intermittent plant shutdowns and low productivity.
Lastly, the Consumer Group has outsourced production in several cases to improve service levels at the expense of margins.
To address these first-half margin challenges, the consumer group is cutting costs and working with customers to secure additional price increases.
We expect that our other three segments will successfully manage supply challenges to continue their robust top and bottom-line momentum from the fourth quarter and carry it into the first half of fiscal 2022.
Turning now to Q1 of fiscal 2022.
We expect consolidated sales to increase in the low to mid-single digits compared to Q1 of fiscal 2021 when sales grew 9%, creating a difficult year-over-year comparison.
Additionally, supply constraints have slowed production in some product categories.
Despite these factors, our revenue growth is expected to continue in three of our four segments.
We anticipate our construction products group and performance coatings group to generate sales increases in the high single or low double digits.
The specialty products group is expected to generate double-digit sales increases.
These sales projections assume that global economies continue to improve.
Sales in our consumer group are expected to decline double digits as it continues to experience difficult comparisons to the prior year when organic growth was up 34%.
However, the consumer group's fiscal 2022 Q1 sales are expected to be above the pre-pandemic record, indicating that we have expanded the user base for our products since then.
We expect our Q1 adjusted EBIT to grow in three of our four segments, with the exception again being our consumer group.
Based on the anticipated decline in this one segment, our Q1 consolidated adjusted EBIT is expected to decrease 25% to 30% versus a difficult prior-year comparison when adjusted EBIT in last year's first quarter was up nearly 40%.
Moving to Q2 of fiscal 2022, we expect good performance again with the exception of the consumer group.
As discussed earlier, the challenges in this segment are anticipated to result in a significant decline in adjusted EBIT against difficult prior-year comparisons when sales were up 21% and adjusted EBIT was up 66%.
We anticipate that the Q2 decline in consumers will be mostly offset by the combined EBIT growth in our three other segments, leading to consolidated adjusted EBIT being roughly flat versus another difficult prior-year comparison when consolidated adjusted EBIT was up nearly 30%.
After we work through the temporary supply chain challenges, we expect to emerge with the consumer group that has broader distribution and a larger user base than it had pre-pandemic.
For our other three segments, good results are expected to continue due to recent strategic changes in our specialty products group continuing to pay off and the catch-up of deferred maintenance driving additional business at our construction products group and performance coatings group. | q2 adjusted earnings per share $0.79.
q2 sales rose 10.3 percent to $1.64 billion.
expects to generate double-digit consolidated sales growth in fiscal 2022 q3 versus last year's q3 sales.
anticipates that q3 earnings will be affected by ongoing raw material, freight and wage inflation.
q3 sales volumes to be impacted by operational disruptions by surging omicron variant of covid-19 & raw material shortages. | 0 |
Joining me on the call today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver; and our Chief Financial Officer, Olivier Leonetti.
In discussing our results during the call, references to adjusted earnings per share EBITA and EBIT exclude restructuring and integration costs as well as other special items.
Additionally, all comparisons to the prior year are on a continuing ops basis.
Let me kick things off with a brief update, spotlighting a few specific areas related to our strategic initiatives and Olivier will provide a detailed review of Q3 results and update you on our forward outlook.
Let's get started on Slide 3.
Another quarter of solid results with demand accelerating across most of our end markets as a robust recovery continues to expand.
Q3 represents our easiest comparison of the year, but I am encouraged to see the underlying sequential improvement experienced in the first half continue to accelerate in the third quarter, with many of our businesses back to operating at pre-pandemic volume levels.
Nonresidential construction markets continue to recover, led by the ongoing strength in retrofit activity tied to demand for healthy building solutions.
New construction is also beginning to show signs of stabilization and the inflection in order trends for our longer cycle project businesses sets us up well as we look to next year and beyond.
Our service business has recovered, and we continue to transform this business through our digital service strategy to drive higher levels of recurring revenue and an improved growth profile.
This recovery has not been without its challenges.
We have managed through significant headwinds related to persistent supply chain disruptions, component shortages, labor constraints and continued inflation.
While these dynamics have created some revenue pressure, which will continue near term, the pace and composition of order growth in the quarter provides confidence that we will remain on track over the medium and long term.
As you may recall, in an effort to mitigate the severe impact of the volume declines during the height of the pandemic, we implemented significant cost actions last year.
These actions provided a material boost to profitability in the prior year period and led to best-in-class decrementals.
Lapping that difficult comparison in managing the return of some of those variable costs, coupled with navigating current capacity constraints and supply disruptions, has resulted in significant margin pressure.
That said, we were able to deliver better-than-expected margin expansion in the quarter and remain on-track to meet our targets for the full year, which is a remarkable accomplishment in the current environment.
At the same time, we remain laser-focused on executing our strategy, which is driving continued share gains.
As we will discuss over the next few slides, we continue to advance our efforts to deliver innovative solutions to help customers enhance building performance and reduce costs, while achieving their net-zero carbon and renewable energy goals.
This will be accomplished through our ongoing digital transformation enabled by OpenBlue and accelerating our offerings to deliver the outcomes our customers need.
Continuing our trend to highlight a few notable achievements over the past quarter, recently, we launched the latest offering under our OpenBlue platform Net Zero Buildings as a Service.
I will spend more time on this announcement in a few minutes as this represents an important step forward in enabling our customers' achievement of decarbonization and sustainability commitments.
We have now filed our 200th U.S. patent application and received 90 U.S. patents for OpenBlue energy optimization innovations.
We announced another strategic partnership with DigiCert, which will allow us to leverage their IoT device manager, an industry-leading automated digital certificate platform to encrypt data and authenticate the identity of users, devices or services within a building.
This will further expand Johnson Controls' already robust capabilities around cybersecurity risk management, providing our customers peace of mind and resilient solutions that ensure hardware, software and communications remain trusted throughout the building life cycle.
Together with the announcement of our partnership with Pelion last quarter, OpenBlue solutions users will have confidence that their devices are safely and securely connected to the network.
About two weeks ago, we launched the Community College partnership program aimed at expanding and advancing associate degree and certificate programs in HVAC, fire and security and digital building automation systems across the U.S. Over the next five years, Johnson Controls will grant $15 million to nonprofit community colleges in support of academic programs that train and develop the next generation of skilled trades technicians.
In addition to the funding, Johnson Controls employees will be increasing their support through volunteer and mentorship programs and also provide a pathway for our student internships and entry-level employment opportunities.
Lastly, we are proud to have received additional recognition for our efforts to ensure we create a diverse and inclusive work environment, recently being named as one of the best companies for multicultural women by Seramount.
We are also proud to be a part of the full 2021 list of best employees for diversity as well as the Financial Times European Climate Leaders list, further demonstrating our commitment to sustainability.
Vijay is transforming our software organization, strengthening our engineering development processes and expanding the solution set of our OpenBlue platform.
We are excited to have Vijay on board.
He is already having an incredible impact internally, and you will hear more from him at our upcoming Investor Day.
Let's move to Slide 5 for a brief update on trends in our service business.
As we have shared with you over the past couple of quarters, accelerating growth in service has been a strategic initiative underway since well before the pandemic.
Ultimately, the actions we are taking are designed to drive 200 or 300 basis points of above-market growth, which would place us firmly in the mid-single-digit annual growth range for the entire $6-plus billion in revenues.
Our approach is multifaceted, simultaneously focusing on increasing our contractual service attach rate, reducing attrition and driving higher revenue per user while transforming our offerings through digital.
Enabling higher digital content and connecting our installed base compounds our ability to create higher levels of recurring revenue over time.
In the quarter, service revenue increased 11%, in line with the rebound we expected with double-digit growth across all three regions.
Order growth also accelerated, as expected, up 13%.
And our attachment rate year-to-date has now improved close to 400 basis points, already achieving our guidance range for the full year.
We expect to continue this pace going forward, again, aided by our digital services and solutions, which were up mid-teens in the quarter.
Please go to Slide 6.
I referenced our new OpenBlue offering, Net Zero Buildings as a Service back on Slide 4, and I thought I would spend a few minutes highlighting the importance of this launch.
Not only does this offering fulfill an immediate need as expressed by our customers, it also represents the next phase in the evolution of our digital, smart buildings offerings, which will drive our shift toward increased deployment of higher recurring as-a-service revenue models.
Our broad Building Systems portfolio and market-leading capabilities and expertise in ESCO projects combined with the OpenBlue software platform, uniquely positions Johnson Controls to provide customers with guaranteed outcomes and risk management models to achieve their emission reduction commitments.
Based on our high level of customer engagement and the extensive market-backed research conducted leading up to the development of this solution, the need for a trusted partner to deliver a one-source seamless road map to net-zero and the urgency to reduce carbon emissions is clear.
What is also clear is that digitally enabled solutions that tie together the IT and OT in the built environment are the only ways to provide these road maps.
And nearly $250 billion, sustainability and decarbonization is a once-in-a-generation opportunity and we are excited about our role in leading these critical trends.
Net Zero Buildings as a Service includes a full portfolio of sustainability offerings tailored to schools, campuses, data centers, healthcare facilities as well as commercial and industrial verticals.
It leverages a game-changing new solution, Net Zero Advisor, which delivers turnkey, AI-driven tracking and reporting of sustainability metrics and helps building operators ensure improved carbon reduction and renewable energy impacts of their buildings.
We also leveraged the full OpenBlue suite of connected solutions and services offered through flexible risk-sharing models that enable tailored deal structures where end users pay for outcomes rather than assets.
Turning quickly to Slide 7.
Just a few examples of customer wins tied to the theme of decarbonization and Net Zero.
I won't go through each of these.
But in every example, Johnson Controls is providing unique solutions to solve the outcomes our customers are looking for.
Some of these new relationships are borne out of our digital partner ecosystem while some are long-standing relationships where we are converting existing building automation systems to OpenBlue or advancing customers' ongoing sustainability initiatives.
In all of these, we are driving energy efficiency, reducing energy consumption, driving cost savings and emission reductions.
Our teams remain dedicated to achieving top-tier performance despite some of the short-term challenges we are facing.
We are watching closely the resurgence of COVID cases and the potential impacts renewed lockdowns and supply chain constraints may or may not have on project activity.
And from a supply chain perspective, we are confident in our ability to manage access to critical materials and components.
Although lead times and conversion cycles are stretching, we believe conditions will begin to improve over the next couple of quarters.
We are successfully leveraging our pricing capabilities to offset inflation, and we still expect to remain price cost positive for the year.
At the same time, we are making tremendous progress on our strategic initiatives to accelerate top line growth and improve profitability, including indoor air quality, decarbonization, smart buildings, digital services and our productivity program, and we continue to reinvest in our portfolio, both organically and inorganically.
We believe we are extremely well positioned to outperform throughout the next cycle.
Continuing on Slide 8.
Organic sales accelerated in Q3, up 15% overall, in line with the guidance we provided last quarter as growth in Global Products and our field businesses accelerated.
The strength in Global Products was across the board from continued high level of demand in residential end markets, including both our global HVAC equipment and security products to the anticipated rebound in commercial HVAC and Fire & Security.
Segment EBITA increased 21% versus the prior year and segment EBITA margin expanded 30 basis points to 16.2%.
Better leverage on higher volumes, the benefit of our SG&A actions and strong execution more than offset the significant headwind from the reversal of temporary cost reductions and a modest headwind from negative price cost.
EPS of $0.83 increased 24%, benefiting from higher profitability as well as a lower share count.
On cash, we had another strong quarter.
Free cash flow in the quarter was $735 million, flat versus the prior year despite the planned uptick in capex.
I will review further details of our performance later in the call.
Orders for our field businesses increased 18% year-over-year, accelerating at a faster pace than expected, led by continued strength in retrofit project activity, which we include in install, but also stabilization in new construction activity.
Service orders recovered above pre-pandemic level, up 13%, led primarily by improving conditions for our transactional service business.
Backlog grew 7% to $10 billion with service backlog up 5% and installed backlog up 7%.
Conversion rates in our service backlog continued to accelerate.
Our installed backlog flow is improving, particularly given the rebound in retrofit activity, which turns more quickly.
Turning to our earnings per share bridge on Slide 10.
Let me touch on a few key items.
Operations were a $0.16 tailwind versus the prior year, driven by higher volumes and favorable mix, partially offset by price cost and the reversal of prior year mitigating cost actions.
Just to further emphasize the magnitude of the headwinds from the temporary actions.
Excluding this impact, underlying incrementals in Q3 were just over 30%.
We're on track with our SG&A productivity program, which equated to a benefit of around $0.03.
Since we spoke last time, we have already begun taking some of the necessary actions to achieve the savings related to our COGS program, which will begin impacting the P&L in fiscal 2022.
We are well on-track to achieve our savings targets for fiscal '21 and beyond.
My commentary will also refer to the segment end market performance included on Slide 12.
North America revenues grew 8% organically with solid growth in both service and install.
Service revenues were higher in all domain, driven by a sharp rebound in our transactional service business, which increased nearly 30%.
Installed demand, which is the area of our business that was most impacted by supply chain disruptions, continues to be driven by shorter cycle retrofit and upgrade projects in addition to easier prior year comparisons.
By domain, commercial applied HVAC revenue grew mid-single digits, while Fire & Security increased low double digits in the quarter.
We had another strong quarter in performance infrastructure, which also grew revenues low double digits.
This business has a leading position in the ESCO market, which is well positioned to address customers' decarbonization needs.
Segment margin decreased 70 basis points year-over-year to 14.7% as North America experienced the most headwinds from the reversal of temporary cost given the majority of the action in the prior year related to furloughs and other employee compensation-related expense.
Orders in North America accelerated on a sequential basis and grew 18% versus the prior year with mid-teens growth in Fire & Security and performance infrastructure.
Commercial HVAC orders were up over 20% overall, driven by strong retrofit activity with equipment orders up over 50%.
Backlog to $6.2 billion increased 6% year-over-year.
Revenue in EMEALA increased 17% organically, led by strong recovery in installed activity.
Non-resi construction grew more than 25% in the quarter, with most verticals returning to 2019 levels, led by increased demand for energy-related infrastructure projects.
Fire & Security, which accounts for nearly 60% of segment revenues inflected sharply, growing at a mid-20s rate in Q3 and surfacing 2019 levels.
Industrial refrigeration grew 20% and commercial HVAC and controls grew high single digits.
By geography, revenue growth in Europe accelerated to nearly 25%, while the Middle East declined low double digits and Latin America increased 10%.
Segment EBITA margins increased 250 basis points, driven by volume leverage and the benefit of SG&A actions.
Orders in EMEALA accelerated further, increasing 22% in the quarter with strong growth in Fire & Security and Commercial HVAC.
APAC revenues increased 14% organically with install and service increasing by the same amount.
Commercial HVAC and controls revenue grew mid-teens, primarily driven by the ongoing recovery we are seeing in China.
EBITA margins declined 380 basis points year-over-year to 11.8% as the benefit of volume leverage was more than offset by the significant temporary cost mitigation actions taken in the prior year and geographic mix.
APAC orders grew 14%, driven by continued strength in Commercial HVAC in China and recovery in controls business in Japan.
Economic conditions outside of China remain mixed with uncertainty increasing as ongoing and renewed lockdown restrictions across parts of Southeast Asia, Australia and part of Japan following rise in COVID cases and continued delays in the rollout of vaccines.
Global Products revenue grew 21% on an organic basis in the quarter, in line with what we initially expected despite incremental headwinds related to COVID lockdown in Asia and the short-term supply chain restrictions.
In aggregate, we continue to gain share across most of our portfolio.
Our global Residential HVAC business was up 16% in the quarter, with strong growth in all regions.
North America resi HVAC grew mid-teens in the quarter, slightly ahead of our expectations, benefiting from a stronger sell-through demand, particularly in April and May.
Our JCH Residential HVAC business was up high teens, led by strong share gains in Japan and Taiwan as part of a successful effort to attain the number-one residential share position in those markets.
Although not reflected in our revenue growth, our iSense joint venture grew revenue 44% year-over-year in Q3, expanding our leading shares in China.
Commercial HVAC sales improved significantly up more than 20% with our indirect applied business up more 25%.
Light commercial industry up over 20%, led by the recovery in North America and VRF up high single digits.
Fire & Security products growth was above 30%, led by continued strength in our security business, which grew over 40% in the quarter.
Commercial fire detection and suppression products were up low to mid-20s on easier year comparisons and the stabilization in key vertical markets.
EBITDA margin expanded 140 basis points year-over-year to 20.9% as volume leverage, positive mix increased equity income and the benefit of SG&A actions more than offset the significant temporary cost actions taken in the prior year as well as current price cost pressure.
Turning to Slide 13.
As expected, corporate expense increased significantly year-over-year of an abnormally low level to $70 million.
For the full year, we now expect corporate expense to be in the range of $280 million to $285 million, slightly below the low end of the prior guide.
For modeling purposes, we have included an updated outlook for some of our below-the-line items.
I would point out that amortization expense now reflects the impact of Silent-Aire.
Turning to our balance sheet and cash flow on Slide 14, starting with the balance sheet at the top of the page.
Similar to last quarter, no significant changes versus the prior period other than the net reduction in cash due to the closing of the Silent-Aire transaction.
Our balance sheet remains healthy with leverage of roughly 1.8 times, still below our targeted range of 2 times to 2.5 times.
On cash, we generated $735 million in free cash flow in the quarter, bringing us to nearly $1.7 billion year-to-date.
This is a significant improvement compared to our normal year-to-date seasonality and has been driven by solid trade working capital management and the timing of capex and order payments.
We expect a much lower conversion level in the fourth quarter given the reversal of some timing benefits.
For the full year, we expect free cash flow conversion to be approximately 105%.
During the third quarter, we repurchased a little more than 5 million shares for roughly $340 million, which brings us to around 19 million shares year-to-date, completing our $1 billion program.
We expect to repurchase an incremental $350 million of shares in Q4.
For the full year, we're raising our guidance once again and now target adjusted earnings per share in the range of $2.64 to $2.66.
This puts the midpoint at the high end of our previous earnings per share guidance of $2.58 to $2.65.
Based on our strong performance year-to-date and the continued underlying momentum we are seeing in most of our end markets, we continue to expect organic sales growth in the mid-single digits.
Segment EBITA margins are tracking toward the high end of our most recent range, and we now expect 80 to 90 basis points of expansion for the full year, which includes a 10-basis point headwind related to the acquisition of Silent-Aire.
Based on the full year guide, Q4 adjusted earnings per share is expected to be in the range of $0.86 to $0.88, which assumes mid-single-digit organic revenue growth and 30 basis points of segment EBITA margin expansion.
We made the decision to host the event virtually.
Registration details will be available over the next couple of weeks. | johnson controls expects q2 adjusted earnings per share $0.62 to $0.64.
expects q2 adjusted earnings per share $0.62 to $0.64.
q1 adjusted non-gaap earnings per share $0.54 from continuing operations excluding items.
q1 gaap earnings per share $0.54 from continuing operations.
qtrly sales of $5.9 billion increased 10% compared to prior year on an as reported basis, and up 8% organically.
reaffirms fiscal 2022 adjusted earnings per share guidance of $3.22 to $3.32.
sees q2 organic revenue up high-single digits year-over-year. | 0 |
Avner will review our financial performance and provide trends and key assumptions for the balance of 2021 with closing remarks from Steve.
This will be followed by Q&A.
A replay of today's call will be available for the next seven days.
I would now like to call over to our President and Chief Executive Officer, Steve Kaniewski.
Before we recap our second quarter results, I would like to share some opening comments.
Like many companies, we have faced unprecedented levels of cost inflation, especially raw materials and transportation since the beginning of the year.
These levels are pervasive and must be accounted for in-market pricing.
So, it has been an imperative for us to quickly increase prices globally across all of our businesses.
Current economic trends lead us to believe that inflation will not mitigate in the near term, especially for durable goods and we will continue to take additional pricing actions in all segments as needed while inflationary pressures continue.
For example, in North America, Irrigation, this year we've raised price five times on irrigation systems, totaling more than 30% inclusive of upcoming increases.
And then Utility, utilizing our pricing mechanisms, we've raised price seven times on steel monopoles.
As we have demonstrated over the past few years, price leadership is a strategic priority for us and will continue to be in all of our served markets.
I want to commend them on the improvement in ship complete and on-time metrics, even as our business is accelerating.
We're proud of our team's persistent focus and we expect to continue building on the strong momentum going forward.
Record sales of $894.6 million increased $205.8 million or nearly 30% compared to last year, an increase more than 26% on a constant currency basis.
Sales growth was realized in all segments, most specifically in Irrigation and Utility Support Structures.
Starting with Utility, sales of $267.9 million grew $36.5 million or 15.8% compared to last year.
Higher volumes were driven by strong broad-based demand from ongoing investments in grid hardening and modernization, as well as renewable energy generation.
Moving to Engineered Support Structures, record sales of $269.4 million increased $16 million or 6.3% compared to last year.
Favorable currency and pricing impacts as well as sales growth in wireless communication products and components were slightly offset by anticipated lower North American transportation market volumes.
Global lighting and transportation sales grew 3.3% as pricing improved in all regions, and international markets benefited from increasing stimulus and infrastructure investments, especially in Europe and Australia.
Wireless communication products and components sales grew 7.2% compared to last year.
Carrier spending and support of 5G build-outs continues to drive strong demand globally, as evidenced by significantly higher sales of our small cell integrated products.
Favorable pricing also contributed to sales growth.
I want to take a moment to congratulate our ESS team on delivering a record quarter of sales in operating income.
I'm especially proud of our commercial teams for their demonstrated price leadership during this inflationary environment.
Turning to Coatings, sales of $98.2 million grew $18.2 million or 22.7% compared to last year and improved sequentially from last quarter due to improving end market demand, favorable pricing and currency impacts.
During second quarter, we commenced operations at our new greenfield Coatings facility near Pittsburgh, Pennsylvania, built with enhanced processes to generate less heat and humidity and providing additional recycling opportunities.
This facility aligns well with our ESG principles while serving the growing demand for new infrastructure in this region.
Moving to Irrigation, record global sales of $282 million grew $131.3 million or 87.2% compared to last year with sales growth across all served markets, including more than 35% growth in our technology sales.
Higher volumes and favorable pricing were driven by the continued strength of Ag market fundamentals and deliveries for the large Egypt project.
In North America, sales of $156.1 million grew 57.6% year-over-year.
Strong market fundamentals and improved net farm income projections continue to positively impact farmer sentiment generating strong order flow.
Significantly higher volumes, higher average selling prices and higher industrial tubing sales, all contributed to sales growth.
International sales of $125.9 million grew 1.4 times compared to last year, led by the ongoing delivery of the Egypt project, strong European market demand and record sales in Brazil.
Our sales through the second quarter have exceeded full-year 2020 revenue, a testament to our market leadership in this region.
Regarding our project pipeline in Africa, we recently were awarded more than $20 million of additional projects from new customers in Egypt, Sudan and Rwanda demonstrating our market leadership, global operations footprint and project management capabilities.
Turning to Slide 5, during the quarter, we completed the acquisition of Prospera Technologies, an award winning global leader in AI and machine learning.
For those who attended our virtual Investor Day in May, you will recall how we outlined our strategic pillars for long-term profitable growth.
Accelerating innovation through investments in recurring revenue services is one of the critical components of our industrial tech growth strategy.
Through this acquisition, together Valmont and Prospera have created the most global vertically integrated AI company in agriculture, immediately providing highly differentiated solution focused on in-season crop performance that is able to go beyond traditional irrigated acres.
No one else in the industry can offer this kind of solution.
Prospera brings advance agronomy and unprecedented visibility to the field.
Their technology is currently being used on over 5,300 fields on a variety of crops including corn, soybeans, potatoes, wheat, onions, alfalfa and tomatoes.
Growers are very excited about this technology as evidenced by strong adoption rates and the critical need for growers to reduce inputs while increasing yields, aligning well with our ESG principles of conserving resources and improving life.
Through Prospera solution, vision and talented team, we are moving to the next stage of agricultural development.
Today, approximately half of our irrigation technology sales are generated from recurring revenue services.
With this acquisition, we expect those particular sales to grow more than 50% per year over the next three to five years.
We also expect this acquisition to be accretive to the segment beginning in 2023, as we continue investing in our in-season data services.
Integration is going well and we plan to share more on our accelerated market growth strategy in future quarters.
Additionally, in today's market, the war for talent is pervasive and competitive.
Prospera brings the strongest team in the industry and we are fortunate to have 100 highly talented and motivated employees on board, including experts in data science and machine learning.
As you can tell, I'm very excited about this acquisition.
It builds upon our demonstrated success over the past few years as we move forward together as one company.
We also completed the acquisition of PivoTrac, the subscription based AgTech company that provides remote sensing and monitoring solutions for the southwest U.S. market, helping grow our technology sales to $50 million year-to-date.
Turning to Slide 6, our solar business is another area where we are accelerating growth and new product innovation while supporting our sustainability commitments.
During Investor Day, we talked about solar growth opportunities in both utility and agriculture and I'm very excited to see our growing pipeline of projects in both end markets.
Our backlog of utility-scale and distributed generation projects has been increasing as we expand the solution globally.
In the second quarter, we were awarded projects totaling $47 million.
Additionally, over the past 18 months, we received more than 30 orders for the North American market.
With our industry-recognized class of one status and the benefits of our scale and global supply chain, we're uniquely positioned to help support global customers with their renewable energy goals.
Our Solar Solutions are also driving accelerated growth in agricultural markets.
In the second quarter, we were awarded three projects, totaling $25 million.
We've already completed several others in Sun Belt regions like Brazil and Sudan and our planning an official North American market launch this fall at the Husker Harvest Days farm event.
We are also partnering with large global food producers to help them achieve their own ESG goals.
Working together with our Utility Solar team and world-class Valley dealer network, we have formed a global cross-functional team committed to delivering integrated solutions to support Ag players in their markets.
We're very excited about this growth potential.
Turning to Slide 7.
At our Investor Day, I talked about several of our ESG initiatives and highlighted the many ways that our products and services conserve resources and improve life and help build a more sustainable world.
As we said before, ESG is a strategic priority for us.
Our environment and social quality scores have improved significantly this year from a 6 to a 2 for environment and from a 6 to a 3 for social, while governance has held steady at a solid 2.
While this is a continuous journey, we are proud of the progress we have made so far.
I want to congratulate our teams and business partners who are strengthening our commitment to grow and innovation as a company with ESG in mind.
Turning to Slide 9 and second quarter results.
Operating income of $90.9 million or 10% of sales grew $25.2 million or 38% compared to last year driven by higher volumes in irrigation, improved operating performance and a favorable pricing notably in Engineered Support Structures.
Diluted earnings per share of $3.06 grew more than 50% compared to last year, primarily driven by very strong operating income and a more favorable tax rate of 22.5%.
This rate was realized through the execution of certain tax planning strategies.
Turning to the segments.
On Slide 10, in Utility Support Structures, operating income of $21.2 million or 7.9% of sales decreased $4.1 million or 300 basis points compared to last year.
Strong volume, increased pricing and improved operational performance were more than offset by the ongoing impact of rapidly rising raw material costs during the quarter, which our pricing mechanisms did not allow us to recover.
Moving to Slide 11 in Engineered Support Structures.
Record operating income of $31.9 million or 11.9% of sales increased $9 million or 290 basis points compared to last year.
We're extremely pleased with the results from deliberate proactive pricing actions taken by our commercial teams to more than offset the impact of rapid cost inflation.
We are also recognizing the benefits of previous restructuring actions.
Additionally, our operations team continue to drive performance improvement across the segment through improved productivity and product quality and better ship complete and on-time delivery metrics.
Turning to Slide 12.
In the Coatings segment, operating income of $14.7 million or 14.9% of sales was $4.3 million or 190 basis points higher compared to last year.
Higher volumes, favorable pricing and operational efficiencies more than offset the impact of raw material cost inflation.
Moving to Slide 13.
In the Irrigation segment, operating income of $42.9 million or 15.2% of sales nearly doubled compared to last year and was 80 basis points higher year-over-year.
Significantly, higher volumes and favorable pricing were slightly offset by higher R&D expense for strategic technology growth investments, including product development.
Turning to cash flow on Slide 14.
We delivered positive operating cash flows of $37 million and positive free cash flow this quarter despite continued inflationary pressures, increasing our working capital needs.
This quarter we closed on Prospera acquisition for a purchase price of $300 million, funded through a combination of cash on hand and short-term borrowings on our revolving credit facility.
We also acquired 100% of the assets of PivoTrac for $12.5 million, funded by cash on hand.
As we stated in prior quarters, rapid raw material inflation can create short-term impacts on cash flows.
The current market outlook indicates that general inflationary trends may not subside in 2021, so we would expect some continued short-term impacts.
We expect working capital levels and inventory to remain elevated to help us mitigate supply chain disruptions and opportunistically lock in better raw material pricing.
Accounts receivable will also meaningfully increase in line with sales growth.
As our historical results have shown, we will see improvements in working capital as inflation subside.
Turning to Slide 15 for a summary of capital deployment.
Capital spending in first half of 2021 was $49 million and we returned $42 million of capital to shareholders through dividends and share repurchases, ending the quarter with just over $199 million of cash.
Moving now to Slide 16.
Our balance sheet remains strong with no significant long-term debt maturities until 2044.
Our leverage ratio of total debt to adjusted EBITDA of 2.3 times remains within our desired range of 1.5 times to 2.5 times.
We are increasing sales and earnings per share guidance for fiscal 2021.
Net sales are now estimated to grow 16% to 19% year-over-year driven primarily by very strong agricultural market fundamentals.
Further, we now expect Irrigation segment sales to grow 45% to 50% year-over-year and continue to assume a foreign currency translation benefit of 2% of net sales.
2021 adjusted earnings per share is now estimated to be between $10.40 and $11.10.
I want to take a moment to discuss the rationale for providing an adjusted earning outlook going forward.
As a technology company, the cost structure of Prospera is very different than any acquisition in Valmont's history, including a significant restricted stock grant for talent retention purposes.
We have also acquired intangibles technology assets.
We believe that by excluding Prospera's intangible asset amortization and share-based compensation in the adjusted financials, the metrics will provide a better comparison a future Irrigation segment performance as compared to historical results.
Other metrics and assumptions for 2021 are also summarized on the slide and in the release.
Turning to our second half 2021 Segment outlook on Slide 18.
In Utility Support Structures, we expect a meaningful sequential improvement to the quality of earnings, beginning in the third quarter driven by margin improvement as pricing becomes more aligned with steel cost inflation.
Moving to Engineered Support Structures, we expect continued short-term softness in North American transportation market and improved demand in commercial lighting.
Demand for wireless communication products and components remains strong and we expect sales growth in line with expected market growth of 15% to 20%.
Moving to Coatings, end market demand tends to correlate closely to general economic trends.
We are focused on pricing excellence and providing value to our customers.
Moving to Irrigation, we expect a very strong year 45% to 50% sales growth based on strength in global underlying Ag fundamentals, the estimated timing of deliveries of the large Egypt project and another record sales year in Brazil.
A couple of reminders that I want to mention for this segment.
The first is that the third quarter is a lower sales quarter compared to the rest of the year due to normal business seasonality.
Second, deliveries of the large Egypt project began in fourth quarter 2020, which will affect year-over-year growth comparisons, and as Steve mentioned earlier, we have been consistently raising prices to offset inflationary pressures.
Turning to Slide 19 and the long-term drivers of our segments.
Overall, we continue to see strong demand and positive momentum across all businesses, evidenced by backlog of more than $1.3 billion at the end of second quarter and the demand drivers are in place to sustain this momentum into 2022.
Like many others, we are closely monitoring the COVID Delta variant and continue to follow state and local regulations to keep our employees and customers safe.
At present, government mandated shutdowns in Malaysia, have led to the temporary closure of three of our small facilities there.
The expected impacts from these closures have been included in our full year financial outlook.
Turning to Slide 20.
In summary, I'm very pleased with our strong second quarter results and our team's ability to navigate and capitalize on challenging market dynamics.
We believe this demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends and strong price leadership in the marketplace.
As we discussed at our Investor Day, we remain focused on the execution of our strategy, which is fueled by our dedicated and talented team of 10,000 employees and our differentiated business model.
Through our acquisition of Prospera Technologies and PivoTrac, we are accelerating growth through investments in innovation, technology and IoT building on our strategy to grow recurring revenue services.
Finally, we're very positive on the year as demonstrated by our updated financial outlook and are poised and well positioned to capture growth and drive shareholder value in the future. | qtrly total revenue $ 1,175.1 million versus $ 1,186.2 million.
in 2021, expects to spend between $450 million and $475 million on capital expenditures.
sees 2021 aggregates shipments down 2 percent to up 2 percent versus 2020.
sees year-over-year aggregates freight-adjusted price increase of 2 to 4 percent in 2021. | 0 |
Before we discuss our results, I encourage you to review the cautionary statement on slides 2 and 3 for our customary disclosures.
Further information can be found in our regular SEC filings.
Bill and Pete will provide a company update as well as an overview of the company's second quarter 2021 results.
Please limit yourself to one question plus one follow-up.
You may get back into the queue if you have additional questions.
It is good to speak with everyone today and I'm excited to report our second quarter results.
I will start by providing some highlights from the quarter.
Our strong performance is a reflection of our market leadership, where we serve more clients than ever before and those clients are engaging with us in more ways given the breadth and essential relevance of our offerings.
I will also review our strategy and progress toward creating the most impactful and comprehensive financial wellness, ecosystem of data, technology and solutions that powers our industry.
Envestnet achieved strong adjusted revenue growth of 23% in the quarter and 70% year-to-date.
Our new guidance reflects the stronger than expected first half of the year as well as an improved outlook for the second half of 2021.
This growth was enabled by our market leading position and the scale we have achieved and this is a market position we continue to expand.
I believe this is important to note our position and ability to create scale, creates unique leverage for Envestnet as we drive our strategic plan forward.
The number of advisors on the Envestnet platform is now almost 108,000 with 14 million accounts that make up $5.2 trillion in assets.
Our data aggregation business serves over 500 million aggregated accounts each day.
Our MoneyGuide financial planning business continues to be the market leader in the industry while Envestnet tamp services also stands atop the podium as the market leader.
We have the largest network of services, solutions and third-party providers and we continue to grow these options for our clients.
New accounts are being opened at a faster pace and we are averaging well more than 10,000 new accounts every week.
We added several new customers during the second quarter including notable firms such as security.
As we also continue to add services to the firms, we serve today.
Our exchanges are activating more and more advisors, financial planning continues to add exciting new features, we've rolled out to our existing clients and in our RIA business, we are seeing momentum adding manage accounts to a growing number of firms.
While our footprint continues to grow, total meaningful metrics such as asset per advisor, accounts per advisor and adjusted revenue per advisor.
We are operating at significant scale as well.
During the second quarter, we serviced almost 15 million trades and completed 1.8 million service requests.
We're also generating more than 8 million data driven recommendations a day for our clients to better connect and better serve all of their clients.
As we mentioned on Investor Day, we are on our way to 10 million recommendations a day by year-end and over a billion, a day by 2025.
These proof points are unique to Envestnet market position and enable us to advance our vision and pursue the growth strategy we have discussed on earlier calls.
I believe these are very clear leading indicators and as we continue to execute the future for Envestnet is brighter than it's ever been.
Over the past several months, we have laid out a straightforward and executable strategy and we are driving progress toward enabling ecosystem that powers our industry.
No one has the strength of platform user base and leadership position that we have and it is a significant differentiator position in Envestnet to continue its leading position and drive the company toward achieving our mission and our stated financial goals.
This scale combined with our cloud-based infrastructure and unparalleled data and solution set opens up the growing opportunity for us.
We are making important progress in bringing the pieces together in a frictionless, intelligent and connected ecosystem, so that the advisor and the consumer sees a much clearer and much more powerful view of their money in one place while at the same time, our customers have easier access to the entirety of our offerings to help them serve their clients more completely.
Our platform and ecosystem is the industry standard for how advisors engaged digitally with their clients today and it will be the standard for how they serve their clients into the future.
Digital transformation is the most powerful of several macro trends we benefit from and by capturing the lead here, we create a virtuous environment that opens, more and more opportunity for our company.
In addition to the digital transformation that is occurring, we continue to benefit from and also power several important industry trends.
These include the growth of fee-based advice even faster growth of managed accounts and the hyper growth of personalization services like direct indexing, tax overlay and impact investing.
As you overlay these trends across the current business that we serve today, which is $5.2 trillion in assets.
We believe we can increase our revenue by roughly 10 basis points on average on 10% to 15% of this asset base.
This creates a significant and growing revenue opportunity, which given our advanced market engagement strategy, we are increasingly identifying, engaging and executing all and our opportunity will continue to grow given these macro trends given our strong market position and given the significant capabilities that we have.
With that in mind, our leadership team has a laser sharp focus on three key drivers of revenue growth.
We will capture more of the existing addressable market by supercharging our platform to leverage our comprehensive data and solutions set.
This opportunity is large and it is sitting directly in front of us.
Next, we are leading and modernizing the digital engagement marketplace by extending our cloud-based migration, which allows us to connect the best of Envestnet for a truly seamless customer experience.
And lastly, we are opening the platform for expansion.
Our developer portal enables over 625, third party FinTechs to leverage APIs embedding our capabilities and data into their environments.
This usage has grown by 1700% since the beginning of January 2020.
At the same time, we are opening Envestnet's ecosystem for more third-party providers, all of which will drive users and engagement ultimately accelerating our revenue growth and our opportunity.
I want to double-click on capturing more of the existing addressable market and why we are very confident given the early progress that we're beginning to see.
You see, we have a differentiated engagement strategy, there is powered by the visibility and understanding we have given our data model.
This prioritize the use cases, the target large, identifiable, addressable pools of opportunity for Envestnet, which also deepen the relationships between advisors and their clients.
We have the broadest number of solutions available to our advisors.
Our data driven recommendations, drive increased adoption and increased adoption and increased solutions provide more data to improve the recommendations that we make.
We are accelerating growth utilizing the data in the ecosystem and removing friction from the tasks required for advisors to use and access our solutions.
And we are adding to our solutions during the second quarter, we introduced several new products that continue to build out our offering to the advisor and ultimately to the individual consumer.
We've been piloting the new client portal with several large customers and early feedback has been incredibly positive.
We also added services such as residential real estate with the credit exchange in our recently launched alternatives exchange, which we launched in July, a collaboration between investment UBS and I capital deliver a curated set of alternative investments in Envestnet clients via end-to-end digital platform.
2021 represents investment charting the course for advancing a tremendous opportunity for our industry to better serve its consumers.
We are a catalyst for this future and this is a moment for us to apply our efforts and taking advantage of the position that we have, and the strategy that we have created and the opportunity for sustained and accelerated growth.
Envestnet organization is locked in on executing on this.
Today, I'm going to review our second quarter results and then provide an update on our revised guidance for the first quarter and the full year.
Our second quarter results continue to demonstrate the strengths in our business model, positive dynamics from the first-half of the year we expect to carry into the third and fourth quarter, which are reflected in our updated full year outlook.
Adjusted revenues for the second quarter grew 23% to $289 million compared to the second quarter of last year, adjusted EBITDA grew 27% to $71 million compared to the second quarter of last year.
Adjusted earnings per share was $0.67.
Turning to the balance sheet; we ended June with approximately $370 million in cash and debt of $860 million.
The debt consists of our outstanding convertible notes maturing in 2023 and 2025.
Our $500 million revolving credit facility was undrawn as of June 30, making our net leverage ratio at the end of June 1.8 times EBITDA.
Turning to our investment initiatives; I want to reiterate our expectations.
We continue to expect the investments to account for roughly $30 million of operating expense during the year.
We are making good progress on the hiring front, the impact of which is reflected in our updated guidance.
We expect the investments to ramp up throughout 2021 with most of the impact in the second half of the year and annualizing to a run rate of approximately $40 to $45 million in 2022, growing at the same rate of operating expenses thereafter.
Additionally, we continue to expect to begin to generate faster revenue growth in 2022 as we create a better more streamlined ecosystem, which elevates our value proposition to existing clients and expands our total addressable market.
Adjusted EBITDA to be between $61 million and $63 million as we further ramp up the investments and earnings per share to be $0.58 per share.
For the full year, we are again raising our outlook to reflect the strength of the first half of the year.
For the full year, we expect adjusted revenues to be between $1.169 million and $1.174 million, up 17% to 17.5% compared to 2020.
Adjusted EBITDA to be between $253 and $257 million, representing growth of 4% to 6% for the full year, and earnings per share to be between $2.30 and $2.35, which is $0.31 higher than the original guidance we gave back in February.
Adding some detail about our revenue outlook for the second half of the year to highlight some of the drivers of our revenue growth trends.
First, our wealth business has performed increasingly well year-to-date.
During the second quarter, we completed the merger of two-like clients moving significant assets from an asset based relationship to a subscription-based pricing model.
While this doesn't hit the way, we have reported reclassifications in the past, it is an effect of reclassification.
If we adjusted for this, the second quarter was ahead of even the first quarter in terms of net new flows from existing business.
Further, our significant asset base benefited from favorable capital markets adding to our forecast of revenue growth.
Second, our data and analytics segment has grown subscription revenue around 4% in the first-half of the year compared to the first-half of last year.
We expect this business to see improving revenue growth in the second-half of the year.
As we continue to execute on our strategy in the coming years and begin to benefit from the investments were making now, we will capture more of the opportunity we've identified positioning us to attain our longer-term targets of mid-teens growth in revenue and adjusted EBITDA margin of 25% by 2025.
We are pleased with the progress we're making and are focused on the execution of our strategy.
The opportunity to be the leader of the ecosystem that powers the industry.
The ecosystem that connects data, technology and solutions to enable the intelligent financial life and is differentiated from every other provider as a fully connected, open architecture, hyper-personalized, wealth management platform.
As the industry leader, we will continue to enable the digital transformation that our clients need from us.
Our roadmap is very clear.
We are capturing more of the addressable market opportunity with our data in our solutions.
We are modernizing the digital engagement marketplace to reduce friction and land more clients and we're opening up our platform to accelerate growth.
We will continue to execute on that roadmap and it will continue to create greater value for each and every one of our stakeholders. | qtrly adjusted earnings per share $0.67.
sees q3 adjusted net income per diluted share $0.58.
sees fy adjusted net income per diluted share to be $2.30 - $2.35. | 1 |
We appreciate you joining us today for Piedmont's fourth quarter 2021 earnings conference call.
At this time, our president and chief executive officer, Brent Smith, will provide some opening comments and discuss our fourth quarter and annual results and accomplishments.
On the line with me is Eddie Guilbert, our executive vice president of finance and treasurer; George Wells, our chief operating officer; and Bobby Bowers, our chief financial officer; as well as other members of the senior management team.
Their tireless dedication continues to garner industry honors for operational excellence and sustainability, including our recognition as the 2021 ENERGY STAR partner of the year and achieving LEED status now on roughly half of the portfolio.
Today, I'm going to cover Piedmont's operational success and leasing momentum along with an update on capital allocation activities across our markets.
Focusing on the fourth quarter of 2021, our FFO per share was $0.51, in line with market consensus.
Portfolio operating metrics were solid with same-store NOI on a cash basis increasing 5.8%.
We leased approximately 400,000 square feet, generated a 3% increase in second-generation cash rents and executed an average lease term of six and a half years, illustrating the longer-term view taken by most of our customers.
Most notably, about half of the fourth quarter's leasing was related to new tenants, making this the second consecutive quarter Piedmont has achieved pre-pandemic levels of new leasing.
Overall, leasing activity remained robust and well dispersed across the portfolio with over 40 leases and amendments executed during the fourth quarter.
And while the omicron variant had a modestly negative impact on building utilization during December and January, the leasing pipeline has not dissipated and we expect the momentum from the second half of 2021 to continue.
Today, our leasing pipeline stands at over 500,000 square feet of negotiations.
And we're trading LOIs on an additional 1 million square feet, which positions Piedmont for space absorption in 2022 and with only about 1 million square feet of existing leases expiring or about 6% of the portfolio.
Boston, Dallas and Atlanta remain our most active leasing markets, albeit for different reasons.
The Boston market continues to exhibit strong fundamentals led by business migration to the suburbs and reduced competitive Class A office stock as the insatiable demand from life science users continues to drive office to lab conversions.
For example, during the past year in our Burlington submarket, three competitive Class A buildings comprising over 400,000 square feet have been repurposed to labs, helping to push net effective rents for office space to pre-pandemic levels.
And in Dallas and Atlanta, our two largest markets, we continue to see an increasing number of corporate relocations, resulting in meaningful job growth.
As an example, during the fourth quarter, we signed a 55,000 square foot lease at our Connection Drive property in Dallas to serve as the new corporate headquarters of an undisclosed Fortune 500 company.
And in that same market during the second quarter, we signed a 44,000 square foot lease to serve as the corporate headquarters for a large national beverage distributor.
In both these markets, rents at our properties are now above pre-pandemic levels.
However, net effective rents are approximately 2% to 5% lower.
I would note a customer flight to quality is well underway, which is driving wider rent disparities between place-making versus commodity office product.
For example, JLL Research noted that 84% of Atlanta leasing activity in the fourth quarter was in Class A or trophy product.
Orlando also continues to perform well with leasing and tour activity across all five of our downtown properties at pre-pandemic levels.
The downtown submarket continues to experience population inflows particularly for the millennial and Gen Z cohorts driven by a highly walkable environment with expanding retail, food and beverage options, along with entertainment amenities surrounding the University of Central Florida's Creative Village campus, Amway Center Arena and Camping World Stadium, along with a uniquely urban Lake Eola.
In Orlando, net effective rents are still trailing pre-pandemic levels by about 5% as a result of increased concessions.
Finally, Minneapolis, the districts in Washington, D.C. and New York City, all experiencing increasing tour activity.
However, leasing velocity and tenant demand still lag our Sunbelt markets.
I would add, we are fortunate to have limited vacancy and near-term lease expirations at our 60 Broad Street property in Lower Manhattan and virtually no expirations at our Washington, D.C. properties for more than two years.
Leasing across all our core markets contributed to the fourth quarter's totals.
And our customer CEO and HR dialogue continues to show our portfolio is positioned to gain market share.
Users of office space are undertaking a flight to quality that focuses on new or newly renovated office buildings with unique environments and a vast set of amenities, owned and operated by responsive, sustainability-minded service-oriented landlords.
And because of these demand drivers, Piedmont's portfolio is well positioned, supported by a concentration of newly renovated, well amenitized buildings located near housing communities and highly regarded education systems with easy accessibility to major highway thoroughfares and airports.
But today's tenants are not only focused solely on location and neighboring amenities.
The physical attributes of a building have never been more important.
The building's indoor air and light, HVAC, fresh air intake, elevator capacity and outdoor collaboration space are all critical.
In addition to high-quality building in a vibrant environment, customers are demanding a higher-quality landlord as well.
And by that, we mean an attentive operator that focuses on sustainability initiatives and which has the capital base and scale to provide tenant offerings and engagement.
Office space is no longer just a real estate product.
Taking a look back at the operational highlights for the 2021 fiscal year.
Piedmont leased almost 2.3 million square feet, which was in line with our average pre-COVID annual leasing levels.
In addition, the increase in second-generation cash rents was seven and a half percent, which helped increase same-store cash NOI for the year by almost 7%.
And finally, our tenant retention ratio was in line with prior years at approximately 70%.
Recovery in leasing activity bolsters our optimism for the rebound of the office sector, and particularly for landlords such as ourselves who offer high-quality, modernized sustainability-focused amenity-rich environments.
Looking ahead, approximately 750,000 square feet of tenant leasing has yet to commence as of this year-end or is in some form of abatement.
This backlog creates organic growth opportunities going into 2022 associated with approximately $26 million in future annualized cash rents.
In addition, approximately 60% of the portfolio's vacancy and 85% of 2022's lease expirations resided in our Sunbelt properties, where we are experiencing the greatest level of leasing velocity.
A schedule of the larger upcoming lease commencements and abatements is included in our supplemental financial information, which was filed last night.
Pivoting now to capital allocation activities.
Despite the disruption from the pandemic and more recently, the omicron variant, the office investment sales market has continued to unthaw.
We are currently in discussions on a pipeline of over $1 billion of high-quality assets primarily for properties in our Sunbelt markets.
Furthermore, we are encouraged to hear of several targeted buildings that will be coming to market in the first half of 2022.
Our principal and broker dialogue suggests insurance companies, pension funds and other private market participants are planning to reduce their office sector exposure in the near term in currently well-leased Sunbelt office with more than seven years of weighted average lease term is among the most liquid type of property in the asset class.
The increase in transactional activity is encouraging, given Piedmont's strategy to recycle capital strategically as an additional driver for our earnings growth.
And finally, I would note that cap rates remain steady for high-quality assets with limited lease rollover and particularly those that are highly amenitized and that can compete with new construction.
While the investment sales market has improved, construction starts have slowed dramatically due to the uncertainty created by the pandemic, a positive for the continued office market recovery.
With supply chain constraints, the construction of new product will now take two and a half to three years to be delivered.
In addition, new construction costs have escalated by 15% to 20% versus pre-pandemic pricing driven by an increase in both raw materials and labor.
In this capital environment, Piedmont continues to focus on our redevelopment opportunities where costs and time lines can be more easily managed.
In 2021, we completed over $50 million of incremental investment in our properties, upgrading assets to remain best-in-class within their respective submarkets.
That said, we continue to have dialogue with a number of clients regarding pre-leasing for ground-up development.
Focusing on Piedmont's investment activities.
During the quarter, we expanded our Atlanta market footprint with the acquisition of 999 Peachtree Street.
And subsequent to quarter end, I'm pleased that we closed on the disposition of a Raytheon asset as well as accelerated our plan to exit from the Chicago market.
As you all know, the 999 acquisition marks our entry into Midtown Atlanta submarket.
The iconic Class A LEED-Platinum 28-story building, a 622,000 square feet with 77% leased at acquisition.
We purchased it for $360 a square foot, which we estimate is over 40% below replacement cost.
We're working with Gensler, a tenant at the building to complete the redesign of 999s arrival experience in public spaces, including a modernized and expanded lobby, energized outdoor space and other enhanced amenities, which will complete over the next 12 to 18 months, and we'll revitalize this asset in a fraction of the time and cost of new construction.
With a 10-foot glass window line across 70% of the facade this asset will effectively compete against new construction at a fraction of the cost with an expected all-in basis in the low $400 per square foot versus new product costing in excess of $650 per square foot, creating substantial pricing leverage for our building when compared to that new development.
The $224 million acquisition of 999 is being funded through multiple dispositions.
Immediately after quarter end, the disposition of 225 and 235 presidential Way in Boston closed in a reverse 1031 exchange for $129 million or a mid-5s cap rate.
Also subsequent to quarter end, we negotiated an agreement to sell and have closed on Two Pierce Place, our last remaining asset in the Chicago area, and we'd anticipate more non-core asset proceeds in the first half of 2022.
The acquisition of 999 Peachtree Street during the fourth quarter as well as the completion of two non-core dispositions just after the quarter end, now makes Atlanta our largest market based on annualized lease revenue.
Adjusting our lease percentage for the disposition transactions our pro forma lease percentage as of December 31 would have been 87%.
Additionally, approximately 63% of our annualized lease revenue is now generated from our Sunbelt properties and our goal is to have 70% to 75% of our ARR generated by our Sunbelt markets before the end of 2023.
We believe a goal that's attainable given the investment in sales market activity we see today.
Myself and the team were extremely grateful to be able to share some of our most recent redevelopment projects.
Looking back on 2021, core FFO for the year was $1.97 per diluted share, a 4% increase over 2020 and in excess of the upper end of our original guidance range for the year.
This growth in core FFO overcame an approximately 1% reduction in our overall lease percentage on a year-over-year basis.
The decrease in occupancy was driven by several factors: Reduced leasing activity during 2020 in the first half of 2021 as a result of the pandemic, a number of sizable lease expirations at recently acquired properties in Atlanta and Dallas that were underwritten as part of their respective acquisitions and the purchase of the 77% leased 999 Peachtree Street property.
After incorporating the just completed disposition activity in January of 2022, our pro forma lease percentage as of December 31 would have been 87%.
We reported $0.51 per diluted share of core FFO for the quarter.
That's an 11% increase over the fourth quarter of 2020.
This increase is primarily due to accretive recycling activity and rising rental rates.
Our core FFO achievement during the fourth quarter also reflects the repurchase of approximately 1 million shares of our common stock at an average price of $17.76 per share during the quarter, leaving approximately $150 million in board authorized capacity under our share repurchase program.
Now, core FFO, as you know, excludes gains, losses, impairments on real estate as well as excluding depreciation and amortization.
And I do want to discuss this real estate activity during the fourth quarter of 2021.
While we had originally intended to lease up Two Pierce Place before disposition, we received an unsolicited offer to purchase the asset during the fourth quarter.
Given the fact that we have no other Chicago holdings, we made the decision to accept the offer if the purchase could be negotiated and closed quickly thereafter.
As is often the case, gap typically just dictates early recognition of potential losses and the decision to shorten the hold period for this asset did result in the recognition of a $41 million impairment charge that is included in our fourth quarter results of operations.
On the flip side, the sale of 225, 235 presidential Way will result in the recognition of an estimated $50 million gain during the first quarter of 2022 when the sell closed.
AFFO generated during the fourth quarter was approximately $39 million, which is well above our current $26 million quarterly dividend level.
Our board has indicated that given our cash NOI growth over the last few years, the fact that we're approaching the conclusion of the large construction restacking project for the State of New York at 60 Broad, and the time since our last dividend increase, they will be reviewing our dividend payout amount during 2022.
Turning to the balance sheet.
I expect more attention will be focused now on corporate financial positions given the rising interest rate environment, including the amount of floating rate debt, upcoming maturities and overall leverage.
Our annual debt -- net debt to core EBITDA ratio as of the end of the fourth quarter of 2021 was 5.7 times and we reported $210 million of unused capacity on our line of credit.
Taking into consideration the completed disposition activity occurring right after year-end, with the net sales proceeds received in January, our current available capacity on our $500 million line of credit is approximately $320 million, with an approximate $120 million more expected later this quarter from the payoff of a note receivable.
Adjusting for the application of proceeds from the two closed January sales, our pro forma debt to gross asset ratio at year-end would have been approximately 35%.
We have no secured debt currently on our books and we have no scheduled debt maturities in 2022 other than our revolver, which we currently intend to renew long term later this year rather than exercise the line's short-term extension options.
Finally, we're introducing 2022 annual financial guidance for core FFO in the range of $1.97 to $2.07 per diluted share.
This guidance assumes a gradual increase in physical utilization of our buildings by our tenants over the course of the year, to a level near pre-COVID utilization by the end of the calendar year.
It also assumes a neutral amount of asset recycling during the year with about $350 million to $450 million each of acquisitions and additional dispositions.
This net neutral activity excludes the recently completed sales of the presidential Way assets and Two Pierce Place property that were used to fund the 999 Peachtree Street acquisition.
We will provide revised guidance as each significant acquisition or disposition is completed this year.
The guidance assumes general and administrative expenses in the range of $29 million to $31 million for the year.
Our same-store cash NOI growth is expected to be flat for the year with a number of abatements occurring during 2022 due to the lease renewals and newly commencing leases such as 160,000 square foot renewal at 1155 Perimeter Center West in Atlanta, and a 56,000 square foot lease at 400 Virginia in Washington, D.C. As well as downtimes between leases associated with new tenant build-outs, such as a 67,000 square-foot lease at 5 and 15 Wayside in Boston and a 44,000 square foot lease at One Lincoln in Dallas.
Accrual-based store NOI is expected to grow from 1% to 3% during the year.
I will remind you that these estimates will ultimately be dependent upon the transactional activity achieved during the year since such properties will be excluded at year-end, from the same-store two-year comparisons.
Likewise, our lease percentage is expected to grow to approximately 88%.
But again, this estimate is subject to the lease percentages of the properties involved was $350 million to $450 million of potential recycling transactions completed during the year.
Our forecast also assumes there will be three to four interest rate hikes during 2022 that will impact interest expense negatively versus recent prior years.
And finally, we are assuming a dividend adjustment around midyear, and it is not expected to impact our overall financial results.
With that, I'll now ask our conference call operator to provide our listeners with instructions on how they can submit their questions. | qtrly core ffo of $0.48 per share.
sees 2021 nareit ffo and core ffo per diluted share $1.86 to $1.96. | 0 |
It is possible that actual results may differ materially from the predictions we make today.
Prudential delivered strong financial results for the fourth quarter and the full year, reflecting favorable investment performance and continued high demand for the products we introduced during the pandemic to address our customers' evolving needs.
2021 was also a pivotal year for Prudential and our efforts to become a higher growth, less market-sensitive and more nimble company.
First, we are repositioning our business mix to generate sustainable long-term growth with reduced market sensitivity.
Second, we continue to advance our cost savings program.
And third, we maintained our disciplined and thoughtful approach to deploying capital.
I'll provide an update on each of these areas before turning it over to Rob and Ken.
Moving to Slide 3.
We are making significant progress repositioning our business for sustainable long-term growth with reduced market sensitivity through a mix of divestitures and strategic programmatic acquisitions.
Following the successful completion of the sales of our Korea and Taiwan insurance businesses, which produced $1.8 billion in proceeds, we reached agreements to divest our full-service business and a portion of our traditional variable annuities.
We are on track to close both of these transactions in the first half of 2022 and generate additional proceeds of over $4 billion.
We are redeploying capital in part through highly targeted acquisitions and investments in asset management and emerging markets.
Last year, PGIM acquired Montana Capital Partners, a European-based private equity secondaries asset manager; and Green Harvest, a separately managed account platform that provides customized solutions for high net worth investors.
Meanwhile, on the emerging markets front, we closed on an investment in ICEA LION Holdings, a highly respected financial services market leader in Kenya with operations in Tanzania and Uganda.
Turning to Slide 4.
We continue to advance our cost savings program and are on track to achieve $750 million in savings by the end of 2023.
To date, we have already achieved $635 million in run-rate cost savings, exceeding our $500 million target for 2021.
We have also taken steps to improve experiences around the world for our customers and employees through innovation.
This includes using automation, artificial intelligence, and other technology to expedite underwriting, reduce and simplify processes, provide faster, more convenient service options, and deliver meaningful financial advice in the ways our customers want it.
I'll touch more upon how we're using the technology in a moment.
Turning to Slide 5.
We have maintained a disciplined and balanced approach to deploying capital by enhancing returns to shareholders, reducing financial leverage, and by investing in the growth of our businesses.
We currently plan to return a total of $11 billion of capital to shareholders between 2021 and the end of 2023.
This includes $4.3 billion returned during 2021 through share repurchases and dividends.
As part of this plan, the board has authorized $1.5 billion of share repurchases and a 4% increase in our quarterly dividend beginning in the first quarter.
This represents our 14th consecutive annual dividend increase.
We also reduced debt by $1.3 billion in 2021.
In addition to the acquisitions I previously mentioned, we also made investments in our businesses to drive long-term growth and to meet the evolving needs of our customers.
In PGIM, for example, we have significantly strengthened our suite of environmental, social, and governance bond funds to better serve sustainability-focused investors.
Meanwhile, in our insurance businesses, we market-sensitive and have higher growth potential, such as our FlexGuard and variable life products, with a focus on improved customer experience and driving greater operational efficiency.
One example, as I mentioned earlier, is our use of artificial intelligence.
We use AI to quickly and accurately assess risk in our life insurance businesses and to expedite the application and underwriting process.
The application of innovative technology generated significant efficiencies for our global businesses during 2021, while delivering a dramatically better experience for our customers.
We will continue to expand the use of AI and other emerging technologies across the firm.
Our capital deployment strategy is supported by a rock-solid balance sheet which includes $3.6 billion in highly liquid assets at the end of the fourth quarter and a capital position that continues to support our AA financial strength rating.
Turning to Slide 6.
Our ongoing efforts to transform the company in 2021 go hand-in-hand with Prudential's long-standing commitment to sustainability.
This commitment is reflected in several significant enhancements to our environmental, social, and governance framework last year.
We committed to achieve net-zero emissions by 2050 across our primary global home office operations, with an interim goal of becoming carbon-neutral in these facilities by 2040.
We are also reviewing our general account investment holdings and have restricted new direct investments in companies that derive 25% or more of their revenues from thermal coal.
On the social front, the Prudential Foundation surpassed $1 billion in grants to partners primarily focused on eliminating barriers to financial and social mobility around the world.
This achievement follows another milestone that we reached in 2020 when our impact investment portfolio exceeded $1 billion.
We also continue to advance our nine commitments to racial equity through investments in funding for organizations committed to diversity, equity, and inclusion, and through internal measures, including diversity training and our commitment to equitable compensation for our employees.
Our governance actions reflected a shared commitment to diversity and inclusion, beginning at the top with over 80% of our independent board directors being diverse.
In 2021, we enhanced our diversity disclosures by publishing EEO-1 data and the results of our pay equity analysis for our U.S. employees.
We also expanded our policy of tying compensation plans for senior executives to the achievement of workforce diversity goals.
As I noted earlier, we believe our sustainability commitments and transformation to become a higher growth, less market-sensitive, and more nimble business are closely connected.
Together, they help us fulfill our purpose of making lives better by solving the financial challenges of our changing world by expanding access to investing insurance and retirement security for customers and clients around the globe.
I am proud of the progress we made and the momentum we built in 2021 and look forward to making an even more meaningful difference in the lives of all our stakeholders in 2022 and beyond.
I'll provide an overview of our financial results and business performance for our PGIM, U.S., and international businesses.
I'll begin on Slide 7 with our financial results.
For 2021, pre-tax adjusted operating income was $7.3 billion or $14.58 a share on an after-tax basis.
Results for the year included a benefit from the outperformance of variable investment income that exceeded target returns by about $1.6 billion, reflecting market performance, strategy, and manager selection.
In the fourth quarter, pre-tax adjusted operating income was $1.6 billion or $3.18 a share on an after-tax basis, while GAAP net income was $3.13 per share.
Of note, our GAAP net income includes realized investment gains and favorable market experience updates that were offset by a goodwill impairment that resulted in a charge of $837 million net of tax.
This charge reflects two main drivers of a reduction in the estimated fair value of Assurance.
First, we acquired capabilities to increase access to more customers, and we have experienced good revenue growth.
However, this growth has been slower than expected and we are now assuming it will take longer to monetize into earnings and cash flow.
And second, we have seen a significant decline in publicly traded peer valuations, which is a key input in our assessment of fair value.
Turning to the operating results of our businesses.
PGIM, our global asset manager, had record asset management fees driven by record account values of over $1.5 trillion.
Relative to the year-ago quarter, earnings reflected the elevated level of other related revenues last year as well as higher expenses supporting business growth in the current period.
Results of our U.S. Businesses increased 13% from the year-ago quarter and reflected higher net investment spread, including a greater benefit from variable investment income, higher fee income, primarily driven by equity market appreciation, partially offset by higher expenses driven by a legal reserve and less favorable underwriting experience due to COVID-19-related mortality.
Earnings in our international businesses increased 5%, reflecting continued business growth, lower expenses, and higher net investment spread.
Turning to Slide 8.
PGIM continues to demonstrate the strength of its diversified capabilities in both public and private asset classes across fixed income, alternatives, real estate, and equities as a top 10 global investment manager.
PGIM's investment performance remains attractive with more than 95% of assets under management outperforming their benchmarks over the last three, five- and 10-year periods.
This performance has contributed to third-party net flows of $11 billion for the year, with positive flows across U.S. and non-U.S.-based clients in both public and private strategies.
As the investment engine of Prudential, success, and growth of PGIM and of our U.S. and international insurance businesses are mutually enhancing.
PGIM's asset origination capabilities, investment management expertise, and access to institutional and other sources of private capital provide a competitive advantage by helping our businesses to bring enhanced solutions, innovation, and more value to our customers.
And our businesses, in turn, provide a source of growth for PGIM through affiliated flows and unique access to insurance liabilities that complement its successful third-party track record of growth.
PGIM's sixth consecutive quarter of record asset management fees reflect strong business fundamentals and record assets under management.
We continue to expand our global equity franchise to grow our alternatives and private credit business, which has assets in excess of $240 billion across private credit and real estate equity and debt and benefits from our global scale and market-leading positions.
Notably, PGIM's private businesses deployed nearly $50 billion of gross capital, up 33% from last year.
Now turning to Slide 9.
Our U.S. Businesses produced diversified earnings from fees, net investment spread, and underwriting income and also benefit from our complementary mix of longevity and mortality businesses.
We continue to shift our business mix toward higher growth and less interest rate-sensitive products and businesses to transform our capabilities and cost structure and to expand our addressable markets.
Our product pivots have worked well, demonstrated by continued strong sales of our buffered annuities, which were nearly $6 billion for the year, representing 87% of total individual annuity sales.
These sales reflect customer demand for investment solutions that offer the potential for appreciation from equity markets combined with downside protection.
We have also exercised discipline through frequent pricing actions and our sales benefit from having a strong and trusted brand and a highly effective distribution team.
Our individual life sales also reflect our earlier product pivot strategy with variable products representing 71% of sales for the year.
Our retirement business has market-leading capabilities, which drove robust international reinsurance and funded pension risk transfer sales, including a $5 billion transaction, which was the fourth largest in the history of the market during 2021.
And reflected strong persistency and revenue growth in 2021 across all segments.
With respect to Assurance, our digitally enabled distribution platform, total revenues for the year were up 43% from last year.
Turning to Slide 10.
Our international businesses include our Japanese life insurance companies, where we have a differentiated multichannel distribution model as well as other businesses focused on high-growth emerging markets.
We remain encouraged by the resiliency of our unique distribution capabilities, which have maintained the stability of our sales and our in-force business despite the pandemic.
In Japan, we are focused on providing high-quality service, growing our world-class sales force and expanding our geographic coverage and product offerings.
Our needs-based approach and mortality protection focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs.
In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions where customers' needs are growing where there are compelling opportunities to build market-leading businesses and partnerships and where Prudential -- the Prudential enterprise can add value.
As we look ahead, we're well-positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security.
We plan to continue to invest in growth businesses and markets to deliver industry-leading customer experiences and create the next generation of financial solutions to better serve the diverse needs of a broad range of customers.
And with that, I will now hand it over to Ken.
I'll begin on Slide 11, which provides insight into earnings for the first quarter of 2022 relative to our fourth quarter results.
Pre-tax adjusted operating income in the fourth quarter was $1.6 billion and resulted in earnings per share of $3.18 on an after-tax basis.
To get a sense for all our first quarter results might develop, we suggest adjustments for the following items: first, variable investment income outperformed expectations in the fourth quarter by $440 million.
Next, we adjust underwriting experience by a net $90 million.
This adjustment includes a placeholder for COVID-19's claims experience in the first quarter of $195 million, assuming 75,000 COVID-19-related fatalities in the U.S. While we have provided this placeholder for COVID-related claims experience, the actual impact will depend on a variety of factors such as infection and fatality rates, geographic and demographic mix and the effectiveness of vaccines.
Third, we expect seasonal expenses and other items will be lower in the first quarter by $105 million.
Fourth, we anticipate net investment income will be reduced by about $10 million, reflecting the difference between new money rates and disposition yields of our investment portfolio.
And last, we expect the first quarter effective tax rate to normalize.
These items combined get us to a baseline of $2.73 per share for the first quarter.
I'll note that if you exclude items specific to the first quarter, earnings per share would be $3.17.
The key takeaway is that the underlying earnings power per share continues to improve and has increased 9% over the last year, driven by business growth, the benefits of our cost savings program, capital management and market appreciation.
While we have provided these items to consider, please note there may be other factors that affect earnings per share in the first quarter.
As we look forward, we have also included seasonal and other considerations for 2022 in the appendix.
Turning to Slide 12.
We continue to maintain a robust capital position and adequate sources of funding.
Our capital position continues to support a AA financial strength rating and we have substantial sources of funding.
Our cash and liquid assets were $3.6 billion and within our $3 billion to $5 billion liquidity target range and other sources of funds include free cash flow from our businesses and contingent capital facilities.
Turning to Slide 13 and in summary, we are executing on our plans to reposition our businesses and we are on track to achieve our targeted cost savings.
And with the support of our rock-solid balance sheet, we are thoughtfully deploying capital. | prudential financial q4 adjusted operating earnings per share $3.18.
q4 adjusted operating earnings per share $3.18.
q4 earnings per share $3.13. | 1 |