year
stringclasses 4
values | company_code
stringlengths 1
5
| text
stringlengths 15
53.7k
| year_company_code
stringlengths 6
10
|
|---|---|---|---|
2018 | TRIP | TRIP
#Thank you, <UNK>, and good morning, everyone.
We're pleased with our strong start to 2018.
Steps we've taken to preserve near-term EBITDA are taking hold and we're progressing well on our long-term growth initiatives.
We have a differentiated competitive position in the travel ecosystem with our global brand, our audience size and the rich value proposition in the dreaming, planning, booking, in-destination and sharing phases of a trip.
Our overall influence in travel continues to grow, as evidenced by our continued traffic growth, and we're excited about our plans for the quarters and the years ahead.
With that brief intro, <UNK> and I are ready for your questions.
Thank you, <UNK>.
This is <UNK>.
Good morning.
Yes, indeed, the overall auction performance within our core TA Hotel business, that's where your questions zoom in on, we're ---+ we had a strong start to the year there and it was generally ahead of our expectations.
And so let's go through the different components.
On the RPS side, clearly, the year-over-year performance was ---+ RPS was negative, mostly driven by the bid-downs we had seen much earlier in Q3 of last year.
The auction stabilized into Q4, as we said on our previous call, and we saw further stabilization into Q1 and, in fact, into Q2.
So that was a headwind compared to the year-over-year but not an incremental headwind to what we had seen at the back half of last year.
And so that's a negative on our year-on-year RPS performance as is the shift to mobile.
But then we saw some positive in RPS as well which is, you call, self-help.
So we are seeing positive results from both the initiatives we've undertaken on our site as well as the incremental performance of our TV.
So we see some good news there as well.
So it was a give and take on both elements.
So we were generally very pleased with our progress there.
In terms of the reduction of sales and marketing, significant reduction of our direct online spend but an increase of our TV spend, we spent $24 million on TV which we didn't spend before.
As you pointed out, the shopper ---+ flat shopper growth was pleasing to us in that environment.
So you see on the one hand, an impact from the reduced spend on online marketing, we believe a positive impact from TV there as well.
And so net-net, it worked out the way it did.
But overall, we were pleased with that performance of our core hotel auction.
Well, thanks, <UNK>.
Great question.
I love talking about sponsor placements because it is a new product for us.
It's appealing to all hoteliers and all restaurateurs globally.
It takes advantage of the fact that there is and always has been a lot of traffic on our site, a lot of travelers who aren't yet ready to make a purchase, but TripAdvisor is being used to influence where, in fact, they're going to stay.
And so for our hoteliers and restaurateurs, to be able to influence where they're going to stay, where they're going to eat well prior to the purchase is a great benefit for our clients and, obviously, helpful to the travelers.
You'll see sponsor placements appear on most every page.
Certainly, what we call our list pages, I'm looking for a hotel in the city, as well as in the cross sells when I'm looking at a particular hotel and it may not be right for me and so I want to find out something ---+ I want to look for some ---+ a different property nearby or just a different option.
And so all of those are good candidates for sponsor placements.
And just like any ad product, as we build out more clients with hoteliers, we're going to be getting much better at presenting the right hotel featured in that sponsor listing, so the click-through rate on that hotel will go up.
So I think it's fairly safe to say we have plenty of traffic on the site given the couple of hundred million of hotel shoppers.
The product is equally applicable on the phone and on desktop.
So it's not subject to kind of a headwind challenge of any shift to mobile, and it's particularly valuable for our widest range of clients not just our big ones, the OTAs, but also individual properties that want to make sure that they're discovered.
In terms of modeling out where it could be in 3 years, we obviously think it could be quite large.
But we're just at the beginning.
We just ---+ for hotels, we just launched it at the very end of last year.
Early quarters.
It's not particularly meaningful in anything right now but I do want you to ---+ I mean I thank you for the question and I'm glad you're looking at it because it is a sign of where we think the business has wonderful growth potential, independent of kind of everything else that we're doing in the Hotel category.
Sure.
This is Steve.
So I'll take the Non-Hotel drivers.
So primarily, as we've shared, experiences in restaurants are the bigger growing segments of that.
For experiences, we think the supply growth is awesome and we look forward to continue.
There's so many more attractions towards operators' experiences that can come online and take advantage of the demand that we already have, and that's a pretty important lens to view this group because as we bring on supply, as we see our supply growth numbers, we're immediately able to turn that into revenue without necessarily the corresponding jump in that tied to the demand on the Trip site because we already have the demand.
We're just able to monetize it a lot better when we have transaction capabilities.
So you see growth across our Viator point of sales, across our pure white label attraction or experience channels and, of course, the TripAdvisor engine hums along faster than almost everything else.
We're also particularly excited, obviously, not for Q1 but going forward, with our latest acquisition in the space, which adds our Bokun, our software-as-a-service business software for tour operators and experiences to help us deliver really a better traveler experience by having more inventory available, better availability to last minute, more seamless, frictionless stability to book on your phone when you're in destination and all of that, the goodness that can come from having some direct relationships with the operators.
Restaurants is more of the same, which is a good thing to be able to talk about as improved seated diners, we continue to grow supply and kind of business is doing well in all of the markets that we're in.
To your second question about the sort of second half in the auction versus first half and CPCs.
So we will, in the second half, lap some of the bid-downs we saw in the second half of last year.
So that is going to be a favorable year-over-year comparison versus the front half of the year.
Some other things to consider there too is we are pulling back on marketing as you know, and that will continue throughout the year.
So that is not necessarily a help later in the year.
And then we called out FX as well as one of the components, the year-over-year performance of the dollar against the euro and the pound is less of a factor at the back half of the year if currencies don't change either.
But you're absolutely correct in the statement that last year in Q3, we saw the most significant bid-downs in our auction and we will lap that when we get to the second half of the year.
Super.
Happy to take the first one.
Then I'll let <UNK> take the second.
Yes, we've been making many quarters' worth of mobile rev per shopper improvements.
And yes, we expect to continue to see that, in part because all of our ongoing optimizations to improve conversion on the site are either led by mobile or a mobile experience as part of the initial release.
So we have teams as we have for a while that work on improvements, and those obviously, get rolled out on all of our platforms.
We fully expect that to continue.
I will point out sort of part 2 of that is more travelers are getting used to buying more things on their phone, independent of TripAdvisor's action that tendency to book means there's more qualified traffic on that device.
More qualified traffic means more downstream bookings for our clients, which means they're able to pay more for the traffic.
So I would expect that to just be an ongoing secular tailwind for us in the category, leading me to my confidence that our continued ---+ our RPS will continue to go up on the phone.
And <UNK>, to your second question about the behavior in our core hotel auction.
As we said in our prepared remarks, we saw really stability in our auction environment in Q1.
We saw the stability starting in Q4, as we had called out 3 months ago.
We saw a continuation of that in Q1.
We saw a continuation of that into Q2.
So we saw the environment as largely stable.
We continue to work on making our traffic as attractive as possible for our partners through the experience for our users on our site by continuing to focus on the downstream impact that the traffic has for our partners, and we will continue to work on that throughout the year as it comes.
But stability was basically what we have seen really since Q4.
Yes.
So Non-Hotel growth was strongest this quarter, a strong performance.
It's really a continuation of many of the trends in our restaurant and Experience businesses, in particular, that we have seen throughout.
There's a bit of a mix shift going on, of course, towards those faster-growing parts of the Non-Hotel segment, attractions and restaurants.
But our outlook for the year remains as it was before.
It's robust continued growth there that is going to, in our view, be similar to what we have seen in quarters past and last year.
And so good performance.
Good start to the year and looking forward to continued growth there.
In terms of the long-term margin profile, we ---+ all of those businesses have attractive margin profiles.
They have good take rates.
They have cost structures that are very scalable and we've seen some of that scalability of the cost structure really come through in margin over the last 18 months.
And so we are confident that we can reach high margins there.
We've said in the past that for the whole business over the long term, we expect to go to sort of mid- to high 20s EBITDA margins and these Non-Hotel businesses are going to be a significant contributor to that.
So we see them as very healthy P&Ls.
And then from a competitive perspective, I think of our biggest competitor is simply the traveler saying I'm going to buy it when I get there.
I'm going to call up to make a reservation.
It's just the lack of awareness that I can and should buy these experiences online.
And I think we have tremendous tailwinds to, just as hotels experienced decades for us ago, of, well, of course, it's now natural to find what you're looking for, to shop around, to get the best price and the best experience online.
And we happen to have ---+ TripAdvisor media group happens to have a huge amount of demand of people doing that now and then going offline to book because we didn't have the booking capabilities.
So again, it's tapping into the demand that we have.
And while we certainly have competitors who are selling experiences online, it's much less a us versus them, in my view, than growing the total size of the pie that we've seen that is booked online.
That's the huge opportunity over the next several years.
Sure.
Thanks, <UNK>.
I'll take the first and <UNK> will take the second.
On the inventory types, we're really benefiting from the marketplace.
So we have a great view into where the demand is for travelers on TripAdvisor specifically, and so we target our sales reps or account managers to go fill that demand as much as possible with the opportunity to book the experience in advance.
A lot of the growth is coming from the growing awareness of TripAdvisor as ---+ and Viator is a big alternative demand channel for the owners, so they're simply coming in and signing up.
And so we have a whole bunch of tech investments under the covers that are all around making that process to get more supply and continue that level of 80-plus-percent growth rate for many years to come because there's so much out there, because we have the demand and because we always believe in providing the most choice possible for our travelers.
And to your second part of the question, <UNK>, in terms of levers in the Hotel business, and looking towards the back half of the year, so the things that we are working on internally are the improvements to our site, to the overall experience for our users on the hotel and, thereby, the improvement for our partners of our traffic.
We have a number of initiatives that we're rolling out.
We talked about some of them in this quarter, both on the desktop and the mobile side and we'll continue to work on that and expecting to see continued progress.
On the TV side, so we're investing more this year than last year, $100 million to $130 million.
We are seeing nice traction on TV.
So it's still not an ROI positive spend in-quarter but we see improvements to the returns there, and we're hopeful that we can continue to see that and confident that we can get that to long-term profitability.
So we're looking at that and the success of that ---+ those campaigns and our ability to tweak those as we go forward.
So those are some of the biggest drivers that we are focused on internally and continue to work on.
And to the extent that we're successful there will impact our success in the back half on revenue.
So on the first question, yes.
So we saw ---+ just start at the high level in Non-Hotel.
Impressive overall growth in our Non-Hotel segment, 36%.
And as you can imagine, our experiences business being a large part of that business, being a very important contributor to that.
So that kind of revenue growth is created by continued bookings growth as well.
So we saw continued nice performance on bookings.
And particularly, which is something we're excited about internally, the growth on our TA site is very impressive and ahead of the kind of revenue growth ---+ overall revenue growth for Non-Hotel would imply, significantly ahead of that.
And so that's exciting to us because that ultimately, strategically for us long-term, that platform, the TA platform, is the most scalable platform for us in our experiences business.
We have so many users already on our experiences pages on TA and able to continue penetration there, continue conversion there is a huge opportunity for us and also, economically, a very attractive opportunity because we have so much traffic already on our site that we don't have to additionally acquire.
Steve, do you want tackle the Bokun question.
Yes.
So with this new company, we're able to help bring a lot more inventory online because so many of the experienced companies still aren't ---+ still don't have any software that's helped them run their business that can also deliver the online bookability.
So point one for Bokun is they have a great company.
We welcome them all into the fold.
Point two, the software that they have really should be and we're making available globally to bring the inventory online so that travelers on Trip or on the Viator or on our third-party channels can find it and book it, and that's just a win-win all around.
And with the Bokun part of the family, we're able to make that easily done for attraction owners, make it very affordable for attraction owners and that, obviously, helps our entire ecosystem.
2018 financial impact, <UNK>, do you want to comment on the meaningfulness of it.
Yes.
Don't expect too big an impact on the financials this year of Bokun.
It's an acquisition that we're going to integrate and then accelerate organically, and it's not going to be material to our numbers for this year.
So that's a great question.
I don't want to tip my hat on ---+ tip my hand on when we would be doing that, but I will reiterate that part of our differentiation and part of the awareness of TripAdvisor in the travel ecosystem is the fact that we have much more than just hotels.
To be clear, we love hotels and we expect that to return to top line growth and we're showing great progress in the system there.
But part of all of TripAdvisor is helping you on the entire trip and we want to make sure everyone knows about that.
And so one should reasonably assume that we will grow our marketing of Attractions and other things in ways that work for our other businesses, such as TV.
So I'm not giving you a particular time frame, but certainly setting the expectation that it's more a matter of when not if.
Sure.
So we have tremendous brand awareness in almost every country around the world on the topic of reviews: a trusted community, always use TripAdvisor to plan the trip.
But a surprising number of people didn't understand that we also have one of the best price comparison engines out there.
So if you're looking not only for the best hotel but that hotel at the best price, you're looking to compare, do your own individual trade-offs between well, am I willing to spend an extra $10 for a slightly better hotel or not, TripAdvisor is the perfect place to do it.
And that message is the core message that we're running our TV ads with, and it's working.
We're driving increased price awareness of TripAdvisor as the place to find the best price, to compare your deals.
And as you know, we did that last year where you've seen our positive results.
We've increased our spend.
So that piece of that strategy is working and we've found no indications or we haven't seen any indications that it's hurting our brand or consumer awareness as the trusted review site that we started at.
Not saying that that'll be the only message going forward, but I'm certainly saying it's working for us now.
Details on the holistic end-to-end user experience.
Well, if you think about what TripAdvisor offers today to so many people, they might come in starting their travel plan with a flight search, move to a hotel search, think about what they want to do in destination and, of course, they need to eat.
And some of that is during the trip, some of that is well in advance.
Some of it is armchair traveling.
We have so many users that, of course, it's touching all segments.
The end-to-end experience that we talk about, you see in some of our travel planning tools that are on the site now and that we really want to highlight so that ---+ and this is an ongoing kind of work stream.
It's been ongoing, it will continue because it's a core differentiated feature of TripAdvisor that you can do all of this planning and it's really hard/impossible to do that anywhere else.
So we have a business unit that we call Core Experience dedicated to providing the common user experience across everything on the TripAdvisor point of sale and then working on some of the newer functionality that we haven't launched yet, we haven't talked about yet that will kind of help drive an experience that, as we say internally, is more than the sum of the individual shopping experience.
It's more than the sum of the parts.
But I'll have to keep you in suspense on that for a bit longer.
<UNK>, I'll take the first part of the question.
It is ---+ the sponsor placements are part of the line, revenue line called display and subscription, so that second revenue line within our Hotel segment.
It is not particularly material.
It was a contributor to the growth in that revenue line in this quarter year-over-year, but it's not ---+ in the grand scheme of things, not a large part of our revenue yet.
We have ---+ as Steve was talking before, we have ambitious plans for the long term.
So it will become more and more meaningful as we progress.
But in our Q1 results, not a particularly material number.
And then GDPR, we, obviously, like most companies have been aware of it for quite some time, so we don't expect a meaningful impact on our business at this point.
Yes.
So I do think returning to hotel shopper growth is in the cards.
Again, we've throttled some of our performance spend, which helps us drive better quality traffic to the site and, therefore, kind of more downstream bookings, the core thing that we care the most about.
But we've also ramped up our television spend.
Why.
Because that'll drive more shoppers and more qualified shoppers to the site.
So I'd still reiterate, we're certainly looking for growth in hotel shoppers and overall hotel revenue as we've done our changes.
The things I was referring to a few moments ago with the Core Ex business unit and some of the improvements that are coming, obviously, aim to build out a more complete travel experience, which in turn gets more people engaged in the funnel, drives more membership, which drives more overall usage of our product that, by definition, helps grow hotel shoppers.
As large as we are, we feel there's still plenty of room to have more people trying to use TripAdvisor to plan their trip.
Yes.
Insightful question.
So we have been receiving performance data.
And to be clear, it\
And to connect the dots with the marketing spend, so what that means if we have better insight into the downstream booking performance, we found that some of our marketing spend that looked good from an ROS perspective on a click-base looked less good on a downstream booking behavior, and that is the kind of spend that we're addressing in the ---+ in our reduction of marketing spend, which is an improvement for profitability and a lesser ---+ it isn't a pressure on revenue and a pressure on the number of bookings, but particularly on profitability, it's a bit positive.
I'll start with the first part of the question on the rentals business.
The rentals business is a stable business for us.
It is not one of the drivers of growth in Non-Hotel.
That is really driven by our experiences and our restaurant business.
It's a good business for us with good margins.
We benefit not only from the various brands that we have in rentals but we benefit from making all that supply available on our TripAdvisor site as well.
So it's a good business for us.
But as we think strategically about which areas of the business we are investing to grow, it is focused on our restaurants and experiences business.
And then when we kind of look at some of the Core Ex improvements, again, some of it is just very foundational.
You'd have to look carefully to see it on the site.
The site's becoming more consistent across all of our different verticals.
Some of it is just we're putting a smarter cross sell or a smarter offer in front of a user.
When a hotel doesn't have availability, we don't want to lose them.
So let's make some other recommendations and let's make them better recommendations.
And we see meaningful wins there.
I'd paint it as they're all relatively small individual wins that happen several times a month, and they just add up over the course of the year.
And that's part of what we call our revenue optimization or our site optimization.
And it's across, again, the sites, the app, our CRM, our e-mails, our notifications, all the things that we have with respect to a traveler who's on a journey and making sure we're sending them the right message at the right time given that we're more than a one-product company.
Sure.
I'll try to hit all of those.
So of course, retargeting is part of our performance-based advertising, but it's been that way for a while.
So I'd say there is RPS improvement because we're looking closer at the downstream booking signal versus the straight click count when we're buying our advertising, as <UNK> was talking about.
But I wouldn't say retargeting was a much bigger or much smaller component than it has been.
The TV ramping in our new markets, because we saw success when we launched last year in our top 6, we're obviously continuing and spending more there but also expanding into an additional set of markets, and we expect a similar growth curve in terms of the TV return on ad spend.
So the curves are all what you'd expect.
The newer markets will take a little longer to build and right now, we're receiving some of the benefit of having started the TV almost 1 year ago.
Well, I think of it as just one of the things ---+ one of the many things that we're doing to invest heavily in our experiences business unit.
So we're making kind of onboarding supply from any partner direct from the attraction or through any other aggregator much easier.
That's an initiative.
We've got our international initiatives making sure that our tours and attractions can be booked in as many languages as possible.
We have our ongoing conversion optimizations, both on TripAdvisor and on Viator, to help make the ---+ to help the traveler find what they're looking for faster and easier and book it.
And then we have the longer-term supply initiative of enabling, through Bokun, thousands of additional suppliers who will eventually go online but, through this technology, can ideally go online a lot sooner.
And of course, if they're going online, it's helping them fill their tours and it helps TripAdvisor monetize those great experiences and the consumer wins because whether you're booking in advance or in destination, they have that level of convenience.
And so again, there's a number of players in that particular space helping attractions go online and we feel we can accelerate that overall trend, which will help us and help everyone else in the Attractions category.
Yes.
So our marketing in Non-Hotel is increasing.
It's significantly higher than last year and not a significant break with how we approached marketing for Non-Hotel last year.
So not much to call out there in terms of a difference of this year versus last year.
In terms of seasonality, so Non-Hotel is a more seasonal business than our Hotel business.
So you have seen that in past years, which is ---+ it impacts both the revenue but particularly the profit profile of the business.
It is a little bit more seasonal driven by our Vacation Rental business in particular but also our Attractions business is seasonal.
The restaurant business itself is a little bit seasonal but not as much as the other 2 businesses.
Yes.
Thank you.
So in terms of the areas where we invest on the experiences side, the Attractions side, you saw the graph in our prepared remarks about our bookable supplies.
So there's a big focus on making sure that more and more supply is bookable on our site, both the Viator site but particularly also the TripAdvisor site.
So that's a big focus area, making sure we have more and more supply to put in front of the large audience that we have already.
We have incremental investments this year around our international non-English-speaking sites, making sure that we have more revenue coming from non-English-speaking sites, which is where our business still skews and where we see a big opportunity going forward.
Obviously, continuing to make investment in the underlying product and in our marketing into it as well, and Bokun is another example of opening up a new area there.
So there's plenty to invest in.
On the experience side, as we've said before, the fact that we've improved our margins in Non-Hotel is not a reflection of us holding back on investing on the experiences side.
We are going full speed ahead and the business is fully focused on driving revenue growth for the long term, and so that's where our focus is.
Then shifting ---+ your question is then shifting to our Hotel business and to ---+ particularly to our core auction business.
Again, in terms of OTA behavior and rationalizing performance spend, as we've said in previous quarters, yes, we did see some of that in the back half of last year.
As we said on this call and in our prepared remarks, we saw stabilization that happened in Q4.
We saw further stabilization into this quarter and into Q2.
So not much more to report from our end on that front.
Yes.
So I assume you're particularly referring to the gap desktop to mobile.
And we have been closing that gap.
So we called out the 20%-plus RPS improvement on mobile this quarter year-over-year, where desktop clearly was down.
And so we are narrowing the gap.
The gap over last year or so has narrowed by about 10 points.
So we are now closer to the 40% monetization of mobile to desktop.
And the year ago, we were closer to 30%.
And so that number is ticking up every time and we continue to work hard on making sure that gap narrows.
As the gap narrows, obviously, the impact that the shift to mobile has on our RPS starts to abate, and that is an important economic part of our model.
So as we look forward into this year and beyond, we're looking at lapping the bid-downs, very important point, at the back half of the year.
And then the crossover point at some point where the mobile shift is actually not going to be as much of a headwind as it has been in the past.
And so we are very focused on that.
You've seen the improvement that we made on the mobile side.
We continue to make improvements there and see some runway ahead of us.
Well, great.
Thanks again, everyone, for joining the call.
2018 is off to a good start, and I want to thank all TripAdvisor media group employees around the world for their continued hard work.
I look forward to updating you on our progress in the next few months.
Thanks, everyone.
| 2018_TRIP |
2016 | BBBY | BBBY
#Thank you, Adrienne, and good afternoon everyone.
Joining me on today's call are <UNK> <UNK>, Bed Bath & Beyond's Chief Executive Officer, and <UNK> <UNK>, Chief Financial Officer and Treasurer.
Before we begin, I'd like to remind you that this conference call may contain forward-looking statements, including statements about, or references to, our internal models and our long-term objectives.
All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today.
Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties.
The Company undertakes no obligation to update or revise any forward-looking statements, as events or circumstances may change after this call.
Our earnings press release, dated January 7th, 2016, can be found in the investor relations section of our website at www.bedbathandbeyond.com.
Here are some key points from the press release: Third quarter net earnings per diluted share were $1.09, in line with the preliminary estimate of $1.07 to $1.10 provided in our December 22nd press release.
Net sales for the quarter were approximately $3.0 billion, an increase of about 30 basis points over the prior year, or 70 basis points on a constant currency basis.
Comparable sales decreased approximately 40 basis points, or were relatively flat on a constant currency basis.
The Company is modeling fiscal fourth quarter 2015 net earnings per diluted share of approximately $1.72 to $1.86 and is now modeling fiscal 2015 full year net earnings per diluted share of approximately $4.91 to $5.05.
I will now turn the call over to <UNK> for his perspective on our third quarter results.
He will also discuss our operational results and the progress we've made on some of our strategic initiatives.
Later in the call, <UNK> will discuss our third quarter financial results in more detail, as well as review some of our key modeling assumptions for the remainder of fiscal 2015.
She will also provide some preliminary modeling assumptions for fiscal 2016.
Thank you, <UNK>, and good afternoon everyone.
As you see from our press release, and consistent with our prior announcement on December 22nd, our performance in the third quarter reflects the recent retail trends we have been experiencing.
As we said, on the one hand, we experienced softer in-store transaction counts, and on the other hand, sales from our customer-facing digital channels demonstrated strong growth, in excess of 25%.
These mixed results were against the backdrop of the overall softness reported in the macro-retail environment during the quarter.
During the third quarter, we experienced a low-single-digit percentage decline in our comparable sales consummated in stores.
At the same time, in our customer-facing digital channels, we are pleased that we have seen continued growth in both the number of visits to our selling websites, as well as in the number of orders placed on both desktop and mobile.
In our mobile channels, we set new record highs across all key performance indicators during the third quarter, including traffic, orders, sales, average order value and conversion.
Mobile sales during the quarter increased more than two-and-one-half-times compared to the same period last year.
These results directionally follow the trends of strong comps in our customer-facing digital channels and softer comps in stores.
As consumer shopping preferences continue to shift, we remain focused on providing a seamless customer experience across all of our retail channels so that our customers can interact with us however, wherever and whenever they choose.
In our December 22nd press release, we anticipated comparable sales through Christmas to increase approximately 1%.
Comparable sales from the beginning of the fiscal fourth quarter through Christmas were actually slightly ahead of that plan.
<UNK> will have more to say on our modeling assumptions for the fiscal fourth quarter and full year in a few minutes.
As we said, the retail environment continues to evolve, and we are making investments throughout the company, including in the areas of information technology, marketing, analytics, merchandising and customer service, to further our market leading position in the categories for which we are best known, and to do even more for and with our customers.
While we recognize that the investments we are making impact our operating profit in the short term, we believe our never-say-no culture and the strength of our balance sheet, provide a strong foundation, and through the differentiated products, services and solutions we provide, we continue to further our efforts to become THE destination for our customer's needs and wants as they express their life interests and travel through their life stages.
While most pure-play retailers who primarily sell merchandise in home-related categories are struggling with profitability, and others rely on outside sources of capital to remain viable, our Company generates healthy cash flows, and our strong balance sheet enables us to make strategic investments necessary to continue to create a best-in-class omni-channel platform to position us for long-term success.
Some examples of recent enhancements to our websites include a new feature for both desktop and mobile, that enables customers to upload their own personal content, such as images of how they have used products, so that other customers may view, enjoy and use them as inspiration.
Also, with regard to our website and apps, we have begun piloting a new solution for our customers to manage their Bed Bath & Beyond and buybuyBaby coupons and promotional offers in one place.
My Offers is a virtual coupon wallet that organizes and stores print and digital coupons and includes the ability to scan and upload paper coupons, so customers can access and redeem them conveniently.
We continue to learn from customer usage, as we further develop the appropriate strategic implementation of this customer-centric solution.
Another new offering on the Bed Bath & Beyond website is the ability to personalize products ---+ using a monogram, an etching or a personal image ---+ on such items as towels, glassware, rugs, and many other giftable items.
Over time, we plan to expand the selection and assortment available for personalization.
With regard to merchandising, we have introduced new categories and steadily expanded our assortment in others, and will continue to do so.
We currently have hundreds of thousands of SKUs available online and/or in store.
Our goal is both to increase the overall assortment, as well as to continue to curate and present the right assortment to our customers.
This requires the ongoing effort to review, edit, refine and present our offerings based on feedback from our customers, as well as the learnings from our merchant, marketing, and analytics teams.
Advancements in information technology further our efforts to connect with our customers across all of our retail channels.
We continue to build on our omni-channel strategy by creating services and experiences that are seamless across our digital and physical channels.
For example, we have enhanced our online registry experience this year for both wedding and back-to-college, by expanding the ability for registrants and potential registrants to schedule an appointment with one of our expert consultants in their local store.
In addition, we have recently launched a social shopping feature that enables registrants to invite their family and friends to recommend items for their registries.
Our service initiatives this year also included the opening of our new Customer Contact Center in October 2015.
Located in Layton, Utah, this new contact center enables us to supplement our 24/7 East Coast contact center operations with additional high-quality service and support.
We are committed to ever-improving our customer experiences wherever, whenever and however our customers wish to interact with us.
This year, in an effort to improve the efficiency and speed of delivery to our customers, and in conjunction with using our stores for fulfillment, we expanded the number of distribution facilities we have to 10, including our newest facility that opened earlier this year in Las Vegas.
In addition, in the Fall of 2016, we plan to open a new 800,000 square foot distribution facility in Lewisville, Texas.
We will continue to assess sites throughout the country for the potential to gain even greater distribution efficiencies.
We also have other important initiatives underway, including the deployment of systems, equipment and increased bandwidth in our stores; continued investments in analytics and marketing which make it possible for us to develop a more comprehensive view of our customers and drive better customer engagement through personalized target marketing; and ongoing development of a new Point of Sale system.
In our real estate efforts, we are on track to, approximately, open 29 and close 11 stores during fiscal 2015.
We had a total of 12 store openings during the third quarter, including five Bed Bath & Beyond stores, six Cost Plus World Market stores, and one buybuyBaby store.
We also closed six Bed Bath & Beyond stores during the quarter.
Since the start of our fourth quarter, we have opened one additional Bed Bath & Beyond store and one Cost Plus World Market store.
Year-to-date, we have opened 22 stores and closed seven.
As we've said previously, we actively manage our real estate portfolio in a manner that permits store sizes, layouts, locations and offerings to evolve over time to optimize market profitability.
This flexible approach has been an important part of our success and will continue to be going forward, especially as the digital and physical retail channels become more integrated.
We believe that physical stores provide a significant competitive advantage, and we concentrate on finding the right balance of physical and digital presence to optimize the products, services and solutions we offer to our customers.
For example, as you may know, we have leased approximately 130,000 square feet of space in the Sunset Park neighborhood of Brooklyn, to house four of our concepts under one roof.
This project gives us an opportunity to create a unique shopping venue to showcase our ever-increasing and evolving merchandise assortment and further integrate our omni-channel capabilities to provide a more experiential shopping environment.
We are planning to be open this summer.
In Mexico, our joint venture now operates seven Bed Bath & Beyond stores, including our newest store in Metepec which opened in early December 2015 and is our second store located outside of the Mexico City market.
Along with our partners, we remain excited about the growth opportunities in Mexico.
In addition to our retail operations, we continue to grow our complementary institutional business ---+ which includes Harbor Linen and T-Y Group ---+ by leveraging our combined expertise, product knowledge, distribution synergies and relationships, to provide products and services to hospitality, travel and other institutional customers.
As I said earlier, we view the ever-evolving retail environment as an opportune time for us to drive change through significant investments in our business ---+ both online and in-store.
We remain committed to, and focused on, positioning our Company for long-term success.
I'll now turn the call over to <UNK>.
Thank you, <UNK>.
I'll begin with a review of our third quarter results, and then provide an update on some of our key modeling assumptions for the remainder of fiscal 2015, as well as provide a few modeling assumptions for fiscal 2016.
Net sales for the third quarter were approximately $3.0 billion, about 30 basis points higher than net sales in the prior year period, or approximately 70 basis points higher on a constant currency basis.
Comparable sales for the third quarter decreased approximately 40 basis points, or were relatively flat on a constant currency basis, reflecting an increase in the average transaction amount, and a decrease in the number of transactions.
As <UNK> said, sales from our customer-facing digital channels demonstrated strong growth, in excess of 25%, while our comparable sales from stores declined in the low single-digit percentage range.
Gross profit for the third quarter was approximately 37.8% of net sales, compared to approximately 38.4% of net sales in the corresponding period a year ago.
Gross profit, as a percentage of net sales, decreased primarily due to an increase in inventory acquisition costs.
Also contributing to the decrease, as a percentage of net sales, was an increase in coupon expense resulting from a slight increase in the number of redemptions and a slight increase in the average coupon amount.
Selling, general and administrative expenses for the third quarter were approximately 27.9% of net sales, as compared to 26.4% of net sales in the prior year period.
Of the increase in SG&A, as a percentage of net sales, approximately 45 basis points was attributable to a non-recurring benefit relating to a credit card litigation settlement in the third quarter of 2014, which was not anniversaried this quarter.
This non-recurring, prior-year benefit, was approximately $0.05 per diluted share, based on this quarter's actual share count.
The majority of the remaining increase in SG&A, as a percentage of net sales, in order of magnitude, was due to an increase in payroll and payroll related items, and an increase in advertising expense due in part to the growth in digital advertising.
Our tax rate for the third quarter of 2015 was approximately 35.3%, compared to approximately 32.3% in the third quarter of 2014.
The third quarter provisions included net after-tax benefits due to distinct tax events occurring during these quarters of approximately $6.9 million this year, as compared to approximately $16.7 million last year.
This year over year unfavorable difference is approximately $0.06 based on this quarter's actual share count.
Considering all of this activity, including the unfavorable, non-comparable items, totaling $0.11, which I just mentioned, as well as approximately $0.02 from an unfavorable foreign currency rate impact in the third quarter of 2015, net earnings per diluted share were $1.09 for the third quarter of 2015 as compared to $1.23 for the third quarter of 2014, in-line with the preliminary estimate we provided on December 22nd.
Turning to some highlights on the balance sheet: As of November 28th, 2015 our cash and cash equivalents and investment securities were approximately $565 million.
Retail inventories, which include inventory in our distribution facilities for direct-to-customer shipments, were approximately $3.2 billion at cost.
Retail inventories continue to be tailored to meet the anticipated demands of our customers and are in good condition.
Capital expenditures for the nine months of 2015 were approximately $244 million, and included expenditures for technology enhancements, new stores, existing store improvements, the new customer contact center, the new distribution facility in Las Vegas, as well as other projects.
Consolidated shareholders' equity at the end of the third quarter was approximately $2.6 billion, which is net of approximately $194 million, representing about 3.3 million shares repurchased during the period.
The Company's current $2.0 billion share repurchase authorization had a remaining balance of approximately $110 million at the end of the third quarter and is now expected to be completed in the fourth quarter of fiscal 2015.
Upon completion of the current program, the Company will begin to repurchase shares under its new $2.5 billion share repurchase program, authorized in September 2015.
As a reminder, our quarterly share repurchase activity may be influenced by several factors including business and market conditions.
Now I'd like to provide an update of some of our modeling assumptions for the remainder of fiscal 2015.
These include the following: Based upon fourth quarter sales to date, and our assumptions for the remainder of the quarter, we are now modeling comparable sales to be between relatively flat and an increase of approximately 2%, including an unfavorable foreign currency rate impact of approximately 30 basis points.
We are modeling comparable sales consummated through our customer-facing websites and mobile apps to grow in excess of 25% and store comps to be a low single-digit decrease to relatively flat for the fourth quarter.
As <UNK> mentioned earlier, this directionally follows the trend of strong comps in our customer-facing digital channels and softer comps in stores.
For the full year, we are modeling comparable sales to increase in a range of approximately 0.6% to 1.1%, including an unfavorable foreign currency rate impact of approximately 40 basis points.
Consolidated net sales are modeled to increase approximately 0.7% to 2.7% in the fourth quarter.
This results in a modeled full year consolidated net sales increase of approximately 1.4% to 1.9%.
Our model includes an unfavorable foreign currency rate impact of approximately 40 basis points for the fourth quarter and full year.
Assuming these sales levels, we continue to model gross profit deleverage, as a percentage of net sales, for the fourth quarter and full year.
We also continue to model the full-year gross margin deleverage to be less than it was in fiscal 2014.
We are modeling SG&A deleverage for both the fourth quarter and full year, which includes increases in investments in compensation and benefits, advertising and technology related expenses.
Depreciation expense for fiscal 2015 is expected to be approximately $260 million.
Annual interest expense is now anticipated to be approximately $83 million, primarily resulting from the interest related to the $1.5 billion of senior unsecured notes and from our sale/leaseback obligations related to certain distribution facilities.
The fourth quarter tax rate is estimated to be in the mid-30's percentage range, with an expected variability as distinct tax events occur.
We expect to continue generating positive operating cash flow.
Capital expenditures in 2015 are now modeled to be approximately $350 million, subject to the timing and composition of projects.
Our technology-related projects continue to represent a significant portion of our planned capital expenditures for the year, and include the deployment of new systems and equipment in our stores, enhancement to our omni-channel capabilities, ongoing investment in data analytics, the continued installment of new equipment and systems in conjunction with the utilization of our new data center in North Carolina, and the continued development of a new point-of-sale system.
Our model reflects completion of our current $2.0 billion share repurchase program in the fourth quarter of 2015, at which time we plan to repurchase shares under our new $2.5 billion authorization, and we estimate this new program to be completed in fiscal 2019.
This repurchase program, however, may be influenced by several factors including business and market conditions.
We are modeling diluted weighted average shares outstanding to be approximately 160 million for the fourth quarter, and approximately 165 million for the full year.
We are modeling an unfavorable foreign currency exchange rate impact of approximately $0.06 per diluted share for all of fiscal 2015, based on a Canadian currency exchange rate for the fourth quarter of approximately CAD1.38 to each US dollar.
This $0.06 estimate includes approximately $0.02 in the fourth quarter.
Based upon these and other planning assumptions, we are now modeling net earnings per diluted share to be approximately $1.72 to $1.86 for the fourth quarter, bringing the full year modeled net earnings per diluted share to a range of approximately $4.91 to $5.05.
Turning to fiscal 2016, while we are in the process of completing our annual budget, our preliminary modeling assumptions include the following: We expect to make continued investments in technology and in our omni-channel capabilities.
We anticipate opening approximately 30 stores across all concepts, and closing approximately 10 stores.
We expect to continue our program of renovating or repositioning stores within markets where appropriate.
We anticipate interest expense of approximately $81 million including the interest related to the $1.5 billion of senior unsecured notes and from our sales/leaseback obligations related to certain distribution facilities.
We expect continuing variability in our quarterly tax rates.
Our model reflects repurchases under our new $2.5 billion share repurchase authorization, with an assumed completion in fiscal 2019, and which may be influenced by several factors, including business and market conditions.
We expect comparable sales growth from our customer-facing digital channels to continue to exceed comparable sales growth from stores.
We will provide further information related to the fiscal first quarter and full year of 2016 on our next quarterly conference call on April 6, 2016.
I'll now turn the call back to <UNK>.
Thank you, <UNK>.
As we said before: The retail environment continues to evolve; We are driving change through significant investments in our business ---+ across our organization, including our websites and apps; While these investments currently place pressure on our operating profit, we believe this is an opportune time for our Company, as we continue to position Bed Bath & Beyond for long-term success.
As we begin a new year, I would like to thank our more than 60,000 dedicated associates for all of their efforts.
Through their passion to succeed and satisfy our customers, and through the differentiated products, services and solutions we provide, we will continue to do more for and with our customers wherever, whenever, and however they wish to interact with us, and further our efforts to become THE destination for our customer's needs and wants as they express their life interests and travel through their life stages.
Thank you for listening in today.
We wish you all a very healthy and happy New Year.
<UNK>, <UNK> and Ken Frankel will be here tonight to answer any of your questions.
Thank you.
| 2016_BBBY |
2017 | ARW | ARW
#On the ERP piece we are still doing sort of horizontal implementation in the Americas.
So, we expect that we will have that completed primarily this year over time.
And there's not going to be any rush or any big bang or anything like that.
It's going to operate much the same way you saw Europe and Asia.
In fact, it has been.
There's already aspects of that conversion that have taken place.
And you know, knock on wood, it's all been without a hitch so far, without any problems.
And we expect it to just continue that way, given our approach.
| 2017_ARW |
2016 | STRA | STRA
#Well, our approach to new students is to focus on building a brand so that when people are contemplating returning to college, as part of their due diligence, they are going to consider Strayer University.
The specific initiatives that we are focused on really revolve around our affiliated channel.
That is one we are very actively trying to grow and build, and that is really a two-pronged approach.
It is deepening the relationships that we have with national accounts, and that means expanding the numbers of arrangements we have and also the numbers of students that we get from each individual one.
And there is a lot of work that goes into that, activating those relationships at a deep level.
And we think we are aided in the fact that we have 78 physical locations, and within those communities, our campus staff members are able to network and make relationships at a local level with these various employers.
So that is a big part of what we do.
The other thing is obviously Strayer@Work.
We created what we consider to be a pretty groundbreaking program with degrees@Work.
We have ---+ yes, Chrysler Automotive is the first customer.
We expect that, over time, we will have thousands of students from that relationship.
So, in terms of specific initiatives, that is where our management team is focused.
In terms of unaffiliated students, we obviously welcome them.
We want to do a good job educating them.
To the extent that we are building brand and advertising, it may or may not reach them, but in terms of a specific initiative to try to get more unaffiliated students, we are actually doing the opposite.
We are trying to build the affiliate channel to be as big as we can get it.
Well, we hope the mix shift continues to more affiliated students.
We expect that that will be the case, and we also expect that there will be quarters where the unaffiliated segment grows.
That has happened in the past.
This particular quarter ---+
No, I was just going to say, the longer trend line will be to more affiliated new students and fewer unaffiliated students.
No, the startup costs will be quite low.
For the most part, we will be using existing Strayer University facilities, meaning our campuses that requires virtually no change to the footprint.
Really, the only startup expenses are a handful of people that are needed to teach the courses, maybe an administrator, so that the startup and operating expenses are actually pretty low.
No.
Good question, <UNK>.
It means students who are enrolled in Strayer University in a degreed program.
There is other revenue at Strayer@Work that is non-degreed, and I am not including that in those comments.
Yes.
Only to the extent that it would be material, and at this point, it is not.
Thank you.
Yes.
Thank you.
It is a big part of what we are planning for this year.
So we are into a multi-year effort to really focus on outcomes and retention.
And we started down a three-pronged strategy, <UNK>, really.
And the first one was just really getting better at adaptive learning.
So being able to deliver up highly personalized interventions to people, particularly early on in their first year, where the vast majority of attrition happens over a cohort's lifetime.
So we have been pretty successful at that.
We have talked a lot, I think, about our use of predictive analytics.
That was a game changer for us, too.
We were able to really hone in on what drives both faculty engagement and student engagement, and that has been a big driver of the retention gains that we have had.
The third and final prong of that is to try to reinvent online learning, really.
Online learning tends to be boring, dull, in some cases, and so we are creating an internal, what we are calling, studio.
But it is really ---+ it is part filmmakers, part instructional designers, part faculty subject matter experts, to really redefine what an online course is, to use more short form documentary, nonfiction storytelling.
Because what we know from our experience with adaptive learning, if students will just take the time to interact with the material, they, by and large, are very successful.
The problem is, the material has not sort of kept up ---+ the quality and engagement of the material has not kept up with the advancement in analytics and adaptive learning, and we are trying to address that by really creating very immersive content.
We have done a couple of courses as tests, and the results have been really positive.
We have seen retention gains in excess of 500 basis points when we have run these tests, so we think that there is a lot of opportunity here.
And it will be the primary focus of our academic leadership team over the next 12 to 18 months to take every one of our high-volume courses and build it with this sort of storytelling arc and really try to redefine what an online course even is.
It will all be part of what we expect to be our normal spin on CapEx.
We think we're going to be able to produce these courses in a very economic way.
And when you are leveraging talent across 10 or 20 or even 30 very high-volume courses, the actual cost per course is not that significant.
And so we are just looking forward to getting them rolled out.
For the quarter, it is not.
It is actually down.
But for the year, we still expect higher CapEx, <UNK>, than last year by a few million dollars.
You know, when we get to a point where we are going to roll one out, we would be happy to do a demonstration for you, <UNK>.
Happy to let you kind of see what we think a course could look like.
The team is working on the first one.
It is an introductory business course.
It is kind of, let's say it is in the early 10% done range, but we are hoping to have it done before the end of this year in time for our fall term, and we would love to give you a demonstration of it.
| 2016_STRA |
2018 | TREX | TREX
#Thank you, <UNK>.
Before we begin, let me remind everyone that statements on this call regarding the company's expected future performance and conditions constitute forward-looking statements within the meaning of federal securities law.
These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements.
For a discussion of such risks and uncertainties, please see our most recent Form 10-K and Form 10-Qs as well as our 1933 and other 1934 Act filings with the SEC.
The company expressly disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
With that introduction, I will turn the call over to Jim <UNK>.
Thank you, Bill, and good afternoon, everyone.
Thanks for participating in today's call to review our fourth quarter and full year results and discuss our outlook heading into 2018.
2017 was Trex Company's fifth consecutive year of record revenue and earnings.
Over the last 5 years, our revenue growth has averaged 13% and our EBITDA has grown by about 25%.
This is a clear confirmation of the continuation of the positive trends we have seen in our business and our ability to capture market share, drive consistent production and process improvements and manage our cost structure.
Our fourth quarter results represented a strong finish to another excellent year.
Revenue growth from Trex Residential Products was 15%, reflecting strong organic activity during the quarter as well as positive dealer and distributor response to our Early Buy Program.
Current industry data can be hard to come by, but it's safe to say that our industry continues to gain share from the dominant wood market.
As the brand leader with our targeted advertising and marketing campaigns, we are confident that Trex is gaining a significant share of this conversion from wood.
Our website analytics for full year 2017 tell the story and support our confidence in our future growth.
Traffic to the purchase indicator areas of our website drove a double-digit increase compared to 2016.
Data coming from our markets outside of North America was even more robust.
Similar to prior quarters in the last several years, we were able to convert our strong top line growth in Residential Products to a much stronger growth to profitability.
Several factors contributed to the significant operating leverage that we achieved in the fourth quarter.
Gross margin expansion reflected our success in the execution of significant manufacturing cost savings initiatives, reduced global demand for recycled polyethylene and new sources of lower-cost material and higher-capacity utilization.
I know there's been a significant interest in how we're able to continuously drive reductions of the magnitude that our performance implies.
So here is one example of an initiative that is underway.
In the fourth quarter, we completed the testing of the first phase of various improvements to our decking lines that will provide a step-change in the manufacturing process for our deck boards.
In the first quarter of 2018, we began to implement the production line enhancements and will complete this phase by the end of the year.
This retrofit not only provides material expansion of our decking capacity, but also drives significant cost savings that we will begin to realize in the second half of 2018.
This is the type of high-return, high-impact initiatives that our operations and R&D teams are focused on to propel our business forward.
As we move ahead into 2018, we'll provide additional color on this project.
At the same time, we continue to allocate a portion of our SG&A spending on the future.
These investments include personnel, R&D and branding to support the expansion of both our top and bottom line in the periods ahead.
In the fourth quarter, the strong performance of our Residential Products segment more than offset softer results from Trex Commercial Products, where revenues were slightly lower than expected due to project-related timing.
Additionally, we continue to make progress on execution issues, primarily associated with legacy commercial projects.
These challenges are similar to what we experienced at Trex in 2008 through 2010.
We are working together with the Commercial Products team to implement the improvements necessary to deliver margin enhancements by the beginning of the third quarter of 2018 as we've previously discussed.
The acquisition of SC has brought additional capabilities and efficiencies to our Residential Product development initiatives.
We met with many of you at the 2018 International Builders' Show, where we introduced the new Trex Signature rod rail, which combines a view enhancing design with the trendy industrial style that has captured the attention of the homeowners and has the look, durability and low maintenance qualities that define Trex products.
We are able to bring that product to market in about 1/3 of the time that it would have taken us without the combined support of the commercial and residential engineering teams.
This is important, because over 2/3 of the decks sold in the United States today are fitted with railing.
We see this as a continuing growth pattern ---+ platform for Trex, and you can expect us to continue to roll out additions to our railing product offering throughout 2018.
We will also continue to drive innovation in the commercial railing space, similar to the product showcased and the impressive array of custom railings at the January 2018 International Building Show.
To sum up 2017, it was a year of continued strong support for Trex products driven by successful branding campaigns, strong relations we have with our business partners and the attributes of our products: high quality, low maintenance and environmentally responsible, all of which are increasingly important to the homeowners today.
At the same time, we executed well across the organization, achieving manufacturing cost savings and efficiencies while also focusing our SG&A spend on current as well as future opportunities.
This is the same formula that has supported our record results over the last 5 years.
I would now like to turn the call over to CFO, <UNK> <UNK>, who will provide additional insight to our financial performance.
<UNK>.
Thank you, Jim.
Good afternoon, everyone.
I'm pleased to report on another year of record sales, gross margin and net income.
Before I get into the quarter and year-end results, as a reminder, EBITDA, net income and earnings per share for the 2016 fourth quarter and full year have been restated to reflect the adoption of the new FASB standard related to deduction of stock compensation.
Also, when I discuss 2016 adjusted figures, I'm excluding the effect of a $9.8 million warranty reserve charge taken in the third quarter of 2016.
Fourth quarter sales increased 28% year-over-year to $122 million, reflecting robust organic growth of Trex Residential Products, where sales amounted to $110 million, a 15% increase from the year-ago quarter.
As in recent quarters, this growth was virtually all related to volume.
Trex Commercial Products contributed $13 million to fourth quarter sales, modestly below our expectations, which was driven by timing of projects.
Consolidated gross margin expanded by 170 basis points to 41.7%.
Trex Residential Products gross margin was 45.9%, 590 basis points ahead of last year, thanks to manufacturing efficiencies, lower input costs and higher capacity utilization.
Trex is perfectly positioned to continue to benefit from China's ban on waste materials.
Recycling market is pressuring scrap prices, continuing to provide Trex a significant raw material advantage.
We also continue to invest in R&D programs to develop processes that will allow us to use a greater variety of scrap material, including lower-cost and harder-to-recycle sources.
SG&A for the quarter amounted to $26 million, up 39% from the same quarter in 2016.
This growth was as a result of the addition of Trex Commercial Products, branding and personnel-related expenses to support future growth.
Also, SG&A this quarter included $1.2 million in non-cash amortization of intangible expenses related to the acquisition of SC Company.
Exclusive of amortization expense, SG&A was 19.9% of sales for the quarter.
In the fourth quarter, EBITDA increased 29% to $30 million, up $23 million in the year-ago quarter ---+ up from $23 million.
Commercial EBITDA was negative for the quarter due primarily to legacy low-margin contracts.
We expect these contracts to continue to weigh on commercial gross margins through the first half of this year, though the impact will diminish through the first half.
Residential EBITDA increased 38% to $32 million compared to last year's fourth quarter.
Net income was $18 million or $0.62 per diluted share, year-over-year increases of 45% and 44%, respectively.
Our net earnings included a onetime positive impact of $1.9 million or $0.06 per share as a result of the revaluation of deferred tax assets and liabilities in light of the recently enacted Tax Cuts and Jobs Act.
Due primarily to the lower-margin legacy contracts I mentioned at Trex Commercial Products, they had a $0.07 negative impact on the earnings for the quarter.
Full year 2017 sales amounted to $565 million, an 18% increase from 2016 with Trex Residential Product sales up 13% to $543 million.
This increase was driven mainly by volume growth that was positively impacted by continued strength in the remodeling sector, market share gains from wood and share gains within the composite industry.
The remaining $22 million was Trex Commercial Products sales contribution from the period from the date of the acquisition of July 31, 2017, through year-end.
You can find further details on both Trex Residential and Trex Commercial Product segments in the 10-K, which will be filed today.
Consolidated 2017 gross margin was 43.1%, a 410-basis point improvement from last year and 200 basis points higher than the 2016 adjusted gross margin, reflecting primarily cost-reduction initiatives, lower-cost raw materials and increased capacity utilization at our Trex-branded decking and railing plants.
Our SG&A expenses for 2017 were $101 million compared to $83 million in the prior year.
As a percentage of sales, however, we saw a 60-basis point increase to 17.9%.
This percentage was slightly ahead of our guidance or flat year-over-year percentage.
The increase was primarily related to the acquisition of SC Company.
SG&A costs related to the acquisition include $2.5 million of intangible amortization and other transaction costs.
The effective tax rate for the year ended 2017 finished at 33%, down 100 basis points from a year ago, primarily due to the recently enacted Tax Cuts and Jobs Act and as a result of deferred tax assets and liabilities revaluation.
Net income for the full year amounted to $95 million or $3.22 per diluted share, year-over-year increases of 40% and 41%, respectively.
For full year 2017, operating cash flows were a record $102 million, 19% ahead of prior year, and capital expenditures were $15 million, similar to the prior year.
The SC acquisition was fully financed with internally generated funds.
For financial modeling purposes, please note following items: We expect consolidated incremental margin for the full year 2018 to be approximately 45%.
Recall that Trex will have a 12-month effect from the SC Company acquisition, which carries lower margins than the residential segment versus 5 months that were included in the 2017 financials.
Full year capital spending is projected between $20 million and $25 million.
SG&A is expected at 17.5% for the year, down 40 basis points from 2017.
Recall that 2018 also includes $900,000 of intangible amortization over the amount expensed in 2017.
Intangible amortization related to SC acquisition in 2018 will total approximately $2.9 million.
In light of the recently enacted tax cut, the company currently estimates the related reduction in corporate tax rate will result in an effective tax rate of approximately 25% for 2018.
Now I will turn the call back to Jim for his closing remarks.
Thanks, <UNK>.
We expect 2018 to be another year of exciting opportunities for Trex.
First, there are the macro tailwinds.
Projections are for continued growth in the repair and remodeling market, and consumer confidence levels remain strong, 2 indicators that we track closely.
At the same time, the composite market is clearly taking share from wood, and Trex continues to gain share of composites, all pointing to the positive momentum that we will expect to benefit Trex in 2018.
Additionally, we expect to continue to capitalize on the structural benefits of our unique recycling business model and our ongoing manufacturing cost-reduction initiatives to continue to expand our margins.
As <UNK> mentioned, the tax reform act will result in a significant reduction in our effective tax rate in 2018.
Based on historical experience, we believe that consumers will utilize a portion of their reduced taxes to improve their homes by investing in outdoor living.
With respect to our capital allocation program, our priorities remain the same: organic investments, acquisitions and share buybacks.
As for the latter, our Board of Directors just authorized a new share repurchase program of up to 2.9 million shares of our outstanding common stock.
This replaces the plan that was in place prior to the end of the year.
Looking ahead to the first quarter of 2018, we expect to report consolidated sales of $172 million, representing a 19% growth.
This is comprised of $157 million from Trex Residential Products, about 8.4% organic revenue growth and $15 million of Trex Commercial Products.
I'd like the listeners to remember that with regard to Trex Residential Products, the first quarter of the year is primarily a load end to distribution as well as dealers and does not represent a sell-through of our product.
Operator, I'd now like to open the call up to questions.
Yes, it is correct that we did see a greater level of participation than what we had anticipated when we provided the guidance.
The incremental sales you saw in residential primarily was a result of that.
As far as getting into further details, I don't think we will on this call.
Yes.
It's merely a timing.
Those projects, we started to see the impact of those actually in January.
So we expect that we will, in fact, pick those projects up.
This related to a long, long lead time project.
The timing, which, as we've mentioned before, cannot be exactly predicted as to when the user will take the product.
Yes.
I don't think you see much of that in the Early Buy, Matt.
With regard to prices, you're correct.
One of our major competitors did, in fact, increase prices.
Trex did not follow those increases as we have been able to offset increases in certain areas with a variety of cost-reduction initiatives, both material and operational related.
This time of year, the December through, basically, March is when we load the channel up.
And for example, the mid-Atlantic has seen pretty decent weather over the last week, and what we try and do is we try and put product into the hands of the dealers so that we can participate in any early takeaway that might open up due to favorable weather conditions.
Yes.
I think it was merely to be an example of one of the more meaty type of projects that we're implementing.
It's a one of many.
We just went through a listing today, and it's about a 3-page listing of cost-reduction initiatives that are in place.
Some of them are meaty like this one.
Some of them are much smaller.
We, like a number of businesses, are experiencing pressure in a variety of areas from a cost standpoint.
We see, for example, transportation costs going up, and more importantly, the availability of transportation becoming a greater challenge not only for us but also for our customers.
This is not unique to Trex.
This will be something that will affect every company across North America.
Transportation is going to be a challenge, and one way to alleviate that challenge is to pay additional money for those shipments.
So our view is that we've got a good cost-reduction model.
It's very similar to the number of projects we had in prior years, a little bit more exciting with some of the projects we have already launched.
But nonetheless, probably we'll deliver similar savings as you've seen in the past.
Matt, we also see that investment like this will benefit us both from a top line as well as from a margin perspective.
We're able to produce our product more efficiently if we can get it to the customer on a more timely basis, especially during the busiest parts of the season, something that we've really excelled at for a number of years now.
And then from a margin perspective, I think that speaks for itself with the performance we've had over the past couple of years as well as the incremental margins that we're expecting going forward.
And this project is included within that guidance.
Right.
So we started to see benefits coming out of China in late ---+ it was really pretty much the end of '15, not as much the benefits but we see ---+ started to see the market change.
We started to generate the benefits in 2016 and into '17.
When they officially came out with the announcement, it was midway through '17 that they were backing away from a market in a more formalized basis.
We were already well down the road.
We do expect some continued benefit not to the same extent that we've seen over the past 2 years in that marketplace, but we do see there's pockets of materials.
There are alternative recycled materials that our R&D team and manufacturing teams are extremely active in vetting.
So it's not just the China ban.
There are other materials that aren't as widely used that the organization is focused on.
Yes.
With regard to channel inventory is ---+ I know you're aware, we don't have an exact read on the channel inventory, but our best information indicates very typical for this time of year.
I would say the channel inventory is slightly higher because the expectations of our customers and the resulting dealers is for a stronger year this year than what we had in 2017.
So from that standpoint, we believe that very normal inventory positions.
We don't expect the margins to be consistent with what we saw in the fourth.
We believe they'll be better.
They'll be improving throughout the first half.
The only question is how quickly they will improve.
We had a number of contracts that were in place when the acquisition was completed.
And while some of those projects, actions could be taken, in many of those, the die was cast, and what we need to do is just fulfill them and move forward.
That's correct.
That is for the entire year.
We're not going to get into trying to do incrementals on a quarterly basis.
If you look quarter-over-quarter historically, it can be somewhat volatile, and it will change depending upon the performance of that quarter.
We have been very accurate when you look at it on a full year basis, and I think that's the best way to go with modeling.
Jim is correct when he mentioned that we expect that investment to assist us in the back half of the year, but there's other things we'll be doing from an operational perspective that will benefit us in the first half of the year as well.
That's correct.
And also, just remember, this is the consolidated corporation.
This includes both commercial and residential.
No, there really isn't a seasonal nature of that business.
It is project driven.
For smaller projects, the more even it's going to be, but when you get some of these larger projects, that can change the timing of it.
But it's not really related to seasonal.
There are some large ones, but to give you an idea of lumpiness, for example, in the fourth quarter, the movement, I think, was under a $2 million movement from 1 quarter to the other compared to what we had anticipated were going to take place.
So it's not really material to the consolidated results, but it does become lumpy.
Now having said that, there are some major contracts that we are engaged in a bid process on that are of a magnitude that could generate something greater than a couple of million dollar swing.
But those would be contracts you wouldn't see until perhaps the end of '18 at the earliest and more likely in 2019.
Well, their materials are split primarily between 2 things: stainless steel and aluminum, primarily stainless steel though.
Now what we do is we have to monitor what we believe is going to be happening with the future cost of that material and build those into our quotations.
So I would say, you can monitor that and expect that we would generally be including expected inflation within those contracts.
So from a margin perspective, we would not anticipate adverse impact on the contracts.
So the CapEx number provided is inclusive of those investments and really nothing further.
It was just an example of the type of programs that we have in place to be able to continue driving the financial benefits of the company.
Thank you.
I know that it's not lost on all of you that it is not a single group of people but rather a full team of the Trex employees that have driven these fantastic results for 2017.
It's the same team that's going to deliver on an outstanding 2018.
I've been privileged to work with this group for 10 years now.
The time has just flown by.
Can hardly believe it.
And they've never ceased to amaze me with their dedication and focus on delivering both top line and bottom line results.
We look forward to talking to you again with our first quarter results, and I want to thank everyone for participating today.
Have a good evening.
| 2018_TREX |
2017 | SPOK | SPOK
#Good morning, and welcome to the Spok second quarter investor call.
Today's call is being recorded.
On line today we have Vince <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Chief Financial Officer; and <UNK> <UNK>, President of Spok's operating company.
At this time, for opening comments, I would like to turn the call over to Mr.
<UNK>.
Please go ahead, sir.
Thank you, and good morning.
Now thank you for joining us for our second quarter 2017 investor update.
Before we discuss our operating results, I want to remind everyone that today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Spok's future financial and business performance.
Such statements may include estimates of revenue, expenses and income as well as other predictive statements or plans which are dependent upon future events or conditions.
These statements represent the company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.
Spok's actual results could differ materially from those anticipated in these forward-looking statements.
Although these statements are based upon assumptions that the company believes to be reasonable, they are subject to risks and uncertainties.
Please review the Risk Factors section relating to our operations and the business environment in which we compete contained in our 2016 Form 10-K; our second quarter Form 10-Q, which we expect to file later today; and related documents filed with the Securities and Exchange Commission.
Please note that Spok assumes no obligation to update any forward-looking statements from past or present filings and conference calls.
With that, I'll turn the call over to Vince.
Thanks, Mike, and good morning.
We're pleased to speak with you today regarding our second quarter operating results and what we believe was a solid performance for Spok.
We continue to see the benefits from investments that we are making to enhance and upgrade our product development team and tools as well as our sales infrastructure and management.
We believe these investments will yield significant future benefits with respect to our integrated communications platform, Spok Care Connect; our enhanced and upgraded sales team; and our growth potential.
During the quarter, we saw strong performance in a number of key operating metrics.
We made further progress towards transitioning Spok to a long-term growth model by delivering industry-leading clinical communication solutions.
In general, our performance in the second quarter was consistent with our expectations and the seasonal trends we typically experience during the year.
We are particularly pleased as we saw a continued reduction in the decline of our paging units and wireless revenue to record low levels.
Software revenue was up more than 7% from the prior quarter and in line with the prior year performance.
We believe we are well positioned for the second half of the year as software bookings exceeded $20 million and were up 3% from the prior quarter, while our backlog was up nearly 7.2% over the same period.
Software maintenance revenue was another area of strong performance due to a more than 99% revenue renewal rate on maintenance contracts.
Similar to Spok's wireless revenue stream, software maintenance revenue is a recurring revenue stream that provides the company with a more stable revenue and margin base.
This quarter, more than 84% of our revenue streams were recurring in nature when you consider our solid wireless base and software maintenance contracts.
This strong revenue base provides us with the ability to make key investments in our business while executing on our capital allocation strategy to enhance long-term stockholder value.
In the second quarter, we also saw strong performance in a number of other key operating metrics, including solid improvements in operating expense management.
Overall, we continued to operate profitably, enhance our product offerings and maintain a strong balance sheet while returning capital to our shareholders in the form of dividends and stock repurchases.
Mike and <UNK> will provide details on our financial and operating performance shortly.
But before that, I want to highlight a few key results for the second quarter.
First, wireless subscriber and revenue trends continue to improve.
Our annual rate of paging unit erosion for the quarter improved to a record low of 5.1%, while the quarterly rate improved 40 basis points sequentially to 0.4%.
Our Healthcare segment increased by approximately 3,000 units in service in the second quarter.
In addition, our annual and quarterly rates of wireless revenue erosion improved.
Also contributing to slower wireless declines was a stable ARPU, or average revenue per unit.
We were pleased to see the continuation of these positive trends, especially in our top-performing Healthcare segment, which now comprises approximately 80% of our paging subscriber base.
Second, software bookings of $20.4 million in the second quarter included $10.5 million of maintenance renewals, which is a record high.
Operations bookings totaled $9.9 million for the second quarter, in line with prior year results.
And our software backlog grew to nearly $43.5 million at mid-year.
Bookings included sales to both new and current customers with existing customers adding products and applications to expand their portfolio of communication solutions.
Overall, we continue to see growing demand for our software solutions for critical smartphone communications, secure texting, emergency management and clinical alerting.
We are proud to be working with more than 1,900 hospitals worldwide, including all of the best adult and children's hospitals, as defined by U.S. News & World Report.
Spok continues to build an industry-leading reputation and is generating activity and momentum at conferences we attend.
We're continuing to establish ourselves as a thought leader within the industry.
In May, we released the second part of the company's annual mobility and healthcare survey.
Spok has been conducting this survey since 2011 to assess mobile workflow enablement trends in hospitals across the country.
More than 300 U.S. healthcare professionals responded to this year's survey regarding mobile strategy development, bring your own device policies, communications infrastructure and opportunities to improve mobile communications.
Spok will continue to leverage the attention that we are receiving as a thought leader within our industry.
Third, consolidated operating expenses in the second quarter, excluding depreciation, amortization, accretion and research and development costs, continued to improve on both an annual and sequential basis.
We've discussed the investments that we are making in our product development and sales platforms.
Most of that increase is reflected in our research and development category, which is up approximately 45% on a year-over-year basis.
Mike will provide a bit more detail in a few minutes.
But net of these expenses, we have seen improvement in many expense categories.
Fourth, consolidated EBITDA, or earnings before interest, taxes, depreciation and amortization was $5.3 million, or 12.4% of revenue in the second quarter, 130 basis point improvement from the EBITDA margin in the prior quarter.
Of course, margin levels will fluctuate over time, reflecting our level of investment and an aggressive hiring program in the areas of product development and sales.
However, longer term, we are focused on transitioning to a sustainable and profitable growth model.
And finally, again, we generated free cash flow in the second quarter, contributing to our ability to return significant capital to our stockholders in the form of cash dividends and share repurchases.
During the quarter, the company paid cash dividends to stockholders totaling $2.5 million, or $0.125 per share.
We also repurchased nearly 573,000 shares of common stock under our stock buyback program.
I'll comment further on our capital allocation strategy later in the call.
All in all, we posted solid operating results in the second quarter, and we look forward to further progress throughout the second half of 2017.
I'll make some additional comments on our business outlook in a few minutes.
But before I turn the call over to Mike <UNK> to review the financial highlights, let me briefly talk about a key addition we made to Spok's management team in the second quarter.
In mid-May, we announced that Mark Costanza had joined the company in a new role of Spok's Senior Vice President of Professional Services.
The addition of this role reflects our plans to broaden our portfolio of professional services and upgrade our enterprise delivery services and capability.
Mark has been a great add to our leadership team, and we've already seen the benefits from the experience and talent he brings to our organization.
With his background in building vision and cultivating relationships as well as his track record of improving the operations of hospitals and other healthcare IT businesses, Mark is the right person to join our executive team as we build for the future and growth.
Spok has been very successful over the past few quarters in building our bookings and backlog levels.
Mark will be laser-focused on running our professional services group to accelerate the conversion of that backlog into our revenue stream as we continue to take advantage of the large market opportunity in the healthcare IT market.
With that, I'll turn the call over to Mike.
Thanks, Vince.
Before I review our financial highlights for the second quarter of 2017, I would again encourage you to review our second quarter Form 10-Q, which we expect to file later today, since it contains far more information about our business, operations and financial performance than we will cover on this call.
As Vince noted, we were pleased with our overall operating performance for the second quarter and remain focused on executing against our business plan as we enter the second half of the year.
In addition to the substantial progress we made toward meeting our long-term business goals, we saw solid sequential improvement in a number of key operating metrics.
Revenue contribution from both software and wireless, combined with focused expense management, helped increase our quarterly operating cash flow, EBITDA and operating margins for the quarter as we continue to invest in our business for long-term growth.
We also maintained our already strong balance sheet and continue to operate as a debt-free company at quarter-end.
In the interest of time today, I will not review our second quarter performance on a line-by-line basis, since much of that information is contained in our news release, schedules and federal filings.
If you have specific questions about our quarterly financial results, I would be glad to address those during the Q&A portion of this call.
Instead, I would like to focus this morning on 4 key areas that I feel will give you a better idea of the drivers of our second quarter performance.
These include a review of certain factors that impacted second quarter revenue, a review of selected items that impacted second quarter expenses, a brief review of certain balance sheet items, and finally, our financial guidance for the remainder of 2017.
With respect to revenue, the second quarter total revenue was $42.3 million, up more than 2% from the prior quarter.
Second quarter revenue performance resulted primarily from continued strong maintenance revenue renewal rates from our software customers and a lower rate of paging unit erosion that favorably impacted wireless revenue.
Both sequential and year-over-year wireless attrition were at historical lows.
Wireless revenue continues to exceed expectations, as we saw quarterly pager unit erosions slow to a record 0.4%.
As a result, wireless revenue totaled $25.6 million, down only $200,000 from the prior quarter.
This solid overall retention reflected another strong performance by our sales team to again generate significant wireless gross additions while minimizing churn and maintaining stable unit pricing.
Second quarter software revenue of $16.7 million was up more than 7% from revenue of $15.6 million in the prior quarter.
As I have noted on previous calls, our software operations revenue is now generally recognized on a ratable basis and totaled over $7 million for the second quarter, up nearly 17% from $6 million in the prior quarter.
Maintenance revenue, the other component of software revenue, increased nearly 6% to $9.6 million in the second quarter from $9.1 million in the prior year period.
It was also up slightly from the prior quarter.
This increase reflects our continuing maintenance renewal ---+ revenue renewal rates in excess of 99% from our installed software solution base.
Turning to operating expenses.
We reported consolidated operating expenses, excluding depreciation, amortization and accretion, of $37.1 million in the second quarter.
The year-over-year increase in our operating expense base is mostly due to the planned investments in our Spok Care Connect platform, primarily in the research and development category.
Net of those planned investment costs, operating expenses totaled $32.4 million as compared to $32.6 million in the year-ago period.
Continuous leverage of our operating platform continues to yield greater cost efficiencies across the business, including cost of revenue; service, rental and maintenance; and in certain areas of sales and marketing.
This performance is the direct result of our cost management initiatives but has not come at the expense of our business operations as we continue to upgrade processes as well as human capital.
Turning to headcount.
We continue to adjust our employee levels to meet anticipated demand as well as make the necessary additions to support investments in the Care Connect platform.
Our full-time equivalent employees, or FTEs, were 604 at June 30, 2017, versus 587 FTEs at December 31, 2016, and 597 FTEs at June 30, 2016.
The majority of these additional FTEs are the incremental R&D staff for our software business in our Eden Prairie, Minnesota, facility and the build-out of our Care Connect platform.
These employee levels will continue to change as we execute against our business plan.
Turning to the balance sheet and other financial items.
Cash totaled $107.2 million at June 30, 2017.
Included in the $18.7 million net reduction in cash balances from the beginning of the year was the use of $20.2 million to fund dividend payments and share repurchases and $5.2 million spent to purchase property and equipment.
This was offset by $6.7 million of cash generated by operating activities over the 6-month period.
We expect to continue to use a portion of our cash in connection with quarterly dividends going forward.
We exited the quarter with no debt outstanding and continue to operate as a debt-free company.
Vince will comment further on our capital allocation strategy shortly.
Finally, with respect to our financial guidance for 2017, as a result of the solid performance we saw in the second quarter, we are maintaining the 2017 guidance range that we provided last quarter.
That includes total revenue to range from $161 million to $177 million; operating expenses, excluding depreciation, amortization and accretion to range from $153 million to $159 million; and capital expenditures to range from $8 million to $12 million.
I would remind you, once again, that our projections are based on current trends and that those trends are always subject to change.
With that, I will turn the call over to <UNK> <UNK>, who will update you on our second quarter sales and marketing activities.
<UNK>.
Thank you, <UNK>, and good morning.
As previously outlined, our sales and marketing team delivered software bookings in the second quarter totaling $20.4 million.
This performance was up on both a sequential and year-over-year basis.
Our momentum continues, and we believe our strategy is resonating with our customers.
Market recognition for the value of our enterprise health care communication platform is increasing, demonstrated by the level of conversations we have had with several customers and prospects, the volume of activity we see on our website and, most notably, by the stories behind our quarterly bookings.
During the quarter, we welcomed more than 3 dozen new customers to the Spok family, primarily in the healthcare and government sectors.
Healthcare remains a key part of our growth, comprising 88% of overall bookings in the U.S. for Q2.
Nearly 1/4 of that business came from new hospitals and health systems that have never worked with us before.
Among our new customers this quarter is an urban hospital in the Northeast.
This hospital is part of a health system that is working to standardize their communication technology among all member hospitals.
They have chosen Spok Care Connect because of our diverse capabilities.
Spok will support a vital communications infrastructure, including contact center operations, automated caller services, emergency notifications and code calls.
Another new customer this quarter, a midsize hospital in the Eastern United States, is looking to eliminate paper binders of on-call schedules and contact information.
With Spok Solutions, they will be able to streamline and automate much of their code call process to save previous ---+ precious time during emergencies when patient lives are at stake and every second counts.
To be effective, emergency communications must be dependable and reliable, an area that is becoming a top priority for many hospital leaders.
We are seeing an increase in demand for our solutions based on these needs.
For example, a Southeastern hospital health system that has been a Spok customer for more than a decade is planning to consolidate multiple hospital call centers into a single secure location.
The first step is to centralize all of the alarms that are currently handled at each individual facility.
To implement this, the customer requires a reliable, dependable alerting solution to ensure continuity of coverage, and they chose Spok because of our ability to meet this requirement.
In the Midwest, a health system that has experienced a large increase in call volume over the past several years is moving and expanding their call center.
Beyond simply adding more operators, this long-time customer also wants to ensure the continuity of vital communications in the event of emergency.
Endurance of a system is a top priority, and this customer places their trust in Spok to deliver it.
And at a hospital in the Southeast, a Spok customer that recently upgraded the secure messaging and emergency notification solutions is working with us to add redundancy to the communication infrastructure and update their contact center.
This customer relies on Spok Solutions to process all of their code calls, including paging physicians from other locations.
The final example I want to highlight this quarter is a health system in the Southeast that is upgrading all of their Spok pagers, more than 7,500 units, to our encrypted pagers with display lock and remote wipe capabilities.
A long-time customer is already utilizing Spok Care Connect to support their communications infrastructure.
This customer wanted to enhance the security of their network and further protect patient privacy and safety with secure messaging from end to end.
All of these examples demonstrate the strategic enterprise-level investments hospitals are making with Spok.
These customers are working with us to improve the reliability of their communications and capture the value that our unified healthcare communications platform make possible.
While healthcare comprises the largest percentage of our business, public safety remains an important part of our strategic plan.
Public safety customers around the world rely on our solutions to support critical communications as well as emergency call handling at their 911 dispatch centers.
Another of our 6-figure deals this quarter comes from a public safety customer that serves one of the most populous counties in the Western United States.
They want to update their system and chose to stay with us because Spoke meets all of their technical requirements, has reliably supported their dispatchers for nearly a decade, and they have the utmost confidence in our ability to also help them streamline and simplify their workflows during the upgrades.
After an organization purchases Spok Solutions, our highly skilled professional services group gets to work delivering an exceptional experience and setting the customer up for success.
In addition to implementing Spok solutions, these experts also help our customers optimize their communication environment.
For example, in second quarter, one of our newer customers, a midsized hospital in the East, needed to get ready for an international sporting competition being hosted in their area.
Prior to working with Spok, it took more than 2.5 hours to alert the emergency preparedness team at a large event.
With Spok Solution and assistance from our professional services team, the hospital reduced the time to less than 10 minutes, helping ensure that their staff is able to assist quickly in the event of an emergency.
Before turning this back over to Vince, I want to provide a brief update on our marketing activity.
Ongoing investments and activities in these areas help us drive leads and fill the sales pipeline.
Our new website that launched in January includes changes to enhance our Spok Care Connect story, improve our visibility in searches and provide a better experience of visitors on mobile devices.
These efforts are proving to be highly effective.
The percentage of mobile users has more than quadrupled over the past year, and our website traffic overall has more than doubled over that period, largely driven by stronger ranking in search engines.
Additionally, our social reach continues to show significant growth and engagement with our audience, such as likes, retweets and comments, has also been more than doubled the past year.
Marketing is also responsible for planning and coordinating Spok's presence at a large number of trade shows throughout the year.
There were 3 notable shows for us in the second quarter, Becker\xe2\x80\x99s Hospital Review, Healthcare IT Institute and The Association of Medical Directors of Information Systems' PCC Symposium.
We are strategically expanding our participation at these events with speaking engagements and focus groups to elevate our brand awareness among C-level executives.
For example, at the Healthcare IT Institute's show in early June, I presented on the topic of how to bolster the benefits of an EHR by improving hospital communications.
I received very positive feedback from the audience of healthcare IT executives.
And our CMO, Dr.
Andrew Mellin, got a great response at his talk about the CIO perspective on supporting clinical workflows at Becker's as well as his focus group at AMDIS symposium on clinical communication inside and outside the EHR.
A large percentage of the audience at all of these shows is made up of VPs and C-level titles.
And more than half of the leads we receive are from new prospects.
These shows continue to be valuable opportunities for us to grow our brand and showcase the benefits of our integrated platform, Spok Care Connect.
Looking forward, we expect continued market demand for our integrated communications, especially in healthcare.
Our investment in research and development is ongoing.
We have hired more than 3 dozen skilled professionals so far in 2017 to help us accelerate product development, meet the demand for Spok Care Connect and enhance our solutions for clinical workflow improvements and better patient care.
And our customers continue to reinforce that an enterprise-wide communication platform fulfills their needs and is the right strategy for Spok.
With that, I'll pass it over to Vince.
Okay.
I don't see any questions in the queue.
So look, thanks a lot for joining us this morning.
We look forward to speaking with you again after we release our third quarter results in October.
Everyone, have a great day.
| 2017_SPOK |
2016 | BGFV | BGFV
#Thank you.
Good afternoon, everyone.
Welcome to our 2016 Second Quarter Conference Call.
Today, we will review our financial results for the second quarter of fiscal 2016 and provide general updates on our business, as well as provide guidance for the third quarter.
At the end of our remarks, we will open the call for questions.
I will now turn the call over to <UNK> to read our Safe Harbor statement.
Thanks, Steve.
Except for statements of historical fact, any remarks that we may make about our future expectations, plans, and prospects constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in current and future periods to differ materially from forecasted results.
These risks and uncertainties include those more fully described in our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our other filings with the Securities and Exchange Commission.
We undertake no obligation to revise or update any forward-looking statements that may be made from time to time by us or on our behalf.
Thank you, <UNK>.
We are pleased to exceed our earnings guidance for the second quarter, despite a highly competitive and promotional environment in our markets.
While sales were pressured by the liquidation efforts of Sports Authority and Sport Chalet, our team successfully held merchandise margins flat with the prior-year period and maintained a healthy balance sheet.
We ended the quarter with per-store inventories down 9.1% and borrowings under our credit facility down 19% from the prior year.
This prudent business management of our business has been a hallmark of our model throughout our 60-year history and has positioned us to take advantage of the competitive rationalization that is occurring in our sector, and we are already beginning to see the benefits in the start of our third quarter.
Our confidence in the strength of our business model as well as our continuing commitment to return value to shareholders is reflected in the new $25 million share repurchase program that we announced today.
Now, I'll comment on sales for the second quarter.
Second quarter net sales were $241.4 million, compared to $240.4 million for the second quarter of fiscal 2015.
As anticipated, net sales comparisons for the fiscal quarter were favorably impacted by the calendar shift and caused fiscal 2016 to begin one week later than fiscal 2015 and resulted in pre-Fourth of July holiday sales moving from the third quarter in fiscal 2015 to the second quarter in fiscal 2016, as well as a calendar shift of the Easter holiday, during which our stores are closed, from the second quarter last year to the first quarter this year.
These calendar shifts benefited net sales comparisons to the second quarter of fiscal 2015 by approximately $6.8 million.
Same store sales decreased 1.7% during the second quarter of 2016 versus the comparable 13-week period in the prior year.
Same store sales comparisons were not materially impacted by the calendar shifts because same store sales comparisons are made on a true comparable week basis.
We experienced a low-single digit decrease in customer transactions, a low-single digit increase in average sale during the second quarter versus the prior-year period.
In terms of how sales trended over the quarter, same store sales were down in the low-mid single-digit range in April, down low-single digits in May, and up slightly in June.
While sales throughout the period were pressured by Sports Authorities and Sport Chalets going out of business sales, we believe we reached an inflection point toward the end of June when the benefit from competitor stores that had already closed began to offset the impact from competitors that we're still in the process of liquidating.
From a product category standpoint, all of our major merchandise categories were affected by the liquidation sales, with our apparel and hardgoods categories each down low-single digits and our footwear category up slightly for the period.
Merchandise margins were flat with the second fiscal quarter of last year.
And as I said, we were very pleased with our team's ability to maintain margins in extremely promotional environment.
Now commenting on store activity.
During the second quarter, we opened two new stores and closed one store.
We opened new stores in Gardena, California; and Nogales, Arizona.
We ended the quarter with 435 stores in operation.
During the third quarter, we plan to open two new stores and to close five stores.
For the 2016 full year, we currently expect to open approximately five to eight stores and close approximately 10 stores.
We continue to watch the ongoing developments in our sector and expect that the rationalization that is taking place could create additional opportunities for us.
Now turning to current trends.
We are off to a very nice start in the third quarter with same store sales for the quarter-to-date up in the high mid-single-digit range as we are benefiting from numerous competitor store closures in our markets.
We believe that these closures are leading more customers to recognize Big 5 Sporting Goods for the right mix of convenience, value, and strong product assortments.
To provide some perspective in the opportunity, the competitor liquidation sales were concluded last week and we have seen roughly 210 Sports Authority and Sport Chalet store locations closed within the general trading area of a Big 5 store.
These 210 competitor stores impacted approximately 250 of our Big 5 stores, or nearly 60% of our chain.
Although, we are well aware that some of these competitive locations ultimately will be replaced by other competitors, the playing field should be much more rational moving forward than it has been for a number of years.
We are working hard to position our merchandise mix and promotional efforts to take full advantage of this opportunity.
Among our initiatives, we are leveraging our deep experience with opportunistic buys to take advantage of the surplus product that is becoming available in our sector.
We are also pursuing new product lines and expanded assortments where we see opportunity, while actively cultivating new vendor relationships.
Additionally, we are implementing marketing plans designed to reach customers who may have been displaced by the competitive closures.
We are tremendously excited about the possibilities for our business as we look ahead.
Now, I will turn the call over to <UNK>, who will provide more information about the quarter, as well as speak to our balance sheet, cash flows, and provide third quarter guidance.
Thanks, Steve.
Our gross profit margin for the fiscal 2016 second quarter was 31.6% of sales versus 32.1% of sales for the second quarter of fiscal 2015.
The decrease in gross margin for the period reflects an increase in distribution and store occupancy costs as merchandise margins were even with the second quarter of fiscal 2015.
Our selling and administrative expense as a percentage of net sales was 29.9% in the second quarter, down from 30.2% in the second quarter of fiscal 2015.
On an absolute basis, SG&A expense decreased $0.4 million year-over-year, due to proxy contest costs in 2015, partially offset by higher employee labor and benefit-related expense.
Now looking at our bottom line, we reported net income for the second quarter of $2.1 million, or $0.10 per diluted share, including $0.01 for the write-off of deferred tax assets related to share-based compensation.
This compares to net income in the second quarter of fiscal 2015 of $2.6 million, or $0.12 per diluted share, including $0.03 for costs associated with the Company's proxy contest.
Briefly reviewing our 2016 first half results, net sales were $475.9 million compared to $484.0 million during the first six months of fiscal 2015.
The calendar shift from a 53-week fiscal year in 2015 benefited net sales comparisons by approximately $2.9 million in the first six months of 2016.
Same store sales decreased 1.8% during the first half of fiscal 2016 versus the comparable period last year.
Net income for the period was $1.0 million, or $0.05 per diluted share, including $0.04 per diluted share of charges for the write-off of deferred tax assets related to share-based compensation.
This compares to net income of $4.9 million, or $0.22 per diluted share, including $0.06 per diluted share of charges for a legal settlement and expenses associated with the proxy contest for the first half of last year.
Turning to our balance sheet, our inventory was $304.5 million at the end of the second quarter, down 9.5% from the prior year.
On a per-store basis, merchandise inventory was down 9.1% versus last year and we feel very good about our inventory position as we move through the summer selling season.
Looking at our capital spending, our CapEx excluding non-cash acquisitions totaled $6.8 million for the first half of fiscal 2016, primarily reflecting existing store maintenance and enhancements, investment in new stores and our distribution center, and computer hardware and software purchases, including amounts related to the development of a new point-of-sale system.
We currently expect capital expenditures for fiscal 2016 excluding non-cash acquisitions of approximately $15 million to $18 million.
From a cash flow perspective, our operating cash flow was $16.4 million in the first half of fiscal 2016 compared to $8.5 million for the same period last year, largely due to reduced funding of merchandise inventory compared to last year.
For the second quarter, we continued to pay our quarterly cash dividend of $0.125 per share.
Additionally, today we announced a new share repurchase program for the purchase of up to $25 million of our common stock.
This program replaces our previous share repurchase program, under which $2.9 million remained available for repurchases.
Under the current authorization, we may purchase shares from time to time in the open market or in privately negotiated transactions in compliance with the applicable rules and regulations of the Securities and Exchange Commission.
However, the timing and amount of such purchases, if any, would be at the discretion of management and our Board of Directors, and would depend on market conditions and other considerations.
Our long-term revolving credit borrowings at the end of the second quarter were $57.4 million, down 18.6% from $70.5 million at the end of the second quarter last year, and up slightly from $54.8 million at the end of fiscal 2015.
Now I'll spend a minute on our guidance.
For the fiscal 2016 third quarter, we expect same store sales to be in the positive mid to high single-digit range and earnings to be in the range of $0.23 to $0.30 per diluted share.
We expect third quarter net sales comparisons to the prior year to be adversely impacted by approximately $9 million, or about $0.08 to $0.09 per diluted share, as a result of the calendar shift from a 53-week fiscal year and fiscal 2015, which resulted in pre-Fourth of July holiday sales moving from the third quarter in fiscal 2015 to the second quarter in fiscal 2016.
This anticipated net sales impact is reflected in our earnings guidance for the fiscal 2016 third quarter, but does not affect our same store sales guidance for the third quarter because we report same store sales on a comparable week basis as opposed to a fiscal period basis.
Our earnings guidance for the third quarter also reflects a charge of approximately $0.04 per diluted share related to store closings.
For comparative purposes, in the third quarter of fiscal 2015, same store sales decreased 0.4% and earnings per diluted share were $0.28.
Now I would like to turn the call back to Steve for some additional remarks.
Thank you <UNK>.
In light of all the changes in the competitive environment, before we open the call for Q&A, I'd like to be a bit reflective.
Our Company was founded in 1955, which means that we have now been in business for over 60 years.
The world has changed plenty over those 60-plus years, and our ability to adapt and evolve our business model over time has allowed us to continue to compete and remain relevant in the markets that we serve.
Our business was founded on the principles of sound retailing, [buy it right], promote aggressively and operate our stores and throughout the business with great efficiency.
Guided by these principles, we created a business model focused on providing customers with the optimal mix of value, selection, service, and convenience.
This philosophy has allowed us to successfully navigate challenging economic cycles and periods when the retail landscape was irrational.
This has not been the first time that we have seen a shake out of an overpopulated retail landscape, albeit this is certainly a large shake out.
Two of our major competitors have gone out of business this year, and we remain financially sound and stand to benefit from this rationalization.
As we pursue the opportunities presented to us as a result of the competitor closings, we remain, as we always have, focused on continuous improvement across our business.
I thank the Big 5 team for their hard work and dedication.
Now operator, we are ready to turn the call back to you for questions and answers.
Well, I'll try.
I'm not going be overly granular because effectively the dust ---+ although this is just a sampling, but we had a situation where a number of competitors were completing liquidations and others were still going through them, and we had stores that were impacted, had a store that had closed and also facing closings.
But typically, the impact that we saw, certainly it should vary by market and areas where there is a lot of competition.
Not a lot of competition, we received a significant lift.
Various flow of our competition, the competitive lift may have been slightly less.
But clearly the benefits we're seeing in the third quarter is a result of having moved through the process.
I think it's noteworthy that our stores in Q3 that are not directly impacted by these closures are competing positively for Q3 to-date.
Beyond that, we're not going to be any more granular as to the impacts of the closing.
No.
Again, I don't think we can break it down to decimal points.
I mean, clearly we're comping up, we said in the high mid-single digits quarter-to-date after being down, and we said in the low mid-single digits in April, low-single digits in May.
We comped positively for the month of June.
But I mean there's a number of variables besides the competitor liquidations that always impacted our business, certainly weather playing a role.
We had some benefit from our firearm sales that surged somewhat in the back half of the second quarter.
We're benefiting across the chain from the introduction of certain opportunistic buys that benefit all stores not just those that are impacted by closings.
So, we can't quantify precisely, but we're very excited by the trends that we see emerging.
Not a significant impact by the calendar shift, I think a number of factors that are working positively towards the inventory.
One certainly was a great sell down of winter products, some right-sizing of our firearms inventories from the prior year.
We're seeing better support from certain vendors in returning of slow-selling products, and we're certainly benefiting from investments and merchandise analytics, and including a roll out of an inventory planning system.
So, lots of positives occurring on inventory, but in this case a calendar shift isn't really one of them.
Thank you, Michael.
I mean, again, not really.
I mean, we have basically all geographies that are seeing some benefit to the competitive closures.
We have weather factors that always impact some of our geographies, more than others the Northwest.
The weather comparisons in the Northwest for the most part through June and July were extremely negative.
California, we've benefited somewhat from better weather patterns and some ---+ particularly Northern California, some better conditions in our lakes and rivers.
<UNK>, we have ---+ I mean, our distribution costs are up a little bit, our occupancy costs are up a little bit.
Margins were flat.
It's just ---+ some of it's a little ---+ we're doing some different things out there, we're bringing some services in-house, some of our shipping cost services in-house a little bit, so we're having to hire some labor to bring those drivers in-house.
Some of those costs are a little higher right now and we're going to ---+ we expect to be able to reduce our outside services costs.
We're a little off kilter on that distribution right now.
We do expect that to write itself in the back half of the year.
With our inventory coming down, also we ended up with a benefit from inventory cost capitalization as your inventory comes or hurts you a little bit.
Actually, as your inventory comes down, your days of cost and inventory come down as well and that ends up being a little pinch that also impacted the quarter.
Sure.
Yes.
Well, it's a huge effect.
I mean, that's definitely a huge effect.
There is ---+ as we mentioned in the prepared remarks, there's about a $9 million calendar shift impact on net sales for the period.
Again, it doesn't ---+ it's very confusing, there's no question when your comp is up mid to high-single digits and yet you've got a $9 million net sales shift because of the calendar.
Remember, the same stores were on a comparable week basis.
So, there's no effect on the calendar shift ---+ of the calendar shift baked into the same store sales.
But if you're just looking at net-net sales on a fiscal basis, we're one week off, and that one week for the third quarter has a negative $9 million estimated sales effect for about $0.08 to $0.09 a share.
So when you've got your $0.08 to $0.09 a share, you've got higher expenses year-over-year, you've got workers, you've got some of the minimum wage pressures and those kinds of things; and as Steve mentioned, we've also got the $0.04 charge in the third quarter for the store closings.
So frankly, if you think about it, our guidance is $0.23 to $0.30.
But really if you make the various adjustments that we just talked about, $0.08 to $0.09 for the calendar shift on sales and then the $0.04, you're really adding back to even the low-point; from $0.23 you're adding in $0.12 to $0.23; and on a pro forma basis, you're closer to $0.35.
I mean just for clarifications, I know it sounds simple, and this has been a source of a lot of misunderstanding of a one-week shift, but this is not a typical slide of one week, we basically trade at a very high volume week going into the Fourth of July holidays, which is one of our ---+ certainly one of our best non-December Christmas holiday weeks of the year; for a week that crosses the end of September into October, that is one of our very lowest weeks of the year.
So that's a significant change and somehow it's gotten loss somewhat in the understanding of our earnings impact.
Sure.
Well, what we can say is, for those that are kind of new to this particular offering, our e-commerce site was launched in the fourth quarter of 2014 with a limited product offering.
We've been gradually ramping up the product assortment and our marketing efforts surrounding the site.
Sales trends have been positive but our e-commerce operating results for 2015 and the first half of 2016 remain immaterial to our overall operating results.
We continue to invest in the business, including enhanced checkout capabilities for mobile platforms, but certainly don't expect our e-commerce sales or profitability to be material for our 2016 financial results.
We plan to continue to test and evolve the e-commerce business model and expand our online product offering and hopefully provide a meaningful shopping channel for our customers.
Sure.
We're currently ---+ let me just again put a little color around it that we're currently developing a new store-wide Oracle-based POS system, which we could launch for a part of our chain in 2016.
It kind of depends on the final leg of the development.
If it's not in the third quarter of this year, then we would roll it out in early 2017.
The new system will have more functionality than our existing system.
It will include advanced pricing and promotions ability, loyalty and CRM program capabilities.
It can integrate with our e-commerce system.
We're excited about the benefits of the system and expect that will really streamline our operations and provide increased efficiencies and overall profitability.
Thank you <UNK>.
Thank you, operator.
We appreciate your interest in Big 5 Sporting Goods and look forward to speaking to you on our next call.
Have a great afternoon.
| 2016_BGFV |
2015 | TPR | TPR
#Sure.
It's really about the three pillars that we've been talking about for the past few quarters coming together, so product, marketing obviously, and distribution.
In terms of product, as I mentioned earlier we have filled gaps in the below-$300 bucket, which I think were an opportunity last holiday season.
So a lot more in both channels, frankly, retail and outlet ---+ a lot more of an offering in the below-$300 bracket.
We've also added, I think, a lot more emotion and elevation at the same time in our stores.
A big focus on gifting.
I mentioned shearling, metallics, glitter, et cetera in full price and outlets.
The other thing in outlets is we had a gap, we know an opportunity last year in gift sets below $100.
We tripled our investment in that area.
I think we're positioned much better in terms of product, certainly, than we were a year ago.
We're also building on the momentum of all the marketing activities that started with the runway show.
That continues to gather momentum.
Obviously, we're continuing to see strength in our modern luxury renovations.
We think the three pillars are going to be slowly coming together this quarter.
Also, I should note that we've seen the momentum that we saw in Q1 has continued into October, so that we think bodes well for the holiday.
Sure.
We think the conversion is the metric that's going to be improving the most.
We've maintained positive ADTs.
We see that continuing.
The conversion is the metric that we're expecting to improve sequentially in both channels the most.
We've seen on the added front, first in product an increasing share of Stuart-designed product, and that's been impacting performance, obviously.
The modern luxury renovations that we've completed so far have been out-performing the rest of the chain, so that's given us confidence to continue to deploy that plan.
The one learning I'd say is in the men's renovations, men's Modern Luxury renovations and outlet, where we've seen less of an impact, candidly.
I think that comes from the fact that the men's doors are more recent doors.
The Modern Luxury doesn't look as different as it does from the core door.
Our focus is going to be more on our core outlet doors in terms of renovations.
<UNK>, we talked about it last quarter, but one of the learnings that we did call out last quarter was that our lighter-touch renovations were not yielding the improvement that we had expected.
We've moved away from essentially the paint and carpet, if you will, to actually doing a little heavier renovation, which gets us the lift as we replace fixturing.
The good news is that our overall cost of renovations through bulk purchasing and procurement activities has gone down, so we're able to accommodate that shift while lowering our total capital cost expectations for our fleet renovations.
Very much so, <UNK>, and I would say globally.
The logo penetration has dropped in outlet.
It's at about 30% now versus roughly 40% a year ago.
It's an integral part of the business.
It's obviously become smaller than it was a few years and quarters ago.
We see that continuing to decline slowly, while leather has been comping positive in outlets.
That's something that I think is very consistent with Coach's core equities.
We stand ready for leather.
The wholesale question I may let <UNK> answer.
I didn't get the question.
No, not dramatically.
Of course we're seeing a slightly higher promotional cadence within the wholesale channel in general, a little bit more price competition, which is leading to the below-$300 bucket having a higher penetration overall.
But in general I would say no really dramatic differences.
Good morning, <UNK>.
I'll take the first question and then pass on to <UNK> in terms of the store closings here, specifically in North America, <UNK>.
In terms of the consumer survey, it's very much as you mentioned.
We see consumers a little bit on the sidelines.
Obviously there's a lot of macro and currency and other issues that are impacting global trends today.
As we've mentioned over the last call ---+ and again, I think are seeing in our most recent quarterly survey, consumers are looking to be inspired, and they're looking for newness and innovation.
Our transformation is very focused on that.
We're incredibly excited, of course, by the progress that we're seeing, especially through our full-price channels.
<UNK>, maybe on the ---+
Sure.
We've seen very minimal transfer of sales from closed doors.
The doors we closed are primarily smaller doors that had limited material impact on the rest of the chain.
Look, we'll continue to valuate and optimize our fleet as leases come up.
We'll make decisions on continuing on closures, so that's an ongoing process.
We are closing about 22 doors this year, as <UNK> mentioned, so that's in the plans.
Thank you, <UNK>.
I would say we haven't seen any change from the previous quarter to this quarter in any one of those areas ---+ very consistent, really.
PRCs continued along the same lines as we saw last quarter, and I would say that in the department stores very consistent, as well.
Thank you.
Thank you all for listening.
I just want to close by thanking and congratulating our Coach teams globally.
Thanks to their hard work, their perseverance, and of course their excellence in execution.
Our transformation remains very much on plan.
We're pleased with the progress that we're seeing here in North America.
Of course with the sequential improvement in our business, which has been led as we have always expected by our full-price channel, where we have put the greatest investment and focus.
In what is a rather turbulent global environment for the category, our balanced and strong franchise in Asia, as well as our greenfield opportunity in Europe is serving us well.
Lastly, I'm excited by the emerging trends that we've seen at the Stuart Weitzman brand ---+ not only thanks to the very strong product foundation that they have, but also thanks to the very strong and growing momentum that we're seeing with them in Asia.
All bodes well for us for the rest of the fiscal year.
Thank you.
| 2015_TPR |
2017 | BEN | BEN
#Thanks very much
I do appreciate the streamlined disclosure
It makes life a little simpler, so thank you for that
A couple questions that come up just from both the commentary and some of the Q&A now
As I look at the gross sales for the franchise, you're running about $24 billion, plus or minus a little bit
It's really nice to see it stabilizing and trend up a little bit
Any plans to change the ad or marketing spend to potentially capitalize on this that might be able to jump start gross sales anymore? And, if so, any shift in how you might go about doing that between maybe product or distribution or digitalization? How are you thinking these days about that growth?
Okay
And just playing devil's advocate for a moment, you were very successful in gathering assets for the gold bond fund in the up cycle, but I think one of the constraints on the stock was the asymmetry that created for the franchise
Presuming you were at the early stages of a potential recovery from here, any behavior, any strategic decisions to potentially limit the amount of AUM that could come back into the platform? Or no?
And just one last one
Thanks for taking the questions this morning
In the, I think, press release or maybe your commentary - your commentary, I guess - you had mentioned that commissionable sales were down, I think about 15% or so, from prior quarters
As you look forward, maybe DOL goes through, maybe it doesn't, how does that impact the mix shift of the business and the blended fee rate, leaving aside market FX impact, all else being equal?
I read, I think it was in your supplement, where you suggested that your commissionable sales segment was down, part of the issue is that was down about 15% versus some prior quarter comparison
If that were to persist, what does that mean for the fee rate for the <UNK>, leaving aside - I understand markets and FX can be very big swing factors but leaving those aside for a moment?
Okay
| 2017_BEN |
2016 | ENDP | ENDP
#<UNK>, let me hit your Xiaflex questions and then I will go to <UNK> on the pricing question and the moving parts in 2017.
Look, I think on Xiaflex, we had a very good first quarter.
We had growth of about 21% when you're looking at the US.
And as we laid out in our presentation and my comments, our expectation for the full year is product growth should be somewhere in the mid to high teens range.
Right.
Now, clearly we are working to accelerate the product, but that is a view of where our best current thinking is.
So if you take a look at the 21% and the full-= year at mid to high teens, there will be a slight moderation as we head into the next few quarters.
But this is still going to be well within the strong double-digit growth profile that we predicted for the product.
<UNK>, your question on the price and the pressure, when we look at the Qualitest portfolio, which had served us well for so many years, as I said before, it is a mature portfolio, which is subject to more than normal competition.
We were very strong in pain; a big portion of our portfolio is directed towards pain.
It's not quite the barrier that it once was, and as a result, the pricing pressure that we saw was about 80% tied to legacy Qualitest and about 20% tied to legacy Par.
And then let me start on your 2017 question, and I'll ask <UNK> to jump in.
So let's take the following view on 2017, so let's talk about what's changed since we last put in our expectations for 2017.
So the three main changes have been a resetting of expectations for our Qualitest base business; the delay in the 505(b)(2) program, as we talked about, which is going out of 2016 but will be impacting positively 2017 and 2018, for that matter; and then we talked about V Gel, which we fully expected to be genericized as we headed into 2017.
It just happened much earlier than we expected, and we do have authorized generic as an option for us to use going into 2017.
So the real major downward revision there is the impact of the Qualitest base business.
Now, there are other moving parts that will impact what our final guidance in 2017 is though, right.
We will have to take a view on exactly how BELBUCA is going to do.
It all depends on where the inflection point is going to be.
Obviously, tailwinds behind Xiaflex will continue to grow.
We will know more by the middle of this year in terms of what's happening with OPANA.
We have a July 29th PDUFA date for our ADF relabeling request with the FDA.
And we will also know more in terms of some of the other pipeline launches and other programs that <UNK>'s pursuing in the Par business and exactly where they will fall in 2017.
Right.
So those are some of the real moving parts we have.
We've also signaled that we expect to increase our R&D spend, particularly behind the Xiaflex pipeline, and to the extent that <UNK> has new ideas from an R&D standpoint we will try very hard to meet any additional funding requirements in the Par pipeline as well.
So those are some of the moving parts.
I don't know, <UNK>, whether there's anything else that you would point to.
I think the only other thing is the strong growth we've been seeing in the injectables portfolio.
We continue to see that momentum into 2017.
It's just understanding where our exit is in 2016 before we make that final call.
Sure.
So let me just comment on the overall status of mesh, and then I'll let <UNK> talk about the financial aspect.
So as we talked about in our fourth-quarter call, we took a new approach to how we're dealing with the tail, which is that we took steps to resolve the higher-quality claims, which is what led to an increase in accrual that we announced in the fourth-quarter call.
Since then, the situation has not changed.
There is alleged potential for another 8,000 cases in the tail that we disclosed, but we were also very to quick to point out the expectation is that a large proportion of those cases could be of lower quality.
We don't have all the facts around them.
We also point to the fact that there is a potential fraudulent scheme that is running through many of these cases, which we are investigating currently.
As we pointed out before, these are typically the types of things you see at the tail end of a mass start situation.
We can't give you a precise projection of what the end date is, but we have confidence that we're seeing the real tail here.
Maybe <UNK>, you can talk about the cash expectations in 2016.
Sure.
At the end of first quarter, we will have a total product liability accrual of about $1.9 billion on the balance sheet.
You'll see that in our 10-Q, which will be issued in the very near future.
Of that $1.9 billion, the amount of restricted cash or cash that's already been put into qualified settlement funds was about $0.5 billion, which leaves a residual of $1.4 billion on a gross basis to be paid.
We'd expect of that remaining $1.4 billion, about $750 million on a gross basis to be paid between ---+ for the rest of 2016.
And then about $600 million $650 million into 2017, or the residual of that $1.3 billion balance.
So that's where we stand from a cash call basis.
As we talked about earlier, we did receive the federal tax refund that we pointed to earlier this year; that came in early April.
We continue to look at ways to provide a shield around future liabilities.
It's an active investigation, we have issued subpoenas in the case.
And are also working with the judge in the NDL case, as well as other parts of the law enforcement infrastructure in the country.
So we really can't comment more on it.
So let me just talk about briefly about V Gel and Frova, and I will pass it on to <UNK>.
With respect to Voltaren Gel, we have pointed to, in the materials for today's call, the relative impact on the rebasing of our 2016 guidance.
We are not going to discuss market's expectations anymore, just other than to say there's a single competitor on the market.
And we are effectively defending the branded product at a level that we would expect to do.
With respect to Frova, yes we do have a new competitor, that is Glenmark, and currently Par has also launched our authorized generic.
So that is also in the market.
Maybe you can address the other question.
Sure, in terms of the consortiums, the cycling, I think you had that exactly right.
So they are staggered, so each consortium has a different timeframe that we bid against.
So it's not like you come in, in Q1 and have to deal with 3 of the consortiums.
Reddo does not actually put out bids; their expedition is that there going to be guaranteed best pricing.
So their style is a little bit different as opposed to the one-stop program or the [weedbad] program or even the ECONDISC program.
Regarding rophirs, that is exactly what it is.
So after you go through the consortium bid cycle, that does not mean that you are still not exposed for rophirs.
That being said, we defend against rophirs and we have our fair share of wins.
You have your fair share of losses, and at the end of the day, I think on a go-forward basis, this is an area that we're fairly strong in, in terms of at lease to protect ourselves from the legacy Par standpoint.
And we are, in essence, right-sizing the Qualitest business legacy side in order to be able to defend against rophirs on a go-forward basis.
Okay.
Thanks.
Look, it's a strategic question.
One of the things that our Company has benefited from over the course of the last three years since my arrival, when we really started to transform the business, is in fact the diversity of the business.
Right.
So the generics business, especially with the addition of Par, despite the rebasing that we are taking, is a highly diversified business with multiple growth drivers.
And we've also taken the steps to build critical mass in our branded business.
But I have been also open that from a forward-looking standpoint, at a certain point in time when we have critical mass in both our branded business, as well as our generics business, these can be both two very viable standalone businesses.
So from a strategic standpoint, we remain open to thinking about creative ways of creating that shareholder value.
But as I pointed to earlier in my comments, our primary focus right now is operational execution.
We have a full plate in Par in terms of restructuring that needs to be done, progress on the pipeline, as well as in the branded business growing Xiaflex and growing the BELBUCA and investing in the pipeline.
But certainly, we keep all strategic options open to us as we think about the future.
Thank you, and I want to thank all of you for your attention today.
There have been a lot of very good questions.
And we've talked a lot about the different factors that have impacted our 2016 guidance, as well as other financial updates.
But what I hope that you will take away from this call today is that despite the rebasing of our 2016 guidance, Endo is a fundamentally different and stronger business than it was in 2013.
And it is also a more compelling investment and growth story.
In 2013 we had two primary and declining assets at that time and a very fragmented base of business across healthcare solutions divided in pharmaceuticals.
You fast-forward to today, we've rebuilt our branded portfolio and pipeline with the acquisition of Auxilium and particularly Xiaflex.
We divested non-core businesses.
We've achieved scale and differentiation in our generics portfolio with the addition of Par, and frankly, that is what the future is going to be about.
Particularly, as we see the rebasing of our legacy Qualitest business.
We established an international structure and footprint for growth and expansion.
We narrowed the mesh tail, and we have built a business generating significant EBITDA, even after this rebasing, and free cash flow that we expect to grow going forward.
So no one likes to rebase guidance more than I.
But we have now reset our business so that we can move forward and effectively drive growth and value.
And we thank you for your continued support.
Thank you very much.
| 2016_ENDP |
2018 | IR | IR
#Thanks, operator.
Good morning, and thank you for joining us for Ingersoll-Rand's Fourth Quarter and Full Year 2017 Earnings Conference Call.
This call is also being website on our website at ingersollrand.com, where you'll find the accompanying presentation.
We are also recording and archiving this call on our website.
Please go to Slide 2.
Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law.
Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from our anticipated results.
This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release.
The participants on today's call are Mike <UNK>, Chairman and CEO; and Sue <UNK>, Senior Vice President and CFO.
With that, please go to Slide 4, and I'll turn it over to Mike.
(Operator Instructions) Your first question comes from Steve <UNK> from UBS.
Just a ---+ first on guidance.
Just want to understand, again, the relationship between the bookings that are trending 8% organic and 3% to 3.5% organic guidance on growth.
Obviously, there's a lag time and kind of order-to-delivery in the industrial side, but maybe help us understand that.
And also on the free cash flow conversion, I guess the CapEx increase, is there inventory build.
Are there other things that kind of forcing that step down versus prior year.
Steve, I'll do the first one, which the bookings came late in the fourth quarter and so the exact timing of some of the larger compressor and Applied shipments would still be a question mark so whether that's a fourth quarter '18 or first quarter of '19 delivery, it's TBD and we'll update that throughout the year, but bookings were definitely much stronger and that was a plus ---+ a surprise really from where we thought we would be at the end of the year.
Backlogs were up about 12% going into the year so we'll update shipments as we go further end of the year.
And Sue, on CapEx.
Yes.
So on CapEx, Steve, as we look at it, so we guided $300 million for 2018.
When we started out the 2017 guidance, we gave you about $250 million.
We came in at about $220 million so in other words, $30 million was really CapEx that we didn't spend in 2017 that we're going to move over into 2018 so you have just a slight amount of increase.
The other thing that I would say is when you think about the $300 million, the $300 million is primarily going to be new product introduction.
It's going to ---+ the capital associated with that is going to be on factories for increasing productivity and increasing cost-reduction ideas in our factories.
So those primary objectives when you think about them, are very clear with our growing operating margin and operating leverage.
So we think that, that $300 million is a good use of capital for 2018.
Okay, and Mike, just at a higher level.
If we go back to the time that you took over, and all of the changes that you've made, particularly on the product development and introduction front, you've clearly run ahead on share of a number of HVAC competitors over this time frame, but now, we're seeing some of these other guys actually stepping up their own product introductions very aggressively, stepping up their own channel investment apparently more aggressively.
Do you see the competitive environment getting more intense at all.
Any forward thoughts on how that might impact the broader pricing, et cetera, your ability to stay ahead.
Yes.
Steve, thanks.
It's hard to look back now over 9 years.
It's seems like ---+ it's a long time to look back, but one thing that we've been consistent about is just the level of investment that we've been pounding through every year on good ROIC out of projects, as Sue mentioned, stepping up capital in those areas.
The innovation pipeline looks solid.
We had a lot of introductions in '17, more planned for '18 so I think we do have a positive gap in the technologies and systems that we're putting out in the marketplace and we've always known that.
We've got large competitors out there that are capable as well.
So we intend to just continue to keep the drumbeat moving and keep innovation out in front.
So we know where the competition is at relative to current launches and we know what our pipeline looks like and I would imagine that we're going to be able to maintain technology, positive GAAP for some time.
And your next question comes from Jeff <UNK> from Vertical Research.
Just a couple of things, if I could also ---+ Mike, just on the sales outlook you addressed Industrial, it also seems like you'd ask the same question about Climate given the way you're exiting here.
Is there anything in particular in the tone of orders or the forward look that gives you some pause in the top line in Climate for 2018.
Jeff, when you say some pause, just tell me what you're referring to there.
Well, I'm just looking at order rates that would seem to support maybe more than 3% organic growth in the business for 2018.
Yes, I mean, the thing we don't know, Jeff, is really the timing of fourth quarter and first quarter whether it's '18 or '19.
And these large bookings come in very late in the year, and we're really trying to assess at this point in time exactly when customers are going to need them so it's difficult to predict and then clearly, carrying 12% increased backlog year-over-year is a great thing relative to the revenue guidance that we've given.
These are longer lead, large projects that we just need to work through a little more time to understand the exact timing.
And could you elaborate a little bit, Mike, just on your confidence on better China price in 2018.
Is that ---+ does that reflect just outright price increase initiatives.
Or is it something that's happening in the mix of the business.
A little color there to understand how that plays out.
So Jeff, we've been increasing price throughout our Climate globally, including Climate ---+ throughout 2017, and the back half of the year in particular.
So I'm confident that pricing increases because we've ---+ in some ways, priced those projects coming through to shipment in 2018.
I think competitive dynamics there would point to rising prices in China as well.
So I think that markets there are recovering and commodities been something that's been felt by all competition so you're seeing pricing coming through in the marketplace.
And I think we've got a pretty good handle on what's happening, at least early in the year from a commodity perspective so I feel like that gap is certainly going to close across the company and China.
Beginning in the first quarter, frankly, the gap closes and then throughout the year.
It's not really a hockey stick at all, I mean, it's not a first half, second half equation.
I think that the leverage, frankly, is fairly linear throughout the year for us.
And just a quick one for Sue, if I could.
Repatriating 10% or 20% of your cash so are you suggesting that although you're on an Irish territorial system before some of your cash was stranded, are you now pulling that back or was there some other nuance in that comment.
No.
There was no nuance in the comment, Jeff.
What that really is, is some of our international entities that roll up under the U.S. structure so the entities report into the U.S. and whereas previously, we had access to our cash through intercompany loans and through other mechanisms.
We're going to use the tax reform and the repatriation tax that we're going to pay over the next 8 years to bring back a small portion of that cash to the U.S. And so you can obviously calculate this as roughly about $300 million and the only reason, really, to signal that is we did not have a lot of cash that we did not have access to or that was a big part of the repatriation so I was just trying to give you context on what the amount would be.
And the reason it's an approximation is we have to go through all of the detailed works now that we've figured out the amount of tax.
With ---+ what the in-country rules are, how you would go about doing that timing of doing that, et cetera.
So it was nothing more than a nuance to give you an idea of how much cash would come back to the U.S.
Your next question comes from Steve <UNK> from JPMorgan.
Can you just give us a little bit of color on what kind of price you're assuming in the guide here year-over-year, just roughly, for the company.
Yes, Steve.
I'd really tell you that ---+ I'd start by saying that nothing changes around how we target and think about the operating system of the company, trying to get a 20, 30 basis point positive spread off material inflation.
So all the internal plans and all the incentive plans, if you will, are set to be able to achieve that.
We've essentially thought about the year as being relatively flat in terms of price, material inflation and we set in place or in motion productivity ideas on a contingency basis that you could even handle, say, a negative 30 and still be able to achieve the midpoint of guidance.
So we're really set for kind of a minus 30, plus 30 with a spread roughly at 0, that's how I would think about that.
Okay.
And again, you're not assuming flat price.
You're assuming some price to offset the commodity, just to be clear on that, right.
No, it's absolutely price.
And on top of that, there's absolutely material productivity on top of that.
So absolutely price.
Is most of that material productivity, is some of that coming from copper to aluminum.
Or has that kind of already run its course.
I know you guys were kind of ahead of the game on that front in resi at least.
Or is it just blocking and tackling around product design.
No, it's a number of things, but supplier consolidation to the preferred supplier program helps, that would be a driver.
Material usage, so the quantity and gauge of material used.
Material change, as you mentioned, would be another one and then there'd actually be product design as well.
So all of that will contribute to a material productivity number.
Okay.
And then just one last one.
You mentioned that, in the press release, it sounded as if the China headwinds would be with you here in the first half, although remedy pretty well for the full year.
You just mentioned the base, you're going to be linear on price cost over the course of the year.
Should we think about the year as being any different from a seasonality perspective.
And I think in the past, you've said 45%-ish of earnings in the first half, I think 10% to 12% in the first quarter.
How should we kind of think about, at a high level, the seasonality of the year with these dynamics.
Sequentially on your first question, really around pricing material cost inflation.
We improved Q4 to Q1.
It improves dramatically.
You could think about maybe 50 basis points would be something that we would be thinking about in terms of that.
So it's an immediate improvement, I think, Q1 and Q4 from that point of view.
As it relates to the seasonality, I think you're right.
If you go back over a 4-, 5-year average, it runs, say, 10.5% to 12.5%.
I would tell you that at least initially, I would be guiding you toward the lower end of that as it relates to just making sure that we've got this all contained around price (inaudible) inflation.
And it flows through the way that it should.
So again, we feel good about what we're doing, but clearly, we fully understand the burden of proof is on the first quarter and so we're prepared for that.
Yes.
Well, in the past, you guys have smartly set a low bar and beat it so kudos to you guys for keeping things reasonable here and not seem to stretch.
Your next question comes from <UNK> <UNK> from Citigroup.
Mike, in the past, you talked about having good visibility into North American commercial HVAC markets and it looks like bookings accelerated again in the quarter.
Was that just easier comparisons.
Did you see any pickup from hurricane-related work.
And can you talk about any differences you're seeing in Applied versus unitary markets.
Remember quarter 4 last year for us was ---+ in '16 was really strong so I think that the strong quarter 4 that we booked is coming back to back really off combined healthy stack of bookings.
So that ---+ there's no easy comp there at all for us.
There's larger projects that we have not planned into '18 that would dramatically change '18 and that would create a comp, obviously, issue for '19, but there really no comp issues other than tough comps, '17 to '18 from that point of view.
Visibility really hasn't changed much.
Institutional projects take longer.
They're something that we work on with customers to help design and specify and then walk ---+ move through the process of tendering and awarding and executing.
So we tend to have more visibility on that and that continues.
Okay, that's helpful.
And then you mentioned the Industrial team is doing a good job on margin, but if I look at the incremental margin, it was mid-30s in 4Q, it looks like you're only guiding to sort of mid-20s in '18.
I know you talked about the large engineered-to-order compressor starting to ramp, which you know have been a bit of a drag on margin so and we know you've taken a lot of costs out of business.
So again, is it just kind of conservatism.
You've got to wait to see how this ramps up, but you could have pretty strong incremental margin growth in '18, if all things sort of set up the way they could.
Well, we feel good about the variable cost leverage and it really depends on how much of the shipments come through in the year and how much fixed cost leverage do we get on that volume.
So it really is something that will play out through the year for us, but clearly, a great 2017 and more confidence kind of going into '18 and '19, and really confidence around the 2020 outlook that we gave some time ago that this business is really ahead of schedule on that front and performing well.
And your next question comes from Joe <UNK> from Goldman Sachs.
Mike, maybe going back to that commentary you made on price cost with plus or minus 30 basis points this year.
If you think about the major inputs, typically you guys hedge copper ahead of the year so I'd be curious to get any details on that.
And then last year, clearly, Chinese steel was a huge negative impact being up, call it 40% last year.
It seems like where we are today, it seems like that's a lot more manageable.
And so I guess my question is, first, maybe some more details around your assumptions.
And then secondly, what could kind of ---+ what are the biggest swing factors in your mind to maybe even getting positive price/cost this year.
Joe, let me start out on the material inflation side and what we're seeing in 2018.
So one, there's obviously the Tier 1 commodities that are inflationary, Tier 2 and then there's also other components so what I want to point out is that refrigerants are going to be inflationary in 2018 and let's call that about 10% of our overall inflation.
We've also got some lead that goes into the Club Car product that will be inflationary.
After that as I break it down, what we expect to see is inflation in Tier 1 commodities.
It's going to be about half of the inflation that we see spread between copper, steel and aluminum.
And so when I think about copper, we do lock copper as we go forward.
So we're going to enter any given quarter with about 70% of that locked, and we're entering 2018 just under 70% locked on, on copper for the year, but we do expect that to be an inflationary component.
You're also correct, Joe, that when you think about the globe in terms of commodities and what happens in '17 and what we also expect to see in 2018, is that Asia is performing differently than prior expectations so before 2017, i.
e.
They've done other things that have kept some of their material inflation, actually pretty high compared to what you would normally see and then in the U.S., not having options for steel purchases offshore and using what's happening is another large part of that.
So we do expect to see inflation in copper, aluminum as well as some steel perhaps in the later part of the year.
But I also point out the refrigerant and some of the other components.
Got it, that's helpful.
And maybe just kind of switching gears, going back to Industrial for a second.
I mean, you're starting the year in such a better spot than you were last year just with your longer-cycle backlog and clearly, short-cycle trends remain good.
When you look at the performance that you got this year from a margin perspective, it seems like ---+ I mean, it seems like you're being very conservative with your margin assumptions for 2018.
And so to the extent you can comment on that and then specifically around what are you getting from a pricing perspective as well on these orders because it seems like your competitors are also putting through decent pricing increases.
Yes, industrial pricing has been really good.
It's been great and direct to our productivity, there's been less of a factor too.
So you're dealing with good price and material inflation that's a bit more predictable than it's been on the Climate side, that's all the way positive.
Restructuring that we're doing in '18, roughly, let's call it $60 million in restructuring there, about 2/3 of that really is completed really now in January and it's about 2/3 of the total and it's really geared in the Industrial area.
So really, thinking about how that will flow through during the course of the year and what the paybacks might look like when complete.
There's an opportunity there.
I like to say there's an opportunity more than there's a risk there, but there's an opportunity there perhaps for us to maybe to do better.
So I'm really optimistic about what's happened with bookings there, what's happened with the margins being ahead of schedule and the fact that we've got an early start toward the productivity requirements that we need to have in '18 and '19 there.
Got it.
If I can sneak one more in.
Sue, pending share count for the year.
For 2018.
2017.
2017, the average diluted shares was about 253.
Okay, average, but what was ---+ so what was ending.
For 12/31.
Joe, we'll come back and grab another call.
We'll find the number.
Yes, I don't know.
.
We'll follow up and grab another question.
No, they're not.
They're not in the '18 forecast.
That would be outside of the forecast, but they're too big to throw in the number and forecast them.
If they hit, then they're going to be delivered really some in '18, but '19 and '20, they're going to be multiyear projects.
Yes, Rich, here's how we looked at the M&A.
So we talked about it, it would be about 1 point of revenue.
We also are factoring in about mid-teens EBITDA on those, which would equate to about $0.06 in 2018 and increasing in 2019 to a $0.15 to $0.16 EPS increase.
And EBITDA sort of in the higher teens closer to 20%, really, the difference in '18 is just a step-up, but really good businesses.
That's exactly right.
So our intention is to refinance the 2018 notes that come due in August of 2018.
You're also correct, it's at 6.75% and obviously, rates are much lower than that at this point.
So we do intend to refinance.
We're watching the markets and also being very conscious on any early break premiums and making sure that we've got the right mix there, but we do intend to refinance those.
Yes, I mentioned, <UNK>.
Yes, quarter 4, quarter 1, sequentially, it's probably 50 basis points better and for the full year, it gets flat.
Quarter 1 would still be a negative relationship so it does imply sort of a second, third, fourth quarter improving.
And you'll see it improve throughout the balance of the year as shipments are made in Q2, Q3, Q4, pricing already established and material cost that hopefully we've got a handle on the inflationary numbers.
So they sequentially get better throughout the year.
Well it's all of the above, but if say, 50% of the whole price material cost relationship was China and if you throw the Middle East in there, you can say it's closer to 70% is China and the Middle East, but I would tell you that the China element really proportionately improved throughout the year as with the rest of the world.
Pricing environment, China, we assume is getting better that's been our experience so far as we've highlighted here earlier.
We feel like the material inflation, part of that now is somewhat under control with capacity really being not rationalized in the marketplace and we feel better about that.
Yes.
In a commercial space, quarter 1, we're shipping what we've already booked so we feel like the pricing there is pretty well established at this point.
There is book and turn, but where there's book and turn, it's typically dealt with by list prices so you think about unitary product is going to have more of a list price than Applied, which is going to be very project-specific.
Well, the Applied project-specific has been quoted third quarter, fourth quarter and shipping in the first and second quarter.
The unitary had price increases go through as did our competitors.
<UNK>, something would really have to change in the first quarter here and the last couple of months for that to really change my guidance (inaudible) here.
And I don't know what that would be at this point.
Yes, as we become less dependent around growth and margin for North American trailer, we're really just utilizing the ACT data here.
So we're not going to try to guess any more than ACT on that.
And it always comes down to which customers are ordering from who, and so it's too hard to predict at this point in the year, but ACT is calling the market down, and we're just reflecting what they're saying.
<UNK>, there's no way that we're losing steam.
The productivity ideas that we've got across the company.
In fact, we're attacking parts that we haven't attacked in the past, warehousing logistics, G&A cost, where the profile of the company has changed over the years and now we're catching up in some of those areas.
So I don't ---+ in a short ---+ the time we've got here, it would be difficult to tell you about all the areas we've got, but I've got confidence that we're not running out of any steam here at all in productivity.
Yes, just one last comment.
This is Joe <UNK>'s last quarterly call with us.
And from all of us at Ingersoll Rand and many of the people that you've known over the years Joe on the call, thank you for 41 years, 120 earnings calls, beginning in April of 1988, we wish you and your wife a great, long, healthy retirement, Joe.
Thank you.
| 2018_IR |
2017 | SONC | SONC
#Thank you, Denise, and thank all of you for joining us today.
For the quarter, we reported a flat adjusted earnings per share of $0.43 on a 1.2% decline in system same-store sales, lapping a positive 2% comp in the third quarter of last year.
The same-store sales consisted of positive product mix of approximately 2.7%, and that was more than offset by the negative traffic in the quarter.
Margins at the company-owned drive-ins increased by 40 basis points, primarily driven by our recent refranchising efforts involving the sales in lower-margin drive-ins.
We continue to make progress on accelerating new drive-in development as well.
Our current area development pipeline is 5% higher versus this time last year, and our system remains on track to open 65 to 75 new units this year.
And then, finally, the last point you see on this page, we continue to return cash to our shareholders, repurchasing $30 million of stock during the quarter, or almost 2.4% of the shares outstanding.
And to the third quarter, we have purchased throughout the year, including the third quarter, we purchased about 9.9% of the shares of the company outstanding.
Now before I get into the specifics of the third quarter performance more specifically, I want to take a moment to comment on our recent release that you almost certainly have seen, announcing our newly promoted Chief Marketing Officer as well as other key additions to our marketing team.
All of us here at Sonic are very excited that Lori Abou Habib, who is a 10-year veteran with our company and most recently was Vice President of National Marketing, has been named as the new CMO of our company.
Lori has really extensive experience with our brands, she\
Thank you, Cliff.
For the quarter, system-wide same-store sales declined 1.2%, while adjusted earnings per share were flat.
Traffic was negative, partially offset by higher check.
Franchise revenues increased $1.8 million or 3.7% as a result of our refranchising initiative and net new unit growth, partially offset by same-store sales declines.
Total company adjusted operating margin improved 440 basis points to 27.9% in the quarter, driven primarily by a higher mix of franchise stores.
Company drive-in margins improved by 40 basis points in the quarter mainly driven by our refranchising effort, partially offset by sales deleverage.
Food and packaging was favorable by 100 basis points given benign cost inflation and the impact of refranchising.
We have logged in a majority of our commodity costs through the fiscal year and anticipate our commodity basket inflation to be up slightly for the full year with 1% to 2% inflation in the final quarter.
We are currently running menu pricing at 1% at our company drive-ins since we did not replace pricing that rolled off during our spring menu change.
Labor margin deteriorated by approximately 80 basis points in the quarter.
Sales deleverage and labor inflation combined to drive approximately 115 basis points.
Direct labor inflation, excluding our Colorado markets, increased by 3%.
Colorado markets experienced an 11% wage inflation, which brings our total weighted average to about 4.5%.
These pressures were partially offset by refranchising favorability of around 35 basis points.
For the quarter, our adjusted tax rate was 33.6%.
Historically, when noting GAAP to non-GAAP adjustments, we've applied the same effective tax rate to GAAP and non-GAAP items.
To increase transparency, we are now segregating the tax rate associated with the change in taxes when adjusted for the non-GAAP items from the effective quarterly tax rate, which may be different.
The tax rate reflected for the refranchising gain in the third fiscal quarter of 48.6% is a higher rate because it reflects taxes associated with non-GAAP adjustments made in prior quarters.
The most meaningful non-GAAP tax rate to consider is the 36.9% fiscal year-to-date rate, which can be calculated using the details in the GAAP to non-GAAP table.
This adjusted rate does include the favorable impact from the early adoption of ASU 2016-09, which relates to the recognition of excess tax benefits related to stock option exercises.
The adoption of the standard is likely to result in increased volatility in our adjusted quarterly tax rate, and the amount recorded is dependent on the timing and amount of stock option exercises.
For the third fiscal quarter, adoption of this standard did not have a material impact on the tax rate.
As we go on to talk about free cash deployment, as of the end of the third fiscal quarter, we had $45.2 million remaining on the $173 million share repurchase authorization for fiscal year 2017.
Year-to-date, through the third quarter, we have repurchased approximately 4.9 million shares at an average price of $25.95.
We will assess the rate of share repurchase and dividend payout for fiscal 2018 in our upcoming budget planning cycle in the August board meeting.
Our intention is to continue to grow the dividend annually from the current $0.14 per share.
We will also be reviewing targeted debt levels in light of the recent completion of our refranchising effort.
As we look at our capital structure, we ended the quarter with $52.1 million in unrestricted free cash.
We anticipate free cash flow of approximately $55 million to $60 million this year.
Please note that we have refined our definition of free cash flow to exclude expenditures related to build-to-suit development projects.
Build-to-suit drive-ins are restaurants that we build with the intention to sell to predetermined franchisees in the very near term.
As proceeds from the sale of build-to-suit drive-ins are recognized as investment cash flow, we have never included them in our definition of free cash flow for market purposes.
Given that we do not recognize the proceeds, we believe that netting expenditures on the build-to-suit against free cash flow obscures the free cash flow generation of the business.
We anticipate capital expenditures of between $46 million and $48 million for the fiscal year, which is inclusive of build-to-suit expenditures of approximately $6 million.
This compares to our prior capital expenditure guidance of $40 million to $45 million that assumed approximately $4 million of build-to-suit activity.
As we look at our fourth quarter outlook, and as Cliff mentioned, we now expect system same-store sales to be flat to down 1.5% in the fourth quarter, equating to an approximate 2.5% same-store sales decline for the full year.
Adjusted fourth quarter EPS is expected to be $0.43 to $0.45, putting us within our current full year guidance of down 2% to 5%.
The modestly lower same-store sales performance is offset primarily by a lower tax rate and lower incentive compensation.
The same-store sales forecast assumes continued negative traffic through the summer and positive check.
Our same-store sales performance of down 1.2% in the third quarter was consistent in our expectation of a [markedly] improved trend from the first half of fiscal year.
Though we continue to drive towards positive low single-digit comps by the end of the fiscal year, traffic trends in May and June have been slightly beyond our prior forecast, driving the change in our sales guidance.
With respect to company-owned drive-in margins, we are refining our full year margin expectation to approximately 15.3% versus prior guidance of 15.5% to 16%, primarily reflecting the lower same-store sales assumption as well as continued pressure on labor rates, including higher wage rates in Colorado.
Our fiscal fourth quarter restaurant-level margin guidance of approximately 18% represents a 100 basis point improvement over the fourth quarter of last year, reflecting the benefit of our refranchising effort and the lapping of several cost headwinds.
The extent of the margin improvement will ultimately depend on same-store sales performance.
We have sharpened our projections for full year SG&A expense to approximately $81 million, primarily reflecting lower incentive compensation based on lower same-store sales and profits in the second half of the fiscal year.
Our expected tax rate for the fourth quarter is 35% to 35.5%, and the full year tax rate is now expected to be between 34% and 34.5%, reflecting the early adoption of ASU 2016-09, as previously discussed.
To conclude, while the third quarter of fiscal 2017 showed a meaningful improvement and trend given more normal comparisons and an improved marketing calendar, we remain focused on returning to our targeted cadence of low single-digit same-store sales growth.
We continue to execute against our technology initiatives and continue to progress towards fulfilling the potential of our more highly franchised business model, including higher free cash generation as we look out over the next several years.
With that, we will open the call for questions.
The regional element of that, Matt, did not play in.
I think we have a slightly different challenge with our company stores, which ---+ so to answer ---+ kind of answer your question what played in, it was not those elements so much.
Frankly, I think it has more to do with the rate in the last several years, the rate of turnover that has evolved in those stores and the quality of service that customers are experiencing.
And so we both made a number of investments, particularly at the management level and different by market.
But we've also, in this calendar year, made a change in leadership of who's managing our company store operation post disposition of stores, with the objective of having a different approach to stabilizing and improving the tenure of management and also a shift in culture of accountability there that we just simply weren't developing.
And with that change in leadership and some refocused efforts on the manner in which management is working in those stores and working to a sufficient degree, make sure of the compensation, you have them both working at a level of work and compensation that's right for that marketplace.
And the consequence of this is we have started seeing some improvement and turnover at the management level.
And this is occurring at a point in time where, according to the People Report, as you're probably familiar with, in fact, it is showing in our industry deteriorating or increasing levels of turnover.
So we actually felt good that we're going contra trends in the industry.
And the surveys that we do with our employees, franchise store employees and company store employees show that the employees' greatest connection for engagement and retention and performance is to the Assistant Manager, and so that's very much where we're focusing and that's where we've seen an improvement in retention.
It has not yet developed or progressed to reflecting improved retention of staff, but we believe it will.
And keep in mind ---+ well, anyway, the point in time ---+ we did these surveys in the spring and it's a little bit different time to do the survey because our business transition of employees is winter and summer.
But anyway, that aside, we do have confidence for a variety of reasons including what the employees tell us that with that reduced turnover of the manager, assistant manager and the relationship there, it will, over time, reduce turnover of the staff.
And we're confident with that.
We will also see better customer service and, in turn, with a better customer experience, growth in sales and profitability.
So we ---+ this is a ---+ has been a bit of a challenge for our company stores.
We believe it's a move in the right direction, but it's not something that will happen in just a quarter or 2.
Well, 2 reactions there.
One is, particularly as it relates to the scale that McDonald's presents, their ubiquitous nature ---+ we're hardly in a market where are they're not, only in some smaller rural areas would they not be present where we are, but given their ubiquitous nature and given their scale, and given their AUV and given their system sales domestic competition with us, when they go positive, it really does impact everybody just because of the scale, and that's kind of a mathematical element.
But that aside, we do track what happens.
We work to track what happens with customers by customer type, by product ---+ excuse me, product line.
And so to the extent that we have impact in specific lines, like drinks, and we're seeing that impact, it's ---+ believe it or not, it's not attributed to the one of the 3 majors, let's put it that way.
We see it more of a challenge.
A broad challenge with a lot of new folks coming into the business, but there are some specific competitive activities that we can track customer behavior and it's not to McDonald's.
You talked a little bit about accelerating some of these initiatives on POPS and your excitement about the integration of mobile.
What have you seen in the test that you can share.
What are you learning from your customers.
What are they ---+ how are they using it, the frequency, check, things of that nature.
And can you give us a sense also just what the actual traffic number was.
Because you gave us a little bit of the mix and pricing, is it just literally ---+ is there anything else.
Or is it just the mix and the price for this quarter.
Why don't I deal with the first part of it, and <UNK> will give you a reaction on the latter part of it in a moment here.
So I want to be clear about my terminology.
As I said, we shift resources.
It's a little less of an acceleration.
Because if I were using the term acceleration, it would probably immediately make you say, well, that's great, how quickly is that going to happen.
The fact is these things occur progressively.
I mean, our industry competitors that are doing very well with these tools have been utilizing them for years and building data banks and leveraging that, so building knowledge that they can then utilize in their business.
So to the extent that we started using things like this, we've used them more for market segment or trade area segmentation rather than customer segmentation.
We've now moved to a point with this revised app that does integrate it with POPS and POS, that when we get to the point that we have mobile order, we'll have a much more robust tool that will allow us to start building that data on an individual basis and we can have far more associations, not 1 to that individual, but 2 with demographics.
When a person ---+ when a woman living in Austin does this and so on.
So it'll build a ---+ we'll be able to build a databank that we have less of to date.
So we have had, with some of the efforts we've have to date, particularly in the market segment activity, we've had some positive results with some of it.
Some of it has not been ---+ I mean, you take a shot at it and it doesn't yield much.
So the efforts have been mixed.
But we are learning from that and learning things that we can repeat then and work to continue the business ---+ excuse me, work to continue to refine our approach to this aspect of our business.
So I'm afraid that's not overly responsive to you, but this is why I'm also trying to portray to you that we're ---+ with the ---+ it's less about getting POPS and POS in almost all the stores now, although that's a big deal, it's more about getting the app integrated and this has taken us a while to have the app rebuilt.
We did have an app in place, but it was an off-the-shelf app from a vendor.
And we realized some time ago, 12 to 18 months ago, that we really had to have the ---+ we had to own the IP in a way it can integrate with POPS and POS if we're going to make this work.
And so, in a way, we kind of started over there.
But we did roll out the new app, a new version last month.
It went very well, and we're very pleased with how it went.
And it bodes well for the next stage of mobile order and, at which point, we can really start moving into a different type of learning about our customers and marketing to them.
But we can also show them a very different experience when they come in back to this point, first in line, every time.
Nobody ---+ none of our competition can have 12 orders come in at the same time and have everybody pull into a single stall and get served by a carhop.
Everybody else has to ask for you to wait in line.
The more people they get at the same time, the worse a problem it becomes for them.
We don't ---+ we won't have that, we'll turn our table faster.
And then with respect to the sales question for the fiscal third quarter, we have ---+ we probably ran about a little bit under 2% on pricing, about another 50 to 70 basis points of positive product mix shift more than offset by negative traffic declines, <UNK>.
You have perceived that correctly.
Our perspective, what drove it was, last ---+ I mean, a year ago, let's just say, when we saw in retail and restaurants a sudden slippage in traffic and sales, the nature of the competition up until that time that had been ---+ the primary activity and the shift prior to that time had been really solely value driven.
And so with that slippage in traffic, our view was we got to see is this something that consumers will respond to and is it momentary and do we need to drive, in a short-term fashion, drive traffic back, what will it look like if we just ignore this trend.
So this is when we came on with the $5 Boom Box.
And it did get a lot of usage, but ultimately, we came to the view that it was not driving incremental traffic and we were just trading off what the customers might have been utilizing our menu for otherwise.
And so as the ---+ really by the time we certainly into this calendar year, as this fiscal year has progressed, it's been our objective to move away from that strategy and towards more traditional product news, day part, new product news, service differentiation approach with our marketing activity.
So you perceived that correctly, that's what drove it.
We have had post-winter, when we go back and look at the negative comps in the winter and how negative they were, we have seen an improvement in the sense that they though negative, not nearly so negative.
And the other thing I'd say, too, is depending on a variety of factors, we also had days where we have positive comps.
So it's not like they're all negative.
And that's a better picture than we saw through the winter.
So I think there are some payoff to this.
But we've ---+ we're kind of in a middle ground where, in '13, '14, '15, we've made some real refinements to our creative and our media in particular, but also our products and promotions.
And those things all wove together really nicely, '13, '14, '15 into '16.
We fully intended to bridge into these 21st century mediums.
These, we believe ---+ let's just say, 3 years ago, we had an app that would get us there.
But 1.5 years ago, we came to the conclusion that the off-the-shelf app might work for somebody, but what we were trying to do with POS and POPS and have that integrated, we could not do it with an off-the-shelf app.
And that's why we, in essence, we slowed down so that we can eventually speed up.
And that slowdown phase is kind of where we are now.
And it's not fun, it's a little painful.
But we also believe that the slowdown will permit us, near term, to speed up once we have mobile order and can have that integration of all these elements.
So the ---+ so I'm wandering a little bit, I hope that's responsive to you, this is why we shifted more to the product and service differentiation.
But the service piece, I think, is also going to be heightened near term when people can order off-premises and be first in line when they come to Sonic.
Pull into the stall, enter the stall number on your app, and boom, they're already making your food inside, they know which stall you're in and you shorten the whole process.
Yes.
So that's ---+ we're currently in our budget planning cycle.
And our board meeting is going to take place in August, and so we're reviewing various scenarios right now, Will.
So we'll talk about that in August, and then subsequent to that in October.
But we're looking at the fact that we are a higher franchise business model and what that means from a capital structure perspective.
So that certainly higher leverage is certainly one of those alternatives that we're looking at.
And in this context, we're also ---+ as our board would expect, we're also looking at alternative uses of capital, what should we be doing in order to make sure we're doing what's best for growing the brand and then also best for our stockholders.
Okay.
I'll take the first part of that and <UNK> will take the second part.
The technology initiative is intended to have several benefits as it relates to the sales driving piece.
The primary piece there is the customer interface on lot and the customer interface off lot.
So POPS on lot and the app or online usage off lot.
The technology initiatives go beyond that because they do include the point-of-sale system, which is already helping the average operator from an inventory control standpoint and methods that were implemented there to help them evolve their management style and improve margins from that standpoint as it relates to inventory.
But over time, with the evolution for the individual operator should help them with inventory, with labor and with cash management and revenue enhancement with the portion that comes in cash.
Now as it relates to the use of technology and the benefits to the consumer, we see this as, one, to the extent we start building a database by consumer, it will help us from a marketing standpoint.
So it should help drive traffic over time and build over time.
And we've seen this with our competitors that have been most successful in development of these tools.
They do drive traffic very positively and consistently, and it takes their AUV and profitability to a very different place.
Consumers who spend using a credit card or an app, their tickets are larger than the cash ticket in our business, we see that.
And they particularly ---+ well, anyway, we see the difference, and in both cases, it's higher than the cash customer.
So that may not be new news, but it is part of the equation.
So we would expect the customer that has some frequency with us the fact that they can ---+ the app has a place now for your favorites, it has a place for your past order, your most recent order, so the ease and convenience of doing that literally with one push of a button if that's what you want.
In other words, I want the same thing I had last time.
And there are a lot of people who do that, particularly at mealtime, particularly at lunch.
So I'll take my last order.
So the ease and convenience when you can, with a consumer, help them save a step in the process, which in this case could be ordering ---+ the whole process of ordering on premises and payment on premises, when you can condense that into one step that allows them with one push of a button to place their last order, to repeat their last order and pay for it with use of their app, it is a very significant advantage to a consumer.
And we saw that 12, 15 years ago when we implemented PAY<UNK>
We knew ---+ if we can put the correct card reader at the stall that would cause people to come to us because it's the technology at the time, they wouldn't have to stop and get cash at an ATM.
It sounds a little quaint now, but 15 years ago that was the case.
So when we put that in place 15 years ago, over time, we went from 5% of our sales in credit cards to 55% of our sales in credit cards.
And we think this can and believe this can have some similar impact on the business in terms of the ease and convenience of ordering and payment.
And when they come on lot, they pull into a stall, they don't wait through a drive-through line, they don't have to go into a store ---+ into a store and wait in line.
They pull into a stall, they enter the number from their stall shown on the screen on to their app, connect inside, all of these are integrated, and ---+ so the ease and convenience should help with driving consistent usage.
And when they do that, they'll spend more money.
So it's kind of all the above.
And I'll turn it over to <UNK> for the other part of the question.
Yes.
On the call, our guidance for same-store sales in the fiscal fourth quarter was flat to down 1.5%.
For the fiscal year at approximately about in the neighborhood of 2.5% down.
And so if you look at the range for the fiscal fourth quarter, that could have an impact, that 2.5% decline, anywhere from 10 to 20 or 30 basis points.
So that's what we mean from that perspective.
With respect to the decreased drive-in level margin guidance, that is in part due to decreased performance.
But it's also due to the fact that we had not expected to see such dramatic wage inflation in those Colorado markets.
And that's disproportionately impacting that labor line.
So I'll do the Colorado piece and <UNK> will deal with the beef piece.
As it relates to any specific market, any thoughts about refranchising, we'd only do that in confidence.
We'd only do that internally, I think, and in conjunction with our operating partners there, franchisees, et cetera.
And so there's probably ---+ there's not a time that we would discuss any specific market that we had any plans for ---+ either way, without dealing with that internally first.
So I don't have a response other than that.
It is our intention with that stable of stores, you might say, the inventory of the stores that we have at this point, it is our intention with the investments we've made in POPS, POS and some trade reps to ---+ and the labor investments we've made and the change in management to focus on improving those and attempt to move into a much more profitable base.
If we're not able to do that over time, then we'll rework our strategy.
But for the time being, that is the focus of our effort.
And as to the beef, <UNK> will pick that up.
Yes.
So a portion of our inflation in the fiscal fourth quarter is related to beef, although we're contracted for most of that through February.
But another portion is related to other commodity costs namely, as you know, we sell quite of bit of ice cream and the butter market continues to be pretty volatile, and so that's another commodity that we've seen some pressure on in addition to just some other ancillary items.
But I would tell you beef and butter are the primary drivers.
So, <UNK>, this is <UNK>.
I think what I would tell you is we absolutely think that we can return to a normalized earnings per share growth model, and it will look a little different because we are a higher franchise business model.
What will be notable though as we go into fiscal '18 is ---+ and I'm going to point out a couple of items, is that for SG&A, and you just noted this, we've has been flat due to the fact that we've reduced our incentive compensation.
And so as we look to next year, there will need to be a minimum of about $3.5 million investment in SG&A just to bring us back to recalibrate the assumption that we'll be meeting performance.
And that doesn't include regular adjustments for inflation and for increased headcount.
So that will be something that will be a headwind from an earnings-per-share perspective.
But as Cliff outlined to you, we are in our planning cycle, and we're focused on how do we drive same-store sales through our traditional way of focusing on product innovation, distinctive targeted value messaging and through that ICE infrastructure, which we feel very positive and confident about.
As we look to ---+ when you talk about investments in our brand, and this again goes back to use of free cash, first and foremost, we always look to invest in the brand and what makes the most business sense and where we can get a return.
Since we have moved to a higher franchise business model, you'll see some slight reduction from a maintenance CapEx perspective for our company drive-ins.
As we continue to see opportunities in either relocations or retro or rebuilds, we will continue to make that investment as we have seen, historically, a 28% to 40% sales lift from those investments.
Then the other big piece is just technology.
And as we move to a higher franchise business model and we look at the investments in the brand that we make, it's really, over time, capital expenditures will be primarily focused on those system technology expenditures.
And as we know from looking at other successful companies, that's a constant reinvestment to ensure that we are continuously improving the customer experience.
So an understandable question, and a question that we are asking here and answering in more than one way.
First, let me say to you that as it relates to the way that can work, if you're talking about the potential bottleneck, if you do get 10 or 12 people ordering in a relatively short period of time and pulling on lot in a similar time line, that if they have gone through some parts of the process, review the menu or the ordering process, the payment process and that has all occurred off lot, you now are in a position to, as you'd say in full-service dining, turn the table.
It will turn tables more quickly than you would be able to otherwise.
And so in the ---+ in that context of getting food to a customer ---+ and of course, it does assume that the service time is the same, and I'll talk about that separately in a moment, if the service time is the same, in fact, the customer can move on more quickly.
And most customers do take their food and leave the lot, some stay on premises.
So the turning-the-table thing should enable us to have more throughput capacity, to the extent it's ever constrained by the length of stay and the number of cars on lot, it enables ---+ it just frees up parking space.
Now as it relates to the throughput capacity in the drive-in and the actual potential for the standard kitchen, our average store is doing just short of $1.3 million.
We have had for years conventional SONIC Drive-Ins that do $2.5 million and $3 million.
We have variations on the conventional drive-ins, they're opening in newer markets where they're not doing in $3 million to $4 million range.
We do have stores doing in excess of $4 million, and they have sustained at that level.
So these are with relatively conventional kitchens.
So the throughput capacity, if it's operated well, the throughput capacity for an average store is greater than what we are experiencing today, and significantly greater.
So to the extent that the technology drives that kind of demand, we do have business across 5 day parts, we do have greater capacity than the average store is called upon to address today.
And as we turn tables faster, even though in the busiest part of the day, it will enable us to serve more customers.
Now that being said, those 2 things being said, the fact is, yes, we are addressing with our average operator.
What does this mean.
What does this mean for staffing.
What does it mean for anticipating the level of business.
What does it mean for level of leadership.
How do we look at assistant managers 5 and 10 years ago.
And how do we look at assistant managers today.
So these are very active points of discussion and consideration and recommendation by us to our operators, that are active points of discussion at our convention, at our regional meetings and our individual business meetings with individual franchisees.
So you're right to be on point about it in your question, but it's not going unanswered in our business.
Let me do ---+ I'll do the first part and <UNK> will talk about the second part.
Well, first of all, as it relates to sales trends, we're only talking about through May 31.
Secondly, we don't ordinarily talk about what happened to this product line or what happened to this day part, and we probably won't start that today.
So I'm afraid I don't have a lot of detail for you on that, so I'll turn it over to <UNK>.
Yes.
So I can answer the second question, <UNK>, we have been engaging the build-to-suit program since fiscal year '15 on a more limited basis.
We started to break it out on our 10-Q and annual report probably within the past 12 to 18 months.
And as we've seen success with it, we've been able to ---+ literally, we designate, we partnered with certain franchisees under certain circumstances, and they usually buy us out within anywhere from 3 months to 2 years.
It's just something, as we were looking at capital expenditures and free cash flow, we wanted to point that out and we want to start incorporating that going forward and thought that would be helpful context.
Yes, so good question.
And I think I understand why you would phrase it the way you did.
The presentation where you ---+ we did make at that time and we have made at times in the past had to do with our multi-layer growth strategy.
And so what we laid out for analysts and investors was, here are the multiple points that contribute to our EPS growth and we laid out the first from the same-store sales, then you got margin improvement, then you got new store developments, then you have our ascending royalty rate, and then you got use of free cash.
So we laid out those 5 points out along these upward swinging arrows to show how these things contribute to our EPS growth.
And then we put a ---+ if we were going to have mid- to high-teens, let's just say, EPS growth rate, what portion of that teens EPS growth rate is made up by each of these components.
And so when we talked about 3% to 5% in that context, it was what portion of the EPS growth would be made up by the same-store sales, as an example, or stock buybacks or whatever.
So I would want to clarify, Bob, that in that presentation, that's what that 3% to 5% was.
Now at the same time, if you go back to '14 or '15, I was kind of surprised because, in fact, we produced 3% to 5% comps.
But that was an interesting scenario that occurred because of a lot of other good activities that was going on.
Now in terms of it being 3 years ago and we laid that out for you, the process of getting this implemented in our system, 3,600 stores, the whole process is much more arduous and much more plodding than we might have anticipated.
We are ---+ I think as we've said, in this year, we're hitting 90%.
So it's getting done, but it's just been a hell of a lot more work and a lot more arduous than I thought and it's required us to focus a lot more resources on fewer initiatives.
And the consequence of this in part has been that the infrastructure is getting done but the beauty, the quality of outcome that we would expect from them, frankly, has had less investment and less work.
So there's not ---+ I mean, there's not a whole lot more I could tell you other than that.
There are steps we've taken along the way and we are investing in outside vendors to help us get there.
We're investing in people even more so now, but we have been for a while.
In spite of the fact that the SG&A may have been held constant over a period of time, our investment in technology, not just infrastructure, but IP and usage, development of it, has been quite significant over the last several years.
So will we get back to where we were, in fact, in kind of the '14, '15 time frame, that's not something we've laid out as an expectation.
But as our AUV climbs, we believe we can get back to some combination of positive traffic, price increase and other methods of engaging customers that would get us back to a moderate single digit, low single digit.
And then if we do that and open stores at net increase 2% to 3% and higher volume, we'll get back to where that multilayer growth strategy as those types of contributors and will get us a nice EPS increase here year-by-year.
They ---+ and it can be in this kind of sequential ---+ it's not a 1-year deal, it's not 1-year pipeline for opening stores, it's not 1-year pipeline of customer engagement initiative.
These are things that can build and grow and build on themselves.
I feel very confident about that.
And you can see people like Panera and Domino's and Starbucks that have done it and they build on it, and it's beautiful.
Okay.
Thank you, Denise.
And thank ---+ again, thank all of you all for participating.
We appreciate your interest in the company.
We appreciate your patience in kind of this transition time.
We got a great brand and a lot of power moving the right direction.
And near term, we believe we're going to harness that in a way to take our business to another level as well.
So thanks for your interest, thanks for being here today.
We look forward to seeing you along the way.
Take care.
| 2017_SONC |
2017 | KIM | KIM
#Thanks, so much.
Good morning, and thank you for joining Kimco's First Quarter Earnings Call.
With me on the call this morning is <UNK> <UNK>, Chief Executive Officer; <UNK> <UNK>, President and Chief Investment Officer; <UNK> <UNK>, CFO; <UNK> Jamieson, Chief Operating Officer; as well as other members of our executive team, including Milton and Ray <UNK>.
As a reminder, statements made during the course of this call may be deemed forward-looking.
It is important to note that the company's actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors.
Please refer to the company's SEC filings that address such factors.
During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results.
Examples include, but are not limited to, funds from operations and net operating income.
Reconciliations of these non-GAAP financial measures are available on our website.
With that, I'll turn the call over to <UNK>.
Thanks, Dave, and good morning, everyone.
Today I'll provide a high-level overview of our first quarter 2017 performance and current market trends.
<UNK> will then cover our transactions this quarter, and <UNK> will provide details on key metrics and 2017 guidance outlook.
To paraphrase Mark Twain, reports on the death of retail real estate have been greatly exaggerated, and Kimco's strong first quarter is living proof.
5 years ago, we embarked upon a major program to improve the quality of our portfolio, focusing on areas of significant barriers to entry, higher density and incomes, strong retailer demand, emphasizing grocers and off-price retailers.
Our leasing volume is validated in the success of our transformation and helping to offset the challenging retail environment the industry is currently experiencing.
As an example of our strengthened portfolio, which, given the size and diverse location, has always been defensive in nature, our top 5 markets, which are entirely coastal, contribute 50% of our rental revenues versus 35% when we began our transformation.
Today, we are experiencing the rightsizing of the retail landscape, as numerous chains announced store closures and embrace the omnichannel experience that consumers have come to expect and demand.
While e-commerce is not nearly as profitable as the physical store, retailers understand that in an on-demand world, those who offer a frictionless experience regardless of channel will thrive, as consumers continue to spend at record levels.
A few of our retailers are starting to effectively evolve their business models to take advantage of their brick-and-mortar retail, offering discounted services and pricing for online orders shipped to the physical store that cannot be matched by a pure online retailer.
Wal-Mart and Home Depot are the perfect examples of this.
As Milton is fond of saying, when it comes to retail real estate, the only constant is change, and Kimco is adapting to this evolving landscape by working hard to deliver both the product and an experience to tenants and shoppers commensurate with this new world order.
And that is why at many of sites you'll see more health and wellness, more service providers, more food and restaurants, more entertainment and more experiential retailing.
Our leasing volume is the highest in 10-plus years.
Our team is laser-focused on this most important part of our business.
We are constantly challenging our entire team to do even better, and they have.
We backfilled 5 former Sports Authority boxes this quarter and continue to see demand for the remaining locations from grocers, off-price, fitness and entertainment concepts.
Despite the normal seasonal vacancies usually experienced in the post-holiday season, our gross occupancy remained flat quarter-over-quarter.
More importantly, leasing spreads remained strong, fueled by the significant mark-to-market opportunities embedded in our portfolio.
And while retailer weaknesses is dominating the media, many retailers, the majority of them our tenants, are thriving.
Of our top 20 tenants, 7 have recently hit all-time highs in their stock price, and many have large new store opening plans.
For example, TJX, <UNK> and Burlington in aggregate have announced expansion plans in excess of 300 stores.
While we are not immune from store closures, we continue to believe we are in the sweet spot of retail and will continue to generate interest from high-quality tenants that will drive more traffic and more sales to the surrounding retail stores.
We've built our business plan, the 2020 Vision, with a focus on balance sheet strength and the ability to deliver sustainable cash flow growth in different cycles.
The good news is, the plan is working.
The balance sheet is strong and affords ample financial flexibility, and we have created a portfolio and pipeline with multiple levers that will deliver both organic and value creation for the foreseeable future.
Of particular note is our development and redevelopment pipeline, which is starting to bear fruit, highlighted by our Grand Parkway project in Houston, which is now open for business.
Our redevelopments, a core competency of Kimco's, are expected to yield incremental returns of 9% to 12%, and we have several major redevelopment projects under way that will create additional flagship assets with high growth profiles.
We believe investing in our business and growing organically is the right way to create long-term shareholder value.
As I said earlier, we have a plan, and the plan is working.
And now I will turn the call over to <UNK>.
Thank you, <UNK>.
The first quarter transaction activity has been a continuation of our 2020 Vision goals and objectives, which include a disciplined approach towards acquisitions and dispositions.
The acquisition environment remains ultra-competitive with opportunities hard to unearth, as the pricing power for high-quality core assets remains in favor of the seller.
While this is no surprise in the major markets of Southern California, New York Metro and other coastal gateway regions, we have more recently seen bidding wars for institutional assets take place in Chicago, Minneapolis, Houston and Dallas.
We remain steadfast, seeking opportunities to selectively buy assets that fit the disciplined strategy we have set forth.
One such example is Plaza Del Prado in the affluent North Shore of Chicago.
This unique asset provided immediate upside with the renewal of a bank outparcel at 10x the prior rent as well as the ability to create future value through a possible early lease extension with a grocery anchor and a new outparcel.
There is also an incremental lease-up opportunity at the site with LOIs already under way just 90 days in the fee acquisition.
Adjacent parcel acquisitions remain a focus for us, as we closed on the purchase of a former Staples box at our Columbia Crossing Shopping Center in Columbia, Maryland.
Sandwiched in between T.
J.
Maxx and Dick's, we have already executed a lease with HomeGoods at an attractive return on investment.
As <UNK> indicated in his remarks, the retail environment is changing, and it is imperative that we continue to evaluate future investments with an eye towards the evolving dynamics.
We have directed our investment team to focus on those assets with a strong growth trajectory either from below-market leases or adaptable site plans with redevelopment potential as well as considering existing and prospective tenant quality and space needs.
Regarding new development opportunities, we are taking a strict and cautious approach and believe that urban core, infill retail projects with multi-family or other vertical development opportunities are the future.
The investment in Lincoln Square in Center City Philadelphia fits the mold.
Our investment was made alongside Alterra Property Group, our partner who has significant multi-family development and management experience.
We entered the project with substantial leasing interest already in place, which we helped finalize into executed deals prior to closing, including a small-format Target, PetSmart and an exciting specialty grocer.
In addition, we have secured in-place entitlements which enabled us to break ground the day after closing on the land.
The development of 322 multi-family units above the retail provides for the urban infill, mixed-use environment that we believe will pay dividends into the future.
On the disposition side, the first quarter sales amounted to $113.2 million of gross value, with Kim's share of $65.8 million.
The blended cap rate on the 8 centers sold was approximately 7.5%.
Currently, we have several assets under contract in the low-6s, and even sub-6 cap rate in a few cases, highlighting the quality of the remaining assets for sale.
In terms of our 2017 acquisition and disposition guidance, we remain comfortable with the dollar amounts and cap rates previously established.
We remain focused on continuing to further enhance and upgrade the portfolio through a disciplined capital recycling strategy.
<UNK> will now walk you through this quarter's financial results.
Thanks, <UNK>, and good morning.
As we begin the second year of our 2020 Vision strategy, we remain confident about achieving the objectives set out in our 5-year plan.
Our transformed portfolio, internal ---+ and internal growth levers remained solid, and we are well positioned to deliver growth, as lease-up continues and redevelopments and developments come online.
2017 is off to an excellent start with strong first quarter operating and financial results.
NAREIT FFO per share was $0.37 for the first quarter 2017 compared to NAREIT FFO per share for the first quarter 2016 of $0.38, which included $0.01 per share from a preferred equity profit participation.
FFO as adjusted, or recurring FFO, which excludes nonoperating impairments and transactional income and expense, was $155.8 million for the first quarter of 2017 as compared to $152.9 million for the same quarter last year, with $0.37 per diluted share for both quarters.
Our results were favorably impacted by increased base rents, improved bad debt expense totaling $7.5 million, and the implementation of our strategic initiatives, which lowered interest expense, G&A and tax expense by $11.1 million.
Offsetting these positive factors were lower lease termination fees, reduced below-market rent amortization and lower FFO contribution from joint ventures.
Our modest growth reflects last year's disposition of Canadian and U.S. properties totaling $982 million and the investment of over $390 million in our development pipeline which will begin to generate NOI and FFO in the second half of this year, as our first completed development project, Grand Parkway, comes online.
Our 4 other active development projects, Dania, Christiana, Owings Mills and Lincoln Square, will begin to come online in varies points during 2018 and 2019 and will be key contributors to our future growth.
Our operating portfolio continues to perform very well.
U.S. occupancy is a healthy 95.3%, with anchor occupancy steady at 97.3%, and small shop occupancy at 89.6%, so down 30 basis points from year-end.
This modest decline is typical for the period directly after the holiday season.
U.S. occupancy is down 10 basis points from year-end.
First quarter occupancy was impacted by approximately 70 basis points relating to the remaining Sports Authority vacancies.
We have leased a total of 14 former TSA boxes and have LOIs or active prospects on 11 of the remaining 13 TSA boxes.
Leasing activity during the quarter was brisk, delivering new leasing spreads of 17.9%, renewals and options exercised at 10.1% and combined leasing spreads of 10.9%.
Same-site NOI growth was positive 2.2% for the first quarter, driven by minimum rent increases of 150 basis points and improved credit loss of 130 basis points, offset by lower recoveries of 80 basis points.
The comparable lower recoveries are attributable to a significant real estate tax refund received last year at one of the properties.
Same-site NOI growth includes 10 basis points from redevelopments.
In addition, there was no impact on first quarter same-site growth from the Sports Authority bankruptcy, as we had previously reserved the TSA rents in the first quarter of 2016.
We continue our efforts to enhance our balance sheet.
We completed a new $2.25 billion revolving credit facility, with borrowings priced at LIBOR plus 87.5 basis points.
This new 5-year facility with a final maturity date in 2022 replaces our $1.75 billion revolving credit facility, which was priced at LIBOR plus 92.5 basis points, and was used to repay our maturing $250 million bank term loan, which was priced at LIBOR plus 95 basis points.
Also, we issued a $400 million 10-year unsecured bond at a coupon of 3.8%.
Proceeds from this issuance were used to repay our maturing 2017 mortgage debt with a weighted average interest rate of 5.71%.
Our weighted average debt maturity profile now stands at almost 9 years, one of the longest in the REIT industry.
We are reaffirming our FFO per share guidance range of $1.50 to $1.54.
Our guidance range does not include any transactional income or expense, which we will incorporate as it occurs.
As a result, our NAREIT-defined FFO per share guidance range and our FFO as adjusted per share guidance remain the same.
We are also reaffirming our full year 2017 same-site NOI growth range of 2% to 3%, which includes the negative impact we expect to incur from the Sports Authority bankruptcy of approximately 225 basis points in the second quarter.
In addition, we are reaffirming our expected year-end occupancy range of 95.8% to 96.2%.
And with that, we'd be happy to answer your questions.
We're ready move to Q&A portion of the call.
(Operator Instructions) Phil, take our first caller.
Absolutely.
I think we've been pretty consistent with our message there that our goal for our redevelopment program is to really unlock the highest and best use of the asset, and a lot of what we're working on is putting the entitlements in place to add density.
So when we look at future projects, we always look to see what was the supply and demand is in the certain area that we're developing and understand the different risks involved with the project and ultimately the return on our investment.
So for now, we've identified 2 projects that are active, our Pentagon and our Lincoln Square projects, and we continue to look through the portfolio for future opportunities and continue to look at the highest and best use of the real estate.
Absolutely.
Typically what we do is, we look for a partner that's a local expert, someone that has a great track record, someone that has product in the close proximity, where they can use that to their advantage and understand the market inside and out.
We understand that we're the retail expert.
So what we bring to the table is really a showcase of what we're doing at Lincoln Square, what we were able to use our expertise to negotiate and execute the deals with Target and PetSmart and others.
And so we really want to focus the JV strategy on mixed-use with partnering with the best-in-class in that local jurisdiction.
Our redevelopment is very self-explanatory.
We use the definition where we're changing the square footage of the site plan.
We think that that's the simplest definition that makes sense.
So that's why redevelopment has a category unto itself regarding TI and CapEx spend, whereas if it's a renewal or an option, that's really an in-place tenant that we're working to keep in place and to extend term with.
If the GLA is changing it will be a redevelopment, and then we will count it as ---+ yes, if it's a new lease, then it will be a new lease.
If it's a renewal, typically, those are not counted in renewal spread.
Sure, Christie.
As I mentioned in my opening remarks, we remain confident in our guidance range of the 2% to 3% level.
As we look ---+ and also as I said, as we mentioned, in the second quarter, there will be an impact related to Sports Authority.
The Sports Authority impact in the second quarter has a negative impact of about 225 basis points.
So when you take that in over the full year, it averages about 56 basis points on a quarterly basis.
That already is baked into our credit loss analysis for the full year, which is why we remain confident about where we are.
We've ---+ as long as there's not massive bankruptcies, which we don't expect, we've accounted for the store closings that we see already.
So we remain confident that we'll make our 2% to 3% range for the full year.
The second quarter, though, will be impacted.
It's going to be very muted because you're starting with a negative 225 basis point decline to start with.
So it's going to be lower definitely in the second quarter, but as we go through the back end of the year, it definitely improves in the third quarter and fourth quarter.
It's a good question, Christie.
I think, when we look at our portfolio, we have not experienced any change in demand from our retailer base.
It's clearly driven by a few categories that are the shining stars in retail today.
I mean, off-price, we've talked about TJX, <UNK>, Burlington, Nordstrom Rack, those are really driving forces for us.
And then you include the fitness category and the specialty grocers that are taking new deals today.
We have not seen any rent relief requests of any material size throughout the portfolio, which is really a great indicator to show how strong the portfolio is operating.
And one of the best thing I could tell you, when we look at our 5 Sports Authority leases that we backfilled this quarter, there were 5 different tenants that took the spaces.
So that just shows the diversity of demand that we're dealing with, and when we look at our pipeline, we think that, that absorption rate is just continuing to build momentum through the rest of the year.
We anticipate that it'll be more of a restructuring going on with some of the tenants that have already filed.
hhgregg obviously one that we anticipated, and that will probably ---+ we were anticipating getting all 8 of those back.
So we've planned accordingly for the store closures that have been announced, and we continue to see strong demand.
So we feel like we are in a good position.
That was back in 2008.
So you're spot on there.
We continue to work on leases there to try and backfill that spot.
When you look at past, the retail headlines, I think you've got to look at the categories of retail that are thriving.
And it's really the off-price segment that really has perfected the treasure hunt.
When you look at TJX and their release, they talk about how their traffic is actually increasing.
When you look at what Home Depot and Lowe's are doing in the home improvement section, it's really impressive and how they've integrated the online channels with the physical brick-and-mortar.
When you look at what Walmart has done with taking advantage of their physical stores in announcing really pricing power that if you ship online order to the store, you actually get a further discount, which is the first move, I think, in terms of our physical brick-and-mortars taking advantage of their network of stores.
So again, it's obviously ---+ there's a lot of headlines out there regarding certain categories, and beauty is another just perfect example of just look what Ulta and Sephora are doing.
And then you layer in fitness and some of the health and wellness and medical categories, it's clear that we're shifting more towards service, restaurants, food, things that are driving traffic to the shopping center, and that's where we're positioned to really take advantage of it.
There's still a balance right now, where retailers are trying to figure out the right balance of where to invest their dollars.
All the retailers acknowledge that their physical store base is where they're most profitable, but they realize they need to have that offering to remove any pain points in the shopping experience.
And so when you look at Home Depot and when you look at Lowe's, they've been investing heavily, yet also investing in the physical stores.
So there is a balance, I think, that a few of our retailers have found, and I think they are going to be setting the model going forward to how to really integrate and how to be able to take advantage of both channels.
Sure.
So we have 3 preferreds.
One's at 6% for $400 million, one's at 5.5% for $225 million and one is $175 million at 5 5/8%.
If you look at where the preferred market is today, for us, we're probably, if you went to it, it's probably around 5.5%.
So there's really not a whole lot of gap or upside in redeeming in one preferred for the other.
More importantly, what we'll focus on is, we have all this optionality, and at the right time, where if the capital is available, we will use it to redeem those preferreds and that'll help reduce overall debt levels, including preferreds over time, which is really part of the 2020 Vision, which we think will help lead toward being put on a positive outlook and an upgrade at some point by the time we get to 2020.
It's all very, very location-specific.
Clearly, if there isn't a demand for a box in a certain location, you've got to look at alternatives.
What we've found is that we have plenty of activity in our redevelopment pipeline to show that whether it's off-price, grocery, fitness, to take advantage of the space that we are creating in addition to what's existing on the property.
So it's all location-specific.
And again, it's really what the highest and best return on that location.
We don't have many deboxing activities going on today.
It's something we look at constantly.
But again, when we look at our portfolio, we think that our redevelopments are well positioned to take advantage of really the sweet spot of retail today.
Sure, happy to answer that.
As we look at the cap rates particularly in those markets, they've been relatively stable.
I think we've mentioned over the last few quarters that they were shifting a little bit higher.
We have not seen any material change the beginning part of this year.
There is still plenty of demand from private buyers and institutions that are looking to take advantage of a bit of an arbitrage opportunity.
So as we mentioned ---+ I mean, the first quarter, we hit about mid-7s on our cap rates.
We have several deals in the pipeline that we expect to close in the second and third quarters that are in some cases 6% and below.
So there's no doubt that there is interest-level even outside of the core markets.
Now when you do look at the core markets, those have been extremely aggressively priced.
And a few examples, whether it be power or grocery, we've seen in Dallas and Chicago power centers in the low-5 cap range.
We've seen grocery in Maryland and Irving, Texas in the 4s and 5s.
A lifestyle kind of power center in Philadelphia just transacted at a flat 4% cap.
So there is extreme demand and limited supply for high-quality real estate, and we're seeing plenty of activity on the secondary and tertiary markets as well.
This is Ray.
With respect to Albertsons, really it's been no change.
We're still focused the company on executing an IPO at the right time.
Fortunately, we are very strong business at about $2.8 billion, $2.9 billion of EBITDA and about $0.5 billion of free cash flow last year.
So we're very comfortable.
The business is running very, very well, and it's getting past the headwinds of deflation.
And so we're optimistic that in the near term, we will execute on a way to monetize the investment.
Happy to.
We actually haven't seen any slowdown in our development projects.
Now each of our development projects has a special case of why we think it's appropriate to take on the development process, and the strength of the underlying real estate, I think, is why there hasn't been a slowdown.
And when you look at the supply coming online, it's very, very muted.
I mean, we were at 38-year lows in terms of new supply coming online.
And so when retailers are looking to grow store count, they are still sometimes challenged to find those opportunities, especially in markets where they're trying to penetrate.
So we feel very good about the pipeline, the strength of the demand and the retailer base that we're working with to continue to prelease projects.
Well, we did take on a massive simplification effort and have reduced our JVs dramatically from the previous high.
We do think that it's appropriate if a partner brings us a deal that we would not normally be able to take advantage of on our ---+ by ourselves, and that situation, like a Lincoln Square, is a perfect example of that, where we do believe our partner is valid and can add value to the property longer term.
We also like to think that the Lincoln Square is a perfect example of a partnership that enhances each other.
We are not a multi-family expert.
We acknowledge that.
So we want to make sure that when we partner with someone, that's the partner that enhances the project going forward.
So those are the ones that we think make total sense.
When we look at our grocery business, obviously, we are invested in Albertsons, and Ray gave a quick recap there of the business, and we think that they have a good business model and continue to battle food deflation but see it coming to an end in the near term.
So other than that, when we look at new deals we did for the quarter, we did a deal with Sprouts Farmers Market.
We continue to see specialty grocers, whether it's Trader Joe's or others that really enhance the traffic generation at our projects.
And then the traditional grocers still are finding ways to create value.
There has been a lot of consolidation, whether it's Kroger or Albertsons, and we continue to think that going forward, it's a great way for us to add a traffic driver to our locations that don't have a grocery component.
We are watching closely and working with Lidl.
And that's coming in this year.
They are going to be a competitor, and I think that there'll be a nice new addition to some of our locations that don't currently have a grocery component.
But it's very competitive.
We do see the strong continuing to thrive.
Publix is another great example of one that continues to dominate.
And depending on the location, we think our portfolio has a lot of opportunity to continue to add grocery components.
Thanks, Phil.
I'd like to thank everybody that participated on our call today.
More information is available on our website.
Thanks so much.
| 2017_KIM |
2016 | UFI | UFI
#Thanks, operator, and good morning, everyone.
Roger is unable to join us today, so I will start with an overview of operational activities and general market conditions in the quarter.
I will then turn the call over to <UNK> who will review our financial performance, and then I will close the call by discussing our strategic priorities and outlook for the remainder of the fiscal year.
In looking at the apparel segment, demand for the Company's products continues to be driven by the fact that the production of synthetic apparel in North and Central America has increased in each of the last six consecutive years, and we expect this trend to continue into the foreseeable future.
Pricing for our raw materials initially declined in the March quarter as the price of oil fell below $27 a barrel, but then increased to $38 per barrel by quarter end.
This pattern was favorable to margins in the March quarter.
Most forecasters do not expect the price of crude oil to increase much from its current level throughout the remainder of the year.
So we would anticipate operating in a fairly stable raw materials environment over the next quarter or two, barring any supply/demand issues with either paraxylene or terephthalic acid.
The Company remains on target to complete the 2016 fiscal year capital projects that were included in our annual investor update meeting.
We are on track with our plastic bottle processing operation scheduled for completion this summer, which will be capable of producing 75 million pounds of clear, polyester bottle flake per year.
When completed, the Company will be supporting the growth of REPREVE brand with a state-of-the-art bottle processing facility in conjunction with one of the most advanced recycling plants in the world.
In addition to these investments, we will continue to explore opportunities to further increase our texturing and PVA capacities by approximately 10% over the next year to support the long-term demand for synthetic yarns in the CAFTA region, which continues to be an important part of our customers' overall sourcing strategy.
Our PVA development work with customers continues to be very strong, particularly for our REPREVE recycled yarn.
REPREVE is gaining traction and a white range of end uses, including an American flag from Seasonal Designs that will be sold at Home Depot, Walmart and online.
Look for these flags in corrugated displays inside stores prior to the 4th of July.
They will feature a cobranded header and a package insert naming REPREVE.
REPREVE will also be in a hammock produced by Yukon Outfitters and will be sold with the REPREVE woven label bottle tag.
REPREVE will also be featured in the Stair Barrier, which is a fabric gate designed to keep children and pets off stairs.
The stair barrier is an innovative safety product that will be sold online, and we are excited to be a part of this program.
On the apparel side, REPREVE will be in a new T-shirt that will be available at all parks within the National Park Service.
The T-shirt will feature a cobranded hang tag and an on-garment heat seal label.
In addition, Abercrombie and Fitch, which operates more than 750 stores in the US, will be expanding their in-store graphics for a women's denim program to all of their retail stores.
This program will include cobranded in-store signage, hang tags and a waist tag.
With that, I will turn the call over to <UNK> for a financial update.
Thank you, <UNK>, and good morning, everyone.
Our results for the quarter show growth in both gross profit and operating income.
This was achieved by a significant increase in the gross margin rate from 12.8% in the third quarter of 2015 to 14.5% this quarter.
I'd like to start the detailed financial review by providing an overview of the impact of specific items on our reported pretax income for the quarter and year-to-date periods.
So turning to page 3 of our presentation, you will see a bridge between our third quarter 2015 and 2016 results.
In the third quarter of fiscal 2015, we reported pretax income of $12.5 million.
This was after loss on extinguishment of debt of $1 million, and we have normalized for this charge when comparing 2016 to 2015.
Parkdale America.
We recorded pretax earnings of $3.6 million for the third quarter.
While this does represent a significant improvement compared to Q2, it is still $1.3 million less than the prior year.
Parkdale's performance this year has been adversely impacted by competitive pricing pressure, coupled with higher depreciation expenses from recent expansions.
Brazil.
While the Brazilian real has recently strengthened relative to the US dollar, the average exchange rate in Q3 of fiscal 2016 was approximately 30% less than the prior year, resulting in a negative impact of around $600,000 on pretax income.
And we also recorded a bad debt charge of $400,000 during the quarter.
Pretax income for the quarter would have been better than the prior-year period by $2.2 million without these specific items.
Were it not for the impact of these items, our reported earnings per share would be around $0.05 more than the prior-year period as opposed to $0.01 less than the prior-year period as reported.
On page 4, we show the impact of the items just discussed on a year-to-date basis.
Year-to-date pretax income before these items would have been $6.3 million better than the comparative period.
Were it not for the impact of these items, our reported earnings per share for the nine-month period would be around $0.20 more than the prior-year period rather than $0.11 than the prior-year period as reported.
Note that Parkdale's results for the first nine months of fiscal 2015 included a bargain purchase gain of $1.5 million, which we have normalized when comparing 2016 to 2015.
Turning to slide 5.
You can see the sales and gross profit highlights for the third quarter.
Please remember that the discussion here focuses on our core segments, which exclude ancillary operations.
Please refer to slide 12 for the consolidated metrics.
Overall, the revenue decline for the quarter was attributable to price changes associated with currency devaluation in Brazil, which adversely impacted sales by around $6 million, and lower raw material costs.
While overall revenue declined, our gross profit margin on a segment basis increased from 12.9% in the third quarter of 2015 to 14.7% in 2016, resulting in a gross profit increase of approximately $1.5 million for around 7%.
We achieved this significant margin increase by continuing our strategy to enrich the product mix, focusing on higher margin offerings from our premier value-added portfolio.
The substantial benefits are visible, in that all segments are showing margin rate improvement.
In addition, as mentioned earlier, our margin did benefit from a favorable raw material cost environment during the quarter.
Looking at the individual segments, the volume decline in Polyester and Nylon is attributable to four factors.
One, customer shutdowns associated with the Easter holiday, which fell in the third quarter of this year but was in our fourth quarter last year.
Two, customer inventory adjustments associated with the warmer winter season.
Three, our strategy to reduce focus on high-volume but low-value product.
This resulted in a volume reduction while favorably impacting profitability.
And four, as we shift production towards lighter weight, or lower denier yarns, we produce fewer but higher value pounds.
Our subsidiary in Brazil has been able to capitalize on its strong market position and disciplined sales and manufacturing practices, while competitors continue to struggle with many of the difficult economic issues that we have seen over the past several months.
On slide 6, we show the year-to-date segment results.
For the nine-month period, the overall revenue decline was largely attributable to price changes associated with currency devaluation in Brazil, which adversely impacted sales by approximately $25 million, and lower raw material costs.
While overall revenue declined, our segment gross profit margin increased from 13% to 14%, resulting in a small increase in gross profit.
This reflects the success of our mix enrichment strategy, as well as disciplined value-based pricing.
Looking at the individual segments, the average price decline in Polyester and Nylon is attributable to lower raw material costs.
The volume declines in Polyester and Nylon segments all occurred during the third quarter, driven by the items that I noted earlier.
We are especially pleased with Nylon's gross margin increase of 190 basis points, driven by favorable product mix and manufacturing cost efficiencies.
Revenue in the International segment was adversely impacted by the exchange rate for the Brazilian real and weak economic conditions in Brazil adversely impacting volumes in the first half of the fiscal year.
Note that despite the sales decline, gross profit increased as a result of product mix enhancements.
In summary, our strategy of expanding the premier value-added portfolio and overall product mix has secured strong operating results, resulting in a highly competitive environment.
PVA continues to grow as a proportion of consolidated net sales.
And for the nine-month period, PVA products represent almost 35% of sales.
This is up from 30% at the end of June.
Turning to page 7 and looking at our equity affiliates highlights.
At the end of the quarter, the Company had approximately $118 million recorded for investments in unconsolidated affiliates.
These investments consisted of our 34% ownership in Parkdale America and our 50% interest in two joint ventures that supply raw materials to our domestic Nylon operations.
I outlined earlier the significant changes in earnings from our equity affiliates as a result of Parkdale America's results.
The details for Parkdale and our Nylon joint ventures are presented on this slide for your reference.
During the nine-month period, we received a total of $2.9 million in distributions from our equity affiliates.
On slide 8, we review the Company's balance sheet highlights.
Adjusted working capital decreased by $8 million during the third quarter.
Adjusted working capital as a percentage of annualized sales was 19.6% at the end of the third quarter, down from 23.1% at the end of the second quarter, and in line with the level at the end of June 2015.
Moving to net debt and total liquidity.
The Company ended the current period with $121.8 million of total debt, and net debt of $106.5 million.
Net debt increased by approximately $12.4 million from the beginning of the fiscal year, primarily due to growth-related capital projects and share repurchases.
Capital spending is in line with our previously discussed plans for the polyester and recycling businesses.
The Company's anticipated total outlay for capital projects as of fiscal years 2016 and 2017 remains at around $100 million.
As of the end of the quarter, our weighted average interest rate for outstanding indebtedness was approximately 2.7%, total revolver availability and liquidity was $78 million and $93 million respectively.
I will now turn the call back to <UNK>.
Thanks, <UNK>.
Overall results for the quarter were very positive, with the bright spots being the performance of our PVA yarns and the results from our international operations.
Our premier value-added yarn portfolio now represents more than one-third of our revenue, putting us ahead of our fiscal goal of 30%.
Our strategy of product mix enrichment is resulting in continued growth in margins as we focus on higher value-added products.
Our global footprint for these products now includes the Americas, China, Turkey, Taiwan and Sri Lanka, which means that we can supply our downstream customers anywhere in the world in which they choose to place a program.
To further extend the global availability of our PVA products, capitalize on the projected growth in the Asia region and take advantage of the pending implementation of the Trans-Pacific Partnership trade pact, we will continue to explore opportunities in Vietnam.
Our goal is to be sure we stay close to our supply chain and have REPREVE and our other PVA products available to supply fabric and apparel producers in that region.
In Brazil, we have been very successful in gaining share from one of our biggest texturing competitors which ceased operations as a result of the challenging economic conditions.
Sales of our manufactured yarn, which is more profitable for the Company, grew in the March quarter.
And we expect this trend to continue as we further consolidate our share gain in Brazil.
Despite challenging economic conditions in Brazil, we have seen our volume grow and expect this trend to continue in the future, which will drive ongoing improvements there.
When economic conditions do improve in Brazil, we will be well-positioned to take advantage of the growth in the textile sector that should result.
Volumes and margins in China were also very strong in the March quarter, and our commitment to PVA yarns continues to allow us to stand apart from the mills that are heavily focused on commodity products.
We have been experiencing real organic growth in China, and we continue to be pleased with the amount of development activity that is in the pipeline.
In looking at our volumes, we are running more texturing machines today than we did a year ago, but the ongoing trend toward lighter-weighted fabrics means that we are producing fewer total pounds of yarn as lighter deniers.
While this has little effect on revenue dollars due to the higher price of lighter-weight or lower-denier yarns, it does show up as reduced volume measured by pounds produced.
In looking at revenue as <UNK> noted in his comments, the overall sales decline in the third quarter was driven by a number of factors, including lower sales prices associated with lower raw material costs, devaluation of the Brazilian real, customer inventory adjustments associated with warmer winter weather this year, and the timing of the Easter holiday which fell in the fiscal third quarter this year as opposed to fourth quarter of last year.
Most of the textile industry in the CAFTA region shut down for the Easter week, which means we lost about a week's worth of business from the region in this past quarter.
That said, I'm very pleased with the growth in gross profit despite the decrease in revenue in the quarter.
We continue to achieve results like this by focusing on our four key business strategies which are: growing our PVA yarn sales globally, increasing yarn sales in growing regional markets, growing through recycling and sustainability initiatives, and driving operational excellence by controlling cost and improving flexibility through rigorous and disciplined process improvement and price management.
If we continue to execute at a high level across these four strategic initiatives, I am confident we will be in a strong position to drive future profitable growth.
We were also pleased to see improved performance from Parkdale America in the March ending quarter, after a soft December ending quarter that was partially impacted by an inventory correction in the supply chain.
Parkdale is currently operating in a very competitive business environment which is reducing their margin somewhat.
However, we remain committed to them and the value that they provide our Company long-term.
Turning to trade legislation, the Trans-Pacific Partnership trade agreement was signed in February and it contains strong rules on textile origin and key market access, safeguard and customs enforcement provisions, which should prevent damage to our supply chain and key trading partners here in the US and the Western Hemisphere.
Our national trade associations have come out in support of this trade pact based on its final provisions.
It is certainly not a perfect agreement, but the industry worked diligently throughout the negotiations to assure our major concerns were addressed, including a yarn forward rule of origin with few exceptions and a longer duty phase-out period for most products that are considered sensitive to our supply chain in this hemisphere.
The focus of this debate now shifts to Congress.
No later than May 18 of 2016, the US International Trade Commission will conclude an economic impact study on TPP.
And once the study is completed, President Obama can request that Congress begin a formal review of the TPP enactment legislation.
It should be noted that time set aside for congressional members to be back in their districts during this primary election season and the scheduled political conventions will significantly reduce the number of days Congress will be in session this year.
In addition, many congressional leaders have expressed their reluctance to consider a TPP bill before the November elections.
Furthermore, other TPP countries will need to ratify the agreement before it can be implemented.
When considering all the prerequisites, it is estimated by many that the earliest TPP could be enacted would be January of 2018.
However, at this point, an exact date for a vote in the U.S. Congress and a timeline for enactment remains uncertain.
While Vietnam's inclusion in the agreement was a concern to the textile industry, we believe the TPP legislation is structured in a way that will result in Vietnam taking share from China.
Once brands and retailers completely review and understand the final structure of the agreement, we believe that the CAFTA region will remain a viable and important part of their sourcing strategy.
There is room for additional growth in the CAFTA region over the next several years if the industry continues to invest in the supply chain, and we certainly intend to do so.
Taking a step back, I would like to welcome our two new Board members as well.
As you know, the Company recently added James Mead and Paul Charron to the Board, and we are pleased to have them.
Jim has been one of the premier executive recruiters in the US and brings valuable sales and marketing experience to the Company through his 14 years at Procter & Gamble.
Paul is the former President, Chairman and Chief Executive Officer of Liz Claiborne Inc.
, and has been an independent consultant working with major publicly-held companies in the areas of consumer products, fashion and retail.
Both of these individuals bring extensive experience and insights from years of working with leading companies on marketing and strategic growth planning and implementation, and will help provide guidance and mentoring to the management team as we continue our efforts to pilot our future growth and profitability that will enhance long-term shareholder value.
And finally, despite foreign-exchange rate pressure, our year-to-date results remain in line with our expectations at the beginning of the year.
And we are reaffirming our previous outlook that adjusted EBITDA be within the high $60 million range for the 2016 fiscal year.
And with that, I will turn the call back over to the operator for questions.
Sure.
Hi, <UNK>; it is <UNK>.
If you look first at the Polyester segment, looking at the volume there, the most significant impact on the volume in that segment was the timing of Easter.
I would say about 75%, three-quarters of the volume decline there is associated with the timing of Easter, the balance associated with the mix and denier changes that we spoke about.
If you look at the Nylon segment, I would say in the Nylon segment about ---+ just over 50% of the decline in the Nylon segment is associated with the supply chain inventory adjustments.
There was more in the Nylon segment than in the Polyester segment.
The remainder of the volume decline there would be from Easter and the product mix changes.
And then the International segment showing strong volume growth, that was in both China and Brazil.
Brazil driven by the market share gains, that is a significant turnaround for the Brazil business.
You may recall in the first six months of the year, we had quite significant negative volume pressure from Brazil, but there is a significant turnaround in that business.
And then China as well had significant volume growth, given the success of the PVA products that we are selling into the Chinese market.
Yes, this is <UNK>.
I can be pretty specific there.
Our understanding is they have shut down for good.
And that business, which was quite substantial, is available to us and we are certainly being aggressive taking that share.
I don't want to put a number on it because certainly it is going to be dependent on what the economy does there, too.
It could be quite substantial.
It certainly is going to be measurable and something that would be certainly very positive for us, but I don't know that I want to put a number on it.
Okay.
I mean, from an FX standpoint I think we are probably going to be looking in the range of a $4 million or $5 million impact versus the previous year, just based on the weakened real versus what it was a year ago.
From a raw material standpoint, our expectation would be they're going to be relatively flat, and that is not a bad thing for us.
We prefer our raw materials to be relatively flat.
So that's certainly the expectation now.
Barring any major upset in the petroleum markets or in the markets for polyester ingredients, we anticipate that would be relatively flat, though they are certainly going to be at a lower level than they were a year ago.
But not as significant as they were third quarter versus the previous third quarter.
Yes, I think I can answer that in very general terms.
It is related to really two things.
One is the growth of our higher value PVA products.
We have seen significant growth there.
And the second item is there was a program ---+ and I won't talk about the customer, but there was a program that was a very low value program that we essentially walked away from, which certainly wasn't adding any positive momentum to our gross profit.
Therefore, I would say the primary reason would be the growth of our higher value products in the mix, and then a secondary reason would be we did decide to walk away from a very low-value program.
It was in the POY business.
It is <UNK>, <UNK>.
So the capital projects for 2016 are on track.
That is around $60 million that we are spending in fiscal 2016.
We are expecting to spend around $40 million in 2017 on CapEx.
The bottle recycling plant is on schedule for completion by the end of this fiscal year, and so we expect that to be up and running by the beginning of the 2017 fiscal year.
This is <UNK>.
Our anticipation, I think, as we have stated before is to spend somewhere in the $30 million to million range next fiscal year.
A portion of that is going to be an additional expansion of our REPREVE recycle center as opposed to the bottle washing, and that will be some time mid next fiscal year.
In addition to that, we will be spending it on the potential expansion of texturing, to some extent, which we have talked about.
I think the way to think about our capital spending is typically $10 million to $12 million a year is going to be for general maintenance capital.
And I think the additional capital, you should view that having somewhere in the three- to five-year payback.
So if you wanted to put some numbers on it as to how it might affect our earnings in EBITDA.
We typically would look at a three- to five-year payback on those projects.
Thanks, <UNK>.
Yes, I will give you some general numbers, <UNK>.
First of all, as far as new customers, I mentioned a few in my script there, and they are relatively small programs.
But I think what we are seeing is we are seeing an expansion of REPREVE into a lot of different segments now.
We are also seeing growth as some of our existing customers, I mean ---+ certainly with Ford, we are in almost everything that they produce now that has cloth interior.
So we are seeing growth there.
I think in general, our PVA is growing about 15% this year, and I think you could assume that REPREVE is growing at about the same rate.
I mean we typically are seeing that.
So I think that answers your question.
Yes, let's talk.
It is a little difficult to project, but I think what you saw in this past quarter is probably going to be what you see for the next couple quarters pretty much.
A little bit less than maybe we have seen in the past from an earnings standpoint, but not significantly different.
And basically what is happening there is there has been some new capacity in cotton spinning that has come online, and I think Parkdale has taken the position that they are going to hold their share and they're not going to give any share up, which I think is the right thing to do.
And I would expect there would be probably no loss in volume, though there may be some squeeze on the margin side for the next couple quarters.
But that said, I think what we saw this past quarter is probably indicative of what we should see in the next couple quarters, though I certainly can't predict that with certainty.
I will start with Brazil.
I mean, certainly as we gain share in Brazil, the mix of products that we would be picking up is going to be driving what our margins are going to be like there.
But I think they should be fairly consistent with what you saw for the past quarter.
Now, obviously, whatever the currency does is going to have an impact on how that reflects back on our numbers.
But I think you could assume that the margins that you see in Brazil are going to stay fairly consistent.
In China, we are growing pretty significantly in China, and it is in a mix of products that have varying levels of margin.
So I think what you saw this past quarter, it's probably indicative of what you are going to see going forward; though if we were to pick up a larger program there with lower margins, it may affect that a little bit.
It is not a huge business right now, so any substantial new pieces of business we pick up are going to have a pretty substantial impact on what the gross margin is on the average there.
So it is hard to say whether it is going to stay exactly that way.
I think what I can say is that everything we do in China pretty much is PVA.
So you should expect to see better margin performance there than you would through the average of the rest of the Company.
Yes.
If we knocked it out of the park, we would probably have to add a few texturing machines down there, and we are certainly in a position to do that if necessary.
It is business that would certainly justify that.
Not a lot because raw materials, even though they dropped over the first half of this fiscal year, they went down a little bit and then back up.
So they were fairly steady in this past quarter.
So not a big impact from the raw materials on our margins this past quarter.
The majority of the impact we saw was really increases in high-value product and a lesser decrease in a very low-value product.
Thanks.
Yes, I will tell you what, I will give you the reason and then maybe <UNK> can give you an update.
Basically, we have got places to put our cash which are, in our opinion, more valuable in terms of shareholder return than buying back stock.
Simply, we make strategic decisions all the time about how to deploy our cash, and right now we are essentially deploying all of our cash into capital improvements which we feel will have a better return than buying back stock at this time.
And we certainly make those kind of judgments all the time and that could change in the future, but that is where we are right now.
It is <UNK> here.
So we bought back $6.2 million in the first quarter of the year.
We haven't bought back any additional shares since that.
We do still have available another $27.6 million on our buyback authorization.
So we would be looking at that as one option for cash deployment.
But as <UNK> said, we have very good opportunities to deploy our cash to grow and to better the business at this point.
The $27 million I quoted to you was the authorization that we have for buybacks.
But yes, when we consider our cash available, we would consider all of the availability including the credit facilities.
Okay, In conclusion, we feel like we had a very good quarter.
We anticipate our fourth quarter is going to be very strong, and certainly we look forward to significant improvement over the next couple of years as our capital investments come online and begin to provide benefit to the Company.
And with that, I think you all and have a good day.
| 2016_UFI |
2016 | WOR | WOR
#Good afternoon and welcome to our first quarter earnings call.
Thanks for joining us.
A reminder that certain statements made on this call are forward-looking under the meaning of the 1995 Private Securities Litigation Reform Act.
These statements are subject to risks and uncertainties and could cause actual results to differ materially (audio difficulty.
) Our earnings release was issued this morning.
Please review it for more detail on those factors that could cause actual results to differ materially.
This call is being recorded and will be made available later on our website.
On the call today are Chairman and CEO, <UNK> <UNK>; President and COO, <UNK> <UNK>; Executive Vice President and CFO, <UNK> <UNK>.
<UNK> will get us started.
Well, <UNK>, thank you, and welcome to all of you who have joined us today.
Obviously, we're very pleased to not only announce a record first quarter today, but our best quarter in the Company's history.
Obviously, we're very proud of our employees around the world for their efforts in helping produce these record results.
Let's turn it over to <UNK> <UNK> and <UNK> <UNK> to go a little deeper into the results this quarter.
Thank you, <UNK>, and good afternoon, everyone.
The Company delivered record earnings per share of $1.03 excluding restructuring in the first quarter to start the fiscal year, up $0.49 or 91% from the prior year.
A strong performance from Steel Processing and the joint ventures, particularly ClarkDietrich led the way, offset by continued weakness in Oil & Gas and Agriculture.
Several unique items in Q1 were as follows.
Inventory holding gains during the quarter were estimated at $17 million, or $0.17 per share, as compared to a loss of $7 million or $0.07 per share in the prior year quarter.
Restructuring charges of $1.3 million were spread across several businesses.
Our effective annual tax rate is approximately 31%, but we benefited in the quarter from a $5.8 million favorable impact from two discrete items, the largest relates to the early adoption of a rule related to accounting for stock compensation.
Cylinders operating income, excluding restructuring, was down $3.3 million or 19% to $14.3 million, driven almost exclusively by declining sales in Oil & Gas equipment down 56 (audio difficulty.
) Pressure Cylinders operating margins for the quarter were once again below normal due to the impact of losses in Oil & Gas.
We have reduced costs in an attempt to match demand in Oil & Gas with the goal of getting the business to EBITDA neutral.
Unfortunately, solid operating margins in consumer products, industrial products, and alt fuels are being masked by the under performance of Oil & Gas.
Steel Processing operating income was up $31.7 million, excluding restructuring, from the prior year quarter to $55.7 million.
Increases in flat steel pricing during the first half of the calendar year had a significant impact in earnings and were also helped by some modest mark-to-market gains in unqualified steel hedges.
Revenue in Engineered Cabs was down 34% to $26 million, and excluding restructuring, operating losses were $1.6 million, a $2.8 million improvement from the same quarter a year ago.
Reductions in operating costs and a 27% reduction in SG&A drove the improvement.
(no audio for several seconds) Equity income from our joint ventures during the quarter was up $8 million, as almost all JVs improved.
Strong automotive and construction markets in the US and lower steel costs are benefiting these businesses.
We received dividends from JVs of $38 million during the quarter.
Cash from operations was $121 million for the quarter.
We spent $16 million on capital projects, distributed $12 million in dividends, but didn't repurchase any stock during the quarter.
Today the Board declared a $0.20 per share dividend for the first quarter payable in December of 2016.
Debt was down $1 million from the prior quarter to $580 million, and down $21 million year-over-year.
Interest expense was essentially flat at $8 million.
We have consolidated cash of $182 million and almost $600 million available under our revolving credit facilities.
Our net debt to EBITDA leverage ratio is now under 1.2 times.
Overall, we're quite pleased with the start to our fiscal year.
The Company generated record earnings per share and continued to deliver strong free cash flow which we are investing to grow our business and reward shareholders.
Trailing 12-month adjusted EBITDA is now $385 million.
We will continue our balanced approach to investing in our business, acquiring new businesses, and returning capital to shareholders as opportunities present themselves.
During the quarter, we continued the rollout of Transformation 2.0 and completed our first back office Kaizen event focused on purchasing.
Once again the engagement by the team and the outcomes were very positive.
As a golden rule Company with profit sharing as a foundational incentive, we expect our employees will continue to embrace the opportunity to eliminate waste and improve all aspects of our business over time.
<UNK> will now discuss operations.
Thanks, <UNK>.
In Steel Processing, our direct shipment volume was essentially flat compared to last year's quarter.
Toll volume was down 6% if you exclude our WSP joint venture which was unconsolidated last year.
Metal service center institute data the same period shows direct industry shipments were also flat compared to last year.
Our mix was 62% direct to 38% toll compared to a 60/40 split last year, again, excluding WSP.
Construction was our strongest major market segment with shipments up 29% this year.
Detroit Three automotive shipments were flat, agriculture was down 6%, and heavy truck was, again, our weakest segment, down 23%.
Our Tailor Welded Blank joint venture started regular shipments of lightweight friction stir welded aluminum blanks in the quarter.
We also received first orders for our new hot wire process which sufficiently welds steel blanks for lightweight hot stamping applications.
Direct shipment volume at our Serviacero joint venture in Mexico was down 3% compared to last year, and toll volume was up 3% there.
And Steel Processings' cold rolling and annealing joint venture facility in China is now complete.
I'm looking forward to joining our partners there in a few weeks to help celebrate the official opening of this world class facility.
In our Pressure Cylinders business, our Oil & Gas equipment revenue was down 56% compared to last year.
The market remains challenged and customer drilling and completion budgets are limited.
We're continuing to drive our cost structure in this business toward EBITDA neutral in preparation for an eventual market upturn.
Our industrial products group saw revenue down 14% in the quarter on weak demand across our refillable propane cylinder product lines, as well as a soft market for our high pressure industrial cylinders in Europe.
However, margins improved compared to the prior year on lower raw material costs and Transformation driven production efficiencies.
In Consumer Products, revenue was up 10% on higher shipments of helium cylinders, torches and kits.
The higher helium volume continues to be driven by our ongoing balloon time end cap promotion at Wal-Mart.
Cryogenics revenue was down 12% excluding our recent acquisition of the former Taylor-Wharton Cryoscience business.
Cryogenic trailer sales were slow in the quarter as we completed the move of trailer production from Boston to the former Taylor-Wharton plant in Alabama.
In Europe, sales and margins were held down by the disruption of our operations move from Istanbul to our new greenfield facility in Bandirma, Turkey.
We made strong progress in Bandirma during the quarter and we're on track for completion of that move later this year.
Alternative Fuels revenue was up again on increased demand for CNG fuel cylinders in Europe and hydrogen cylinders in Asia.
In Engineered Cabs, the volume remains soft as off-highway equipment market demand remains weak.
But Transformation has driven our costs down and increased our productivity in the Cabs business, and commercially we're focused on expanding our base to include more customers who need a solution that includes our engineering and design expertise.
In our WAVE joint venture, overall volume was fairly steady with some weakness in North America, partly offset by some marginal strength in Europe and Asia.
North America volume we attribute to customer order timing rather than market weakness.
As <UNK> mentioned, the 2.0 iteration of our Transformation continues to spread through the Company.
We've seen impressive improvements, not only in our operating facilities, but also across our supply chain and commercial operations, as well as now in our business support functions and we're pleased with the results so far.
We'll update you on our transformation progress in future quarters as we continue to build on the foundation of our initial work.
<UNK>, back to you.
Well, thank you, both.
We'll do our best to answer any questions you have now.
Well, this is <UNK>.
On the last question, automotive demand is strong.
Where it goes from here really depends on interest rates, gasoline prices, and a number of other things.
So our outlook is fairly steady at this point.
For me it was hard to, you were breaking up a little bit on the first question, and I don't know if <UNK> or <UNK> heard enough to give it an answer.
Yes, I think if I heard you correctly, <UNK>, on inventory holding gains our estimate is $17 million for the quarter.
We're probably through most of that.
I would say the second part of your question on JVs, ClarkDietrich did benefit from what for them was essentially declining raw material prices in a rising price environment, so their spreads were higher during the quarter.
Yes, that's just for the Steel Processing business, correct.
It does not include any of the joint ventures.
So the spread is very attractive right now as I'm sure you're aware.
We have two coating businesses, Delta and Spartan.
Spartan is primarily a toll operation, so they don't benefit significantly, although there's some opportunity there.
Delta is more direct business, but a lot of it is contract business, and so the spreads are determined when we do our contracts at the beginning of the ---+ typically around the beginning of the calendar year.
And so they're benefiting on the spot portion of their business, which is maybe 20% or 25% of their volume, and then there would be an opportunity, obviously, as we go through the contracting season this year to improve on the contract business.
The underlying demand is very strong, <UNK>.
Yes, I'm not specifically familiar with your estimate so I'd have to do that offline.
I apologize.
Yes, I guess the easy part of that question is the first one, <UNK>, on WAVE.
They had a little bit of buy ahead in our fourth quarter, so think May timeframe, and so what happens is, obviously, when they get that buy ahead then in June and July their business is going to be a little softer, so that really explains the impact that you're seeing there.
The other piece on payables and receivables is going to be more complicated to understand.
I'd have to go back and take a look at that.
Now one thing you did mention, in the past year, we have had some changes in terms with some of our larger suppliers which has helped with working capital, but we believe that's more of a permanent change.
Okay.
Thank you all for joining us today.
And, again, congratulations and a big thank you to all of our employees for producing the best quarter in the history of Worthington Industries.
Thank you.
Goodbye.
| 2016_WOR |
2017 | GWW | GWW
#Thanks <UNK>, and thanks everyone for joining us today
So the main event as <UNK> implicated was price for the quarter
And as we discussed in November, we are laser focused on creating value for our customers
Customers value our product breadth and delivery capabilities, they value our sales and service model for large customers, and they value our strong customer service capabilities overall
But we all know that our prices have been a significant source of dissatisfaction for our customers
And we really haven't been able to leverage digital capabilities like digital marketing to acquire new customers and to grow with existing customers
As a result, we've taken action to improve our pricing, so that we can grow share with existing customers and attract new customers
Now in the quarter the volume response to the pricing changes was faster, more immediate and stronger than we anticipated
Given this response, we've made the decision to accelerate our pricing actions this year
This is absolutely the right thing to do for the business and it provides Grainger with a sustainable long-term platform for future growth
It allows us to market our offer more aggressively
The decision to accelerate involves a large GP write-down in the short-term, but it is accretive to earnings over the long-term
Ron is going to talk about the changes to guidance as a result of this acceleration later in the call
Before I go into more detail on pricing, I’m going to talk about Company results for a few minutes
Now as a reminder, this morning's call is going to focus really entirely on adjusted results which exclude restructuring
So revenue in the quarter was up 1%, volume was healthy at up 5%
Our gross profit and our operating margin were significantly impacted by the pricing actions which we mentioned before
Operating earnings were down 14%, operating cash flow was actually up 13% driven mostly by working capital
So I am going to talk about non-U.S
businesses first; so our other businesses which includes our online model and our businesses in LATAM, Europe and China performed as expected
Other business sales were up 12% and that includes a 3% headwind from foreign exchange
Operating earnings for the segment were up 45%
Now the online business is driven by MonotaRO in Japan and Zoro in the U.S
continued to deliver strong sales growth of 23% and the operating margin in those businesses expanded by 100 basis points, so great progress with the online model
Switching to Canada for a moment, our sales increased 1% in local currency
The good news here is that our service levels have stabilized and we're hearing very good things from our customers in terms of those service levels
We started pricing actions in Canada where contract customers were implementing additional price increases that really are going to offset currency related COGS inflation
As you might recall, during the ERP implementation, we did not take price increases that related to currency translation we otherwise would have
The service stabilization took longer than anticipated and that has delayed the realization of our price increases
For non-contract customers, we are introducing – also introducing market-based pricing somewhat to that in the U.S
In the quarter, gross margin in Canada declined 270 basis points versus the prior year and while price increases have lagged our plans, we have seen sequential improvement month-by-month in the first quarter
Year-over-year in Canada, our operating expenses were up and that's really impacted by two things
The first is 2016 had the sale of the old Toronto distribution center that obviously did not repeat this share
So that was a gain or a benefit in 2016, not repeat in 2017. And the other is we reinstated the annual sales meeting this year which did not take place as we went through the ERP limitation in 2016. Based on continued service improvements, based on the pricing actions we are taking and starting to see some progress on and based on the strong cost actions we will put in place, we still plan to breakeven as we exit 2017. And as we go forward more fully describe our actions and progress in Canada in the coming months
So turning to the U.S
results are really all about the strategic pricing actions that we are taking
Sales in the U.S
were down 1%, but volume was up 4% entirely driven by price
So let's talk about pricing
As we discussed in November, our price structure has been a period of growth across the business
With midsized customers, it has hurt our ability to acquire new customers and it also hurt our ability to penetrate midsized customers
With large customers, pricing has been a barrier to capturing all of the volume with customers, our customers tell us time and again that they want to consolidate their purchases with us, but our price has been a barrier to that spot buy
So we took action in the quarter to lay the foundation for sustainable share gain and customer acquisition
In January, we adjusted list prices to support large customers consolidating their purchases
That resulted in some list prices going up and some going down
That was a huge change from a list price perspective in the quarter
In early February, we introduced web pricing for about 450,000 SKUs, which is essentially market based pricing
To get that pricing customers today have to opt in to that price online or on the phone
We also continue to negotiate large customer contracts with the updated pricing structure that's a process that we started in the fourth quarter of 2015. As a reminder, large contract customers generally have competitive prices
We're adjusting the structure to make it more attractive for them to consolidate all of their volume with Grainger
So our initial results from the pricing actions have been positive
We saw stronger than expected price elasticity on the list price changes that means both places where we've raised prices and places where we've lowered price
For large and midsized non-contract customers who opted into our web pricing program, volume had been declining at double-digits and is now growing at mid-single digits
Now this is off a relatively small base, but it is a representative base, it represents only a third of our assortment, and we have not yet been able to market web prices aggressively given the requirement for customers to opt into the new pricing
For contract customers where we have implemented pricing changes for the spot buy purchases
Our results are quite encouraging, total volume growth for these customers has increased from 4% to 9%
We've now work through enough contracts to get a feel for how customers will respond to these changes and these customers are very supportive of these changes
Overall, we've also seen customers buying at their new price points versus requesting quotes
This is a good sign it affirms that more relevant pricing simplifies the process and makes Grainger easier to do business with
So spending a moment on volume, we've seen the strongest volume growth in two years for the quarter
And we expect to see volume grow in the U.S
, about 6% for the year and while some of this is certainly a slightly improved market, our volume performance this year should be improved on a relative basis
So we're excited about the volume trends
Now based on these results, we've made the decision to accelerate our pricing actions into 2017. The actions will begin in the third quarter and will include three things
We will introduce web prices on the entire assortment SKUs and eliminate the opt-in requirement at that time
We will add digital marketing under the Grainger brand
So we are going to use digital marketing to acquire customers under the Grainger brand, which we've not been able to do, and we're going to accelerate the large contract customer negotiations during the period between now in the third quarter
We are excited about these actions and we expect them to speed up customer retention efforts to accelerate our customer acquisition and help us gain back the spot buy volume, and we will also help us simplify our pricing structure and accelerate our ability to lower expenses relative to our price complexity today and it also allows to put the pricing change behind us faster, enabling stronger sales growth and improved operating margins
With these changes, there is obviously an impact this year Ron will talk about, but we do expect to be back on track to hit our 2019 guidance, operating margin of 12% to 13%
Importantly, we are going to eliminate a significant barrier for our customers, while we won't have the lowest price in the market, we will be competitive which will be a very attractive for our customers given our industry leading supply chain and service model
Ron is going to talk about guidance in a minute, but our expectation is that the pricing acceleration will allow us to change our trajectory and get back to our long-term operating margin guidance by 2019. To do that we are going to have to continue on the cost leverage path that we have been on for the last few years
Now to be clear, this is a huge change for Grainger
It's not an easy one to execute, but this is absolutely the right thing to do
We will be more competitive
We will provide a much better customer experience and we are going to allow Grainger to compete leading with our strikes
So with that, I will turn it over to Ron
Cost productivity is a key component to making sure that we achieve our forward-looking goals, I think it's important to understand the progress that we've made on cost
So the chart shows that over the last four years, we've demonstrated an ability to manage expenses and to drive productivity and we're going to continue to do so going forward
We generally look at both expense to sales and expense to COGS, which is more of an activity metric to measure our progress
And you'll hear more from us as we go through the year on how we're going to get to 2019, but continuing this cost leverage path is going to be a very important part of that story and we feel like we've got strong momentum here to continue to improve our cost structure
So overall, it was a challenging quarter, but we are very focused on what matters to drive value
We continue to be encouraged by the growth and the profit improvement of our online businesses, we've stabilized service levels in Canada, we need to do a lot more to improve both price realization and the cost structure of the business
, the pricing acceleration is going to allow us to be more aggressive in our marketing efforts to drive market share gains and to allow new customer acquisition with the Grainger brand
Most importantly, we are completely focused on creating a flawless customer experience
So a change of this nature is challenging and it's complex
We know this is the right thing to do for the long-term success of the business and we are committed to making the changes needed to accelerate growth and to get back to the profitability that we expect
So with that, I will open it up to questions
Question-and-Answer Session
Good morning
I think it's a great question
And our expectation now is that we were more than breakeven in terms of profit dollars as we get the volume growth and improve our cost structure to get the operating margins back to our expectations
So it's a significant challenge in 2017 and 2018, but by 2019 we feel like our profit dollars will be at or higher than they would otherwise have been
It’s a great question
So I would say that the behavior at a customer level, so if you think about large customers who go along the new pricing model or small, mid-sized customers that opt-in to web pricing was exactly as we would have expected
I think the web pricing uptick was maybe a little higher without doing any marketing that which will be expected, but generally those two were as expected
The big change was when we altered the list prices that had a big impact – a bigger impact than we expected both on prices that we raised and prices that declined
And so that had an immediate impact that we were not fully expecting and that has been the biggest part of the surprise
Now that's long-term not particularly relevant because we will get out of the list price game and we will go to web prices and so web prices are going to be the full story
But in the short-term that has been the biggest surprise that we have
And I would just add a point, we've been talking for probably close to 10 years about unfavorable customer mix and when we make these changes, our expectation is by 2019 that's not going to be the story that we're going to have a favorable mix and start growing parts of the business that haven't been growing that are actually more profitable
Well, so that the short answer <UNK> is that it's not – it’s very similar to what we always expected in terms of the price impact overall
So the difference here is we had talked about moving the large customer contracts over three years to four years
And so we had spread out that impact over a longer period of time than we're talking about now
But the overall impact is very similar to what we always expected and most of the impact is re-pricing - resetting the price for customer acquisition and for spot buy for large customers and given the mix of our business, the spot buy for large customers initially is actually probably the bigger impact, what is the bigger impact, but none of the total expectation of impact is changed at all
So let me talk about the cost structure, maybe broadly
So on the branch issue, I think most people are familiar we've gone from [420 to 250] branches in the U.S
So we're relatively pleased with what we're actually seeing from the volume perspective in those remaining 250 branches and that's been a big shift from the recent past
The other thing to consider here is that these price changes are likely to have an impact on volume through those 250 branches, because a lot of those customers find sticker shock in our branches when they – especially small ones when they walk into them
So we want to watch that very closely, but we have a very well developed muscle for evaluating branch profitability
Overall, I would say that more of our volumes going to eCommerce, no question, winning based on eCommerce capabilities is absolutely critical
More of our volume is being shipped
Continuing to invest in our physical distribution capabilities outside of distribution center just important as a way to create competitive advantage and widen our competitive advantage
There is some changes we're making to areas like the contact centers where we are consolidating contact centers and lowering our cost in contact centers and to my point earlier, we are getting rid of cost, really in every part of the business
Our expectation is that we will get more productive in the sales force, more productive in the distribution centers, more productive in the branches, in headquarters, all of that needs to improve and that's going to be a big focus for us
So we are going to over communicate on what we're seeing from the changes we make
My expectation is that we will see the volume growth that we're talking about that will be a signpost, the expense to COGS will be a signpost and we'll talk a lot about what actions we're taking, what we're seeing from a productivity perspective
But I appreciate your comment and your question
The reality is that this is the biggest change and we had not changed enough prices yet in November to exactly know what was going to happen and it was improved at that point to talk about acceleration, we didn't know we are going to accelerate; now we do
It is a change I recognize that it's a difficult change, but we're going to basically track very closely what we're seeing from a volume, from an expense to COGS perspective, from a customer satisfaction perspective, from a customer acquisition perspective
The reality is we have not been able to acquire a customer into the Grainger brand for years and we are now going to start acquiring customers for the Grainger brand starting in the third quarter
And so that's a big shift for us and one that we're really excited about and we're confident we are going to get the results
Hi, <UNK>
So we certainly don't
Our experience with prices that we change would suggest that we are absolutely not in a race to the bottom
When we have competitive prices and they're in the ballpark we are winning the business and it allows our customers to consolidate their purchases with us
So I’m not going to talk about specific competitors, I would say there are a lot of competitors in the online space who have competitive prices, some of which are growing, many of which are growing
So when we look at the entire competitive landscape for us and going forward, we feel like having competitive prices at least in the ballpark
This price is really, really important to be able to leverage the full suite of tools that we have to grow the business to create the customer experience we need
And so there's just so many different types of competitors out there in our space that I don't think you can sort of talk about one
The whole market, we have to understand and as we look at the whole market, we are going to have prices that are competitive that makes sense and it's going to enable us to acquire new customers and to grow the existing customers
We're broader for one I guess than most of the competitors and I'm not sure who exactly you're talking about specifically, but certainly we are broader
I would also say that some of those competitors may not be talking about it, but they've already taken action in some of the things that they've done to try to mitigate it as well
So just depends - it depends who you're talking about, but we're confident in the decision we're making that it's the right thing to do
We are not going to have the lowest price
We're going to be competitive
We are going to be in the ballpark and it’s going to give us the opportunity to grow the business
Without getting into too many details, <UNK>, the good news as we know the impact of the list price change, the open web change, the changes that we've made and so we can quantify those
We would expect of course the second quarter to look similar to the first quarter in the sense that we're not making changes until the third quarter
And then the changes we make in the third quarter are similar to some of the changes we made in the first, so we're able to get reasonably comfortable with the range and that’s where that comes from
So doesn't entirely go away and we'll provide more information as we go
Red Pass is the program that also includes a free freight component for customers that will stay and depending on the type of customer there may be specific pieces of the program that make sense to the different based on the segment
So it doesn't go away entirely certainly once we have open web, the price difference between Red Pass and what customers see will be very, very small
So that is a big difference
So Christy, I would say couple of things
First of all, when we track 20 competitors on customer service metrics and on their perceptions of us, I would not actually say that our service advantage has been diminished
I would actually say we are stronger now than we've been in the 10-year that I've been with the Company on that dimension
The ability to get complete orders to customers quickly, the ability to provide great experience on the web side, on eCommerce channels and our sales force and service model with large complex customers get very, very high marks and actually higher than they've gotten historically
So I would necessarily say that's true
In terms of terminus, we're confident that we're in the ballpark from a pricing perspective
We're going to be able to grow the business
We've done a lot of work to understand what those price points are
We've analyzed it, as you might guess quite a bit
And so we're pretty comfortable that that we're going to be in a place to expand margins, operating margins, assuming we continue to get the cost leverage we've gotten
We will continue to do that, but we're pretty confident the price points were likely to end at that
So from a list price perspective, when we made the changes January 1 about two-thirds of the price has changed
There were more down than up’s at that time, but there certainly were items where we were not priced high enough and we made those decisions as well
We feel like the web – we've obviously done a lot of work already to know where web price needs to be
There are some items that we were just priced incorrectly
But in general, we will be more competitive and we will be in the ballpark and that's the strategy that we have
Well, it's less typically around product categories than SKUs within categories actually where we will see the changes that we had to make
So they weren't broad categories that we had to lower a bunch or increase a bunch in general and most of it was actually within the category where the numbers were interesting
So we've set the new pricing for fairly broad swaths of customers and we have not seen anything particularly interesting by customer end market
So we haven't seen differences for manufacturing, healthcare or commercial at this point
We have not seen big differences in terms of the reaction
And we are going to talk a lot more about Canada over the next couple of months, but they're over 50% direct-to-customer today and given the ERP change, there is still some fairly inefficient things that are happening to serve customers today
We will improve that over the next six months, so we've got a lot of room to improve and we still feel like 70% probably where we're going to end up in terms of direct-to-customer in Canada
That stills a fairly reasonable number for us
Well, I would say primarily because for large our complex customers, they have competitive prices already
What we're doing is trying to give reasonable prices in the spot buy and that is unlikely to drive significant competitive response when you do that that’s really the way we're thinking about this
The other thing is we just look at prices and what's happened with pricing in the market over time
Our need to reset price is not really based on competitive changes in the marketplace, it's really based on our own pricing and what our customers are asking for and how they buy
So we don't see the market racing to the bottom in general and we really haven't seen that over the last few years
So competitive dynamics, we are pleased with what we're seeing out of that business
We started the Cromwell direct business
Part of the thesis for buying that business was they had the supply chain and product range that allowed us to build the online model
We're seeing very nice growth with that portion of it
Currency and Brexit has had an impact on the UK economy, but the business is actually performing quite well
I would say Europe generally favor
We actually saw some decent growth in the first quarter as well
So really the entire international portfolio right now I'd say we feel like there is lots of opportunity to grow and grow margins and so in the UK we're happy with our position right now
So we manage inventories to service level expectations generally and so we are very good service levels right now in the U.S
and in most of our businesses
So in general, we're pretty happy with our inventory levels
Obviously, as you grow the business you have to add some inventory
Typically we get some productivity out of the inventory pool and don't have to add as much inventory as the growth requires
Ron do you have anything to add?
Right
Yes
That's right
That's our expectation
So in any period that's a fairly narrow period of time, if you reduce price, you will not get the volume back right away
Customers have to realize and particularly customers have to realize that our prices are now more reasonable in order for them to start buying with some frequency
So we've done a number of trials over the last three years to get comfortable with this, both with smaller customers – midsized customers through Red Pass, large customers by contract negotiations in every one of those when you change price right away, you don't get enough volume to make up for, but over time, it's actually quite attractive
So that gives us a lot of confidence in the path we’re heading now
Well, so I think it's best to talk about large complex customers on that dimension
So large complex customers often have contracts, they might have specific items that are in the contract, they might have categories that are in the contract, but they also have a discount off of list for their slow moving items
When we talk about mix, one of the things we're trying to do is to make sure that we are attractive for the entire bundle and the entire bundle would includes slow moving items and those would be better than the average margin for us, but also very attractive prices for them because those items very frequently
So we're trying to make the price structure makes sense, so that we can consolidate the entire purchasing for customers and we find customers respond very, very when we get there
Well, I don't know that there's really any – I mean with the changes complex in this challenge
I wouldn't say there's any lower hanging fruit necessarily
I would say that we are – we have built muscles around two areas that I think we are going to be very exciting for us
One is, when we get the price that right with large customers driving that volume
Our sales and service model with large complex customers is very effective
The other is our digital capabilities and when we get prices that are reasonable and we can start marketing those prices digitally that's going to help drive volume and we're very confident about that too
So those are two things that we're doing that I think is going to be very, very helpful to driving growth into the business and so we're going to track our performance against those two very, very closely to make sure that the price strategy translates into growth and translates into the customer experience and in the margin
It's not that different, I think even we had that in Q&A, if I remember in November
We talked about kind of GP being in that for the Company that 39% range, falling below 40%, but not below 39%, probably falls below 39% next year and then bounces back in 2019. As the mix in the volume benefit from mix outweighs the pricing changes, which we kind of lap as we exit 2018.
That's exactly, that's the right way to think about it
So we are being much more aggressive, much faster in terms of getting the prices reset on that volume
Good morning
So, if I understand your question correctly, I would say that the volume growth is a mix of getting that spot buy volume with large customers and acquiring new mid-size customers and penetrating them and we think we're going to get volume out of both
I would say that our experience with the online model would suggest both of those are actually pretty sticky when you've got a strong supply chain, you provide great service
So our expectation is that we'll be able to get growth both through our large contracts and through new customer acquisition with the changes we're making
Yes, I would say – yes, I’d also add that the cost leverage is in a world where you have that much price decline
We are getting significant cost leverage on an activity basis on a COGS basis, but it's a challenge obviously when you have that much price deflation
So thanks everyone for joining the call
Obviously it was a challenging quarter
I just want to conclude by saying that we are facing into the challenges we have, we're facing into them with that the information that we have now and we are confident this is the right thing to do for the long-term health of the Company
We obviously wouldn't be taking these actions if we didn't think they are right for our customers and for creating value over the long haul
There is no question about that, but we are aligned as a team, we are fully committed to making this work to driving the volume growth and to getting the margins back to where they need to be
So appreciate your time today and we'll see you soon
| 2017_GWW |
2016 | CTL | CTL
#So we think it's a very, very interesting proposition.
And so, we're piloting that capability in four markets, and we're going to evaluate how that plays out in those markets.
But we think it's a very, very intriguing opportunity, and we're definitely looking at that as an alternative to some of the other opportunities we have in the video space.
Thank you, Sayeed.
We're confident that CenturyLink is well-positioned to help our customers realize the promise of the digital economy as we've stated is our goal.
We have a strong set of assets.
We have dedicated and passionate employees.
We have the financial strength, to continue to invest in our future, and we have the strategic clarity of how we will grow our business, by connecting our customers to the digital world.
And we're really inspired by the opportunities we see for our customers, for our employees, and our shareholders in the months and years ahead.
So thank you for joining our call today, and we look forward to speaking with you in the weeks ahead.
| 2016_CTL |
2016 | CNP | CNP
#Yes, <UNK>, I think it's difficult and not appropriate to comment on what I think the outcome here is going to be.
We are continuing to look at this.
It could take different forms and as you know, we are in the middle of this process and we will be in a position later in the year to I think clarify the questions ---+ or give answers to the questions you are asking.
Yes, I don't think you can automatically assume that that's the outcome.
Yes, again, <UNK>, I think it's a similar answer here.
We've been obviously observing what's going on at the PUC here in Texas, but we are in the midst of doing this evaluation ourself, and at this point, we are not prepared to comment on it.
We will be in a better position to comment later in the year as we conclude our evaluation.
Yes, <UNK>.
We have higher accretion related to our Enable investment in 2016 relative to 2015.
And the accretion related to the Enable investment is a result of the accounting that comes out of the impairment charge that we took at third quarter and again at year-end.
The accretion element for our EPS should be $0.07 per share this year relative to $0.01 per share in 2015.
Yes, sir.
Hold on, <UNK>, we are trying to get the exact information.
<UNK>, we have $6 billion of debt outstanding at year-end and less than that after first quarter.
So we have significant maturities in 2016, 2017 and 2018, plus we had some maturities last year aggregating to approximately $1 billion.
We do not expect to be a material increase in net borrowings over the next few years.
I talked about that in my prepared remarks.
And therefore, it's that $1 billion, which helps us reduce interest expense, as well as not increasing the amount of debt on the balance sheet.
There aren't any economic opportunities at this time to do that.
Starting with the last filing that we made, we filed on October 1, 2015, rates were effective November 23 of 2015 and the amount was $16.8 million.
We haven't concluded the specifics of our filing for 2016, but it's very likely we will file in the third quarter and we don't have a dollar amount to share just yet.
I will ask <UNK> to answer this.
Yes, the Minnesota PUC deliberated on the final order last week and while we are not in receipt of the final order yet, we expect that early June sometime.
They did make some decisions and especially with regard to the cost of capital.
So let me share a few of those with you.
They decided on a 9.49% ROE and a 50/50 debt equity capital structure.
We were a little disappointed in that 7.7% of that debt capital was at short-term rates.
But while we were disappointed in that, we do anticipate that the final rate increase amount when we get the final order will be in line with our expectations for the financial performance of the business and consistent with our overall guidance, and we do expect to be able to continue to earn right at that allowed ROE.
And we really don't experience much lag in Minnesota once we've filed a case because we are allowed to put interim rates into effect, and those have been in effect at the $48 million level since sometime last year.
There could be some, <UNK>, after we get the new rates into effect, but, as you said, we are on track to continue to file every other year, and we have substantial rate base additions that we are continuing to make there.
And so we will do everything in our power with O&M and other decoupling mechanisms certainly helps because that captures the lag from ---+ or not the lag, but any under recovery from usage variation.
So we will do everything we can to earn as well as we can towards that allowed return.
No, not to what we shared back at the fourth-quarter call back in February.
No, that won't require any additional capital.
As you mentioned, the purchase price was $77.5 million plus working capital adjustments, and we are working very diligently to integrate that acquisition and we expect to have that completed within the next few months.
And that will contribute to our growing income at CES, as I mentioned in my prepared remarks, of $40 million to $50 million on an annual basis starting in 2017.
Those guarantees relate to our tax basis in Enable and so they may expire or may look to put other guarantees on in order to manage our tax position.
Sure.
We closed a significant of projects to rate base in the fourth quarter of last year, so that contributed to increase in rate base and the increase in depreciation.
We also had capital with shorter depreciable lives that increased the composite rate.
So it's a combination of more rate base and a higher composite rate related to, including but not limited to, IT capital.
That's correct.
As <UNK> stated in his remarks, we are well on our way to integrating Continuum.
We closed on April 1 and today is May 10, so we do expect it to be modestly accretive this year, but I think it's too early in the process to report as to how much that might be.
As I said in our prepared remarks, we are very pleased with our cash generation from operations, and the way we look at that is to back out the funds collected for principal amortization associated with transition bonds, as well as the interest expense associated with that.
But that cash from operations the first quarter, you are right, covered our CapEx, covered our dividends and we paid down $100 million in debt, so very strong.
For the year, as I said, we are expecting to borrow incrementally $150 million and we said on the year-end call that 2017 looks like we will be paying down debt.
So we've not thought beyond that with respect to other uses.
It's a balance between capital investment on behalf of our customers, maintaining our solid credit quality and then thinking through what we do for our shareholders.
We will be thinking about that, but we've not shared any thoughts on that at this time, <UNK>.
We don't have a big presence in the East and we really don't add much in that regard with this acquisition, but it clearly gives us additional scale and reach in particular in some of the markets in the West; gives us a bigger presence in Colorado, for example, which we've been trying to do because we think there's opportunities out there.
Some of the things that we are already finding in terms of synergies with that acquisition is they have some good relationships with government and school districts, and so we are using that to complement our national accounts and some of the other customers where we have a strong presence.
And then just in general to take advantage of scale economies as we put these two businesses together.
We think we are going to have several opportunities on the supply side and other areas to be more efficient and to hopefully capture better margins as we integrate the two businesses.
What we might get with the acquisition is they had some choice customers and we used to be in that business.
What I mean by choice is residential customers being able to choose their provider for natural gas.
And so we think that might present an opportunity to us within CES for a new line of business, as you say.
And we've got a great customer platform in our utility business, and so we will see if we can pick up some additional opportunities in that particular segment of the business.
<UNK>, the answer to your question is yes.
It is a good proxy for it.
So we are not seeing a reduction in use per customer.
The comments about reduced usage had to do with a year-over-year comparison based on the implications of weather, the changes in weather.
So when we weather-normalize, we end up with usage that continues to hold essentially flat at the residential level.
Yes, flat on a use-per-customer basis.
Yes, it doesn't change our forecast for the year.
We still ---+ it's all part of our consolidated guidance that we've given.
We anticipated some of this, I will say, because some of this is timing.
There's a timing element involved with right-of-way revenues, as well as with some of the O&M expense.
So it's down in large part due to what I will call timing-related events that we were anticipating, and those will be compensated for, reversed, throughout the balance of the year.
We are looking that up.
Hold on one second.
<UNK>, one way to think about this would be the heating degree days at the electric business, which is Texas, which were 86% of normal compared to 135% in the first quarter of last year.
On the gas side, as <UNK> said, we are largely hedged, so those heating degree days were 87% this first quarter compared to 113% of last year.
Weather had some effect, but not material effect to us in the quarter, largely because of the hedging mechanisms that we have in the gas business that <UNK> reviewed, as well as our hedge in the electric business which we use for the winter.
So we intend to mitigate weather impacts as much as possible and practical.
<UNK>, I think the non ---+ after the hedging, the impact was probably less than $5 million for the quarter.
Yes.
| 2016_CNP |
2016 | BANC | BANC
#Sure.
Within our seasoned loan portfolio, historically we've bought certain loans that we have a path to restructuring and holding.
These tend to be lower LTV loans or loans within our strategy.
What we saw this quarter is that there were loans within that portfolio that we were successfully able to restructure.
All of them continue to be within our purchase strategy and are consistent with our expectations when the loans were acquired.
<UNK>, would you like to add to that.
And I think you see that, right, as you haven't seen a material change from our provision exception from that front and so essentially while you've seen kind of a change in the categorization driven by kind of the accounting literature, our exceptions, as Steve mentioned, relative to the overall performance yield, cash flows, those points haven't changed.
No, this isn't ---+ I can tell you two things on the securities.
One is, we finished the quarter with the unrealized gains on our securities book, meaningfully above where they started the quarter.
So you saw meaningful unrealized gains within that portfolio during the first quarter.
So we're not looking at pulling forward unrealized gains that existed before the beginning of the quarter.
This is all intra-quarter.
What you really see here is that, from a portfolio and risk management approach, we're highly cognizant of the impacts of things like MSRs in our swap portfolio on ---+ the impact that rates can have on those securities.
And so we use and look to our overall balance sheet and balance sheet strategies to be able to offset fluctuations from those portfolios and to opportunistically manage our balance sheet so that instead of providing you adjusted core earnings, we strive to just have consistent core earnings.
And so the securities portfolio gains, in large part, were intra-quarter recognized gains that were correlated with the intra-quarter fair value losses you saw in the MSR and other financial instrument portfolios.
No, there's always the potential for volatility in NIM, but you have to remember, we managed our portfolio with both a held for investment and held for sale component, and we also manage our existing portfolio where we have the capital markets capabilities from time to time, if the market conditions require, to, you know, hold or sell loans or securities, you know, effectively.
So what you see, I think, from the new originations is a combination that a lot of our originations, especially for sale, tend to be asset classes that may have lower coupons than some of our originations that get held.
Thank you.
Good morning.
Look, we measure the organization regularly from a risk and kind of business standpoint, and a lot of the growth is driven by what we believe we can attract in a core, fundamentally sound way.
I remember back to early last year where we slowed our growth a little bit through additional sales, and received some questions about whether our platform could continue to grow at the pace we had historically grown.
I feel really good that we have the optionality to grow the NII through assets or to manage the portfolio and prune it through our capital markets function.
We look at that every quarter.
I would tell you we provided some guidance earlier that we expect our gain on sale from loan sales to revert back towards what we were seeing last year, and I think we gave a guidance that it is closer to $6 million to $8 million.
Not every quarter but kind of on an average run rate quarter.
And this quarter was materially below that.
So you also saw some HFF loan build where that number went up, and some of that resulted in the increased assets that we have.
So we have a larger inventory available for sale, we have confidence that that inventory would recognize prices above their carry prices, and we look to the market and to our business to determine what the right mix of asset growth versus gain on sale is from time to time.
I mean, sure, that's a fair summary.
We recognize that high quality deposits and loans that generate net interest income are the highest value and best long-term franchise builder for the bank, so if there are opportunities to achieve that without pressuring capital liquidity or operations or other risks, we'd look to achieve that.
So our best estimate that we've provided in the guidance is a balance of those factors, but, you know, we are seeing and, you know, even this week we've been fortunate enough to announce the addition of some really exciting new talent, especially in our commercial banking and FBA lending groups.
To the extent that we saw earlier attraction or accelerated traction from some of these folks or from our existing folks, you know, that could change our views.
Sure.
You know, the Palisades Group transaction is expected to close in the next few weeks, so we'll be able to provide kind of a day one accounting shortly after that.
We do anticipate a gain on sale, although not a materially large number.
That being said, we've retained an upside within this agreement where over the next several years, we could receive, you know, up to $20 million or more of payments that are subject to certain performance conditions.
We would expect that, you know, the first couple years, the first year or two, that might be more concentrated on whether those earn-outs would be realized.
We haven't filed the complete documents yet so I'm a little bit unable to get into materials that we haven't filed on the call, but, you know, we feel very good about the Palisades group, we think they have a bright future, we're really excited to continue to participate in their upside.
And we're equally excited about the simplifying effects of the transaction, the down side risk that's been taken off the table with the transaction, and the effects on our efficiency ratio and the focus of our management team and operations where our team can really focus on scaling and growing those businesses that are right in the our sweet spot without distraction.
<UNK> mentioned those two numbers, yes, related to the financial instrument fair value marks that we saw as directly related to the interest rate movements in the first quarter.
Good morning, <UNK>.
There was clearly a mix, however, a big part of that mix this last quarter was from new accounts.
We continue to see progress on existing account relationships and growing our pocket share within those accounts, but we're also really starting to see the benefits of some of the great new talent we've brought in and the relationships we've been starting to build here in California where we're seeing a lot more inward inquiry on relationships, we're seeing a lot better brand presence and exposure, and we believe that as we continue to grow out our teams, we're getting some of the best relationship managers in the region and we're very excited about that.
And, you know, are hopeful to continue to see promising returns from those investments.
Yes, it's more a flexibility issue.
I talked in my comments about our initiative to review all aspects of our balance sheet, and as we approach the $10 billion mark, including the impacts on DFAST.
What we found was having that flexibility capacity was very helpful when we think about our continuing source of liquidity, and it also is very helpful with our decision to call and repay our $85 million of senior debt, where we had been finding that a large amount of that senior debt that was outstanding at a 7.5% yield was sitting at our holding company and not being deployed into assets that earned back the cost of that debt.
So the expansion of the facility also enables us to have the confidence that we have the capital we need if we need it without having to take on a 7.5% yield in the meantime.
Hi, Abraham.
Well, thank you everyone for joining our call this morning.
We appreciate your support and interest in Banc of California and we look forward to keeping you updated throughout the rest of the year.
| 2016_BANC |
2016 | LB | LB
#<UNK>, at a high level ---+ and this might seem obvious, but it's important to maybe confirm the obvious ---+ the integration of how we're presenting product to the customer, the integration of pricing and promotion, the interplay in terms of driving business online versus to store, all of that is happening much more naturally today than it was six or 12 months ago.
And I wouldn't suggest from the comment that we've completely nailed that and completely figured it out and it's all perfect; it's not.
But that coordination is more effective, more natural than it was six or 12 months ago.
And we'll make from time to time deliberate decisions about driving business one way or the other in terms of the channels, obviously with the customer in mind through all of that.
So I'd say we made good progress on that, but certainly more to do.
Sure, so we did drive a fair amount of volume in prior years, in 2015 and prior years, through that direct mail promotion that you're familiar with and that we've talked about.
With that said, and again, as I think you appreciate and we've talked about on the call, we've been able to replace a lot of that volume through our targeted promotions, particularly as it relates to sport bras and bralettes.
The amount of direct mail volume that we're lapping is more significant in Q3 and Q4 in dollars than it was in the second quarter, but Q4 in relation to the total quarter, it would be a little less than Q3.
Separately, one way we were able to drive a lot of volume, and we're committed to and did drive a lot of volume in the second quarter, was clearance activity.
We wanted to make sure we ended the season clean, and particularly as it relates to exited categories, and so that sales driver, if you will, or that source of sales that existed in the second quarter, we won't really have that opportunity in the third quarter.
So able to replace some of the volume.
Clearance was also a contributor in Q2.
It does represent pressure in Q3 and Q4, but you should know that we're of a mindset that we're going to offset that volume, and whether that's every month or every week and the right people involved in those discussions, including Les and other leaders in the business, we're working hard to replace that volume and do it in a way that's healthier for the brand and that drives trial and business in core categories.
Thanks.
Thanks, <UNK>.
Sure.
So <UNK> in terms of the exits, there will be pressure in the first half of 2017, and we know what we sold in terms of business from those exited categories, and when we get closer to 2017, we will get more specific about the calendarization of that.
But I think what you know, and you've known us for a long time, and we commented about this on the last call, we're going to work like heck, and we're optimistic we're going to replace that volume with growth in other categories.
And so we got to prove that and we got to do that.
But you should know that that's our mindset, and we're taking specific actions to do that this fall, and certainly, we'll work to do that next spring.
Does the math get harder next spring in terms of the dollar impact of those exits.
It does.
But again, you should know that we'll be working hard to offset that volume.
With respect to the bra launch calendar and key drivers of bra growth in holiday, a couple thoughts.
You mentioned Jan.
Jan hasn't started yet.
She starts in early September, but that doesn't mean we don't have a plan.
We do have a plan.
But given competitive aspects, <UNK>, and so on, and I'm not trying to be in any way unhelpful, but we'll be close to the vest about our bra launch strategy for holiday given where we are in the calendar.
As helpful as I want to be competition, I'm not sure I want to be quite that helpful, so we'll keep that closer to the vest.
So <UNK>, thanks for the question.
Two things.
One, the clearance activity did drive a lot of volume in the second quarter, and some of that was hard to estimate as we entered the quarter, but what we were very clear minded about is how we wanted to end the quarter with respect to our inventory position.
And that was dynamic within the quarter.
But headline answer to your question, some upside related to clearance.
And then the second thought I would register, and I'm being repetitive, but it's a theme through the dialogue, is that we drove some good volume in some of these emerging trends in the bra business.
So the bralette business and the sport business were very healthy for us and good growth in the second quarter, and the panty business, we've got good results there as well, so that's what I would call out.
And PINK continued to have a very nice business in the second quarter as well.
But in terms of what was really different, I would say clearance very strong and some good growth in these emerging categories within bras.
<UNK>, with respect to bralettes, we believe that that business is highly incremental to the bra business.
Nothing is ever perfectly incremental, but we believe it's highly incremental.
With respect to how that category interacts or interplays with PINK, PINK has been in the bralette business for a long time, and it has a very nice business there with good volume and good growth.
We believe that the brand positioning and the customer segmentation of PINK vis-a-vis Victoria's is relatively clear to customers, and while there's always a little bit of interplay, we believe, again, that the segmentation and the positioning is pretty clear between the two businesses, so feel good about it.
Hi there.
It's <UNK>.
Good morning.
I think the only thing I would add to what <UNK> is talking about is also two other components to it from a customer perspective.
There's an acquisition side of it as we see new customers coming into the brand, but there's also a renewal aspect of it as customers get reintroduced to Bath & Body Works as both sides of the store or both front and back of the store are completely remodeled, so there is an additional benefit from that, too.
Okay, so with respect to the sport business and how we are doing and what's our assessment, it's obviously an important category in the bra business.
We think we're well positioned today, generating very substantial growth, but we're working hard to accelerate that growth, and frankly, increase our position and our dominance in that space.
And so you're seeing regular flow of new products; you're seeing relatively sharp price points; you're seeing promotion targeted to sport, and we're getting good results.
So we would grade our paper pretty well for the second quarter, with high ambition for the fall season in terms of growth of sport, and particularly sport bras.
In terms of the comp needed for ---+ to leverage buying and occupancy given the benefit of the catalog lap there, low single digit would be the break point, if you will, to get B&O leverage within gross margin net of the benefit of the catalog elimination.
<UNK>, the only other thing I would just add even at a higher level, and we've talked about it, and it's an additional view, is that Bath & Body Works operating income rate is very high, and what we're looking to do is reinvest in that business for the long-term health of that business and to accelerate growth.
And whether that's through the investment in real estate that <UNK> and <UNK> have remarked about or other things, we want to balance operating income rate with top-line growth and dollar growth.
And so the observation of about the impact of real estate is there.
But again, over a multi-year basis, it's a terrific business.
We want to keep it a terrific business and accelerate growth, and so we're going to invest in the business, and we are.
It's a lot in that question, <UNK>, but that's okay.
All right, fine.
The most important point I want to register, frankly, in response to the question, and I mean this sincerely, but I think it's the most important thing for an investor to understand about us, is we're not trying to win by being the low-cost player.
That's not what we do.
And so you're asking about cost inputs, and I understand.
We're a big Company, and we do pay attention to cost, whether it's about product cost or other cost inputs in our business.
But what this Management Team is most focused on is delivering emotional content, great customer experiences, great store environments, great digital experiences, great interactions with store associates, et cetera, and we're willing to pay for that.
And great product quality as well.
So are there material changes in input costs related to merchandise fall 2016 versus fall 2015.
I would say no.
Are there some changes related to mix.
Yes, sure.
But in terms of year-on-year cost input related to merchandise, no significant changes.
We've got a great sourcing organization that does terrific work, but what they're most focused on is product quality and speed.
They do manage costs, but no big changes.
With respect to wage inflation, we are seeing that more in the United States, which is, at the end of the day, probably a good thing.
As you know from prior conversations we've had, we want to make sure that we're attracting and retaining terrific associates, whether it's at the store level, in our distribution centers, in our home office, and so we're not looking to be the low-cost player in those spaces either.
We're looking to pay for terrific people, ensure that we're getting productivity from those people in terms of sales productivity in stores or other forms of productivity in other parts of our business.
But in terms of cost pressures, the wage piece is affecting store selling, but as you again heard us talk about over time, we believe that through sales growth and other leverage that can come from more productive store associates, we don't ---+ we believe that we shouldn't have, over time, significant deleverage in store selling costs.
Lastly, you mentioned the catalog.
We did cease producing the catalog this spring.
A big cost in our business.
I think as part of that, you're asking are there going to be changes in marketing at Victoria's Secret.
There already have been, and I'm sure there will continue to be more.
And so I don't mean that in an unsettling way, but that's just the dynamic aspect of our business.
And we've made some good progress in marketing in the second quarter, but there will be more change in fall, and I'm sure there will be more change in 2017.
So when we remodel stores, or most of our stores, if we have a change in square footage, they are out of the comp base, so you may be asking about how does it contribute to sales growth.
We are getting sales growth in those locations as we've talked about, and we provided some dimension of that last fall.
And I would say in general, results that have been pretty consistent.
But specifically, as it relates to comp, those stores often, if there's an expansion of square footage more than 20%, those stores are going out of the comp base.
With respect to your second question, it was about the magnitude of volume that we're lapping Q3 versus ---+
The Q3 dollars in proportion to the base, if you will, are more significant in Q3 than they were in Q2.
Yes, want to be helpful, <UNK>, but don't want to get too specific, to be honest with you.
It's some increase Q3 versus Q2, but as you know, we're going to work hard to offset that volume.
| 2016_LB |
2017 | FULT | FULT
#So for the year in '16, our SBA revenues were $2.2 million.
I think in the fourth quarter, they were around $1 million.
So the first quarter, there is seasonality in the first quarter.
So we did $300,000 in the first quarter.
That compared to essentially nothing in last year's first quarter.
And we would expect that $300,000 as we go through the year to ramp up again like it did last year each quarter.
And we do expect for the year to be probably closer to the $3 million number as compared to $2.2 million.
Look, in the other income ---+ noninterest income, Frank, you do have the SBA gains in that line item, so that's part of the reduction that you're seeing linked quarter.
We also had some branch gains in the fourth quarter relative to the sale of branches.
So year-over-year, we were up 8% in the first quarter.
And right now, we believe that we can be in that range for the year.
We believe that we have a program in place that meets the needs and we have ---+ it's ---+ the whole process is ---+ gets complicated because we have 6 different regulators involved.
So we are ---+ actually have one exam going on now, but we would expect over the next 4 to 6 months to have probably 3 more.
So ---+ and at the end of the day, it's their decision as to whether they agree with us or not.
Matt, I think the way to think about that is that within the 3.26%, you do have some impact relative to the interest income on nonaccrual loans.
But other than that, I think as you look forward, that would be the way to think about it in terms of that impact on that 3.26%.
We said 3 basis points.
Again, it's hard to predict the amount of interest income we could have on nonaccrual loans.
We don't try to forecast that but that's the element that's in that.
Well, the first priority is to consolidate our charters into one.
The second priority is to begin branching again.
We have not added a new branch in 5 years.
The third priority is to begin to consider acquisitions.
But just let me remind you that we still have the Department of Justice investigation also and we don't know the timing of that, so that's a factor in all of this also.
To the Department of Justice.
Similar to the BSA.
Yes.
So in our 5-state footprint, we operate in 52 counties.
And in those 52 counties, we have a market share ---+ we have a market in 14 of the 52 counties, we have a market share position that's either first, second, third, fourth or fifth in 14 of the counties.
So from a geography standpoint, our goal would be to look at acquisitions that would increase the number of counties where we have a significant market share.
They exist in all 5 of the states that we operate in.
And from a size standpoint, we would look at banks from $500 million to $6 billion or $7 billion.
About $400 million.
Not to date, no.
Well, thank you, everyone, for joining us today and we hope you'll be able to be with us when we discuss the second quarter results in July.
Thank you.
| 2017_FULT |
2017 | HAS | HAS
#Thank you, <UNK> and good morning, everyone
Our first quarter performance was in line with our expectations, and reinforces our full year outlook
As expected, 2017 began with a difficult comparison, yet we grew revenues 2%, and earnings per share 40%
Operating profit was negatively impacted by anticipated events in the quarter, including an extra week of expenses and a shift in product mix
Given the first quarter's smaller relative size to other quarters of the year, these changes are amplified and are expected to smooth out over the course of the year
Net earnings increased to $68.6 million, and earnings per share increased to $0.54. We experienced a $0.03 favorable foreign currency gain recorded in the other income line, as well as an $0.11 benefit from Hasbro's adoption of the new accounting standard governing stock-based compensation
This tax benefit was $0.03 higher than we forecasted in February due to the stock price appreciation over that time
Hasbro is in a very strong financial position, with positive consumer takeaway, strong earnings, and a healthy balance sheet
For the quarter, revenues in the U.S
and Canada segment increased 2%
<UNK>evenue growth in Hasbro Gaming and Emerging Brands offset lower Partner Brand revenues and a 1% decline in Franchise Brands, primarily due to the decline in MAGIC: THE GATHE<UNK>ING
In total, U.S
and Canada point of sale increased in the high single digits and remaining retail inventory is of good quality
Allowances during the quarter remained consistent with last year
Operating profit in the U.S
and Canada segment decreased 17%, or $13.6 million, due to the anticipated decline in MAGIC: THE GATHE<UNK>ING revenue and certain higher expenses
International segment revenues were flat, including a positive $3 million impact from foreign exchange
Within the international segment, Franchise Brands, Hasbro Gaming, and Emerging Brands revenue increased
Partner Brand revenues declined
Point of sale grew across all three regions: Europe, Latin America, and Asia Pacific
<UNK>etailer inventories are overall of good quality and while there are always certain regions with pockets of inventory, our overall inventory continues to be concentrated in new and growing brands
Operating profit in the segment was $0.5 million, compared to $2.9 million last year
The $2.4 million decrease was the result of product mix and higher expenses in the quarter
Entertainment and Licensing segment revenues increased 24%, driven by growth in digital gaming, including Backflip Studios
Segment operating profit increased over 100%, or $5.9 million to $11.3 million in the quarter
The improvement came primarily from the growth in higher margin digital gaming revenues
Overall, Hasbro operating profit decreased 9%, and operating profit margin was 9.2% versus 10.1% last year
In addition to a shift in product mix, the first quarter of this year had 14 weeks versus 13 weeks last year
Falling in the last week of the 2016 calendar year, the extra week does not drive much incremental revenue, but did drive incremental expense of approximately $7 million
Cost of sales increased 6% to 36% of revenues
This reflected the shift in product mix, including in Partner Brands and MAGIC: THE GATHE<UNK>ING revenues and the timing of lower margin closeouts
These closeout sales have a lower gross margin and are part of our normal annual activity, but were more highly concentrated in the first quarter this year compared to a year ago, as we aligned around marketing for entertainment windows
The decline in Partner Brands drove an associated 8% decline in royalty expense
Combined, cost of sales and royalties increased 30 basis points
Product development increased as a percent of revenues in the quarter, in part due to the incremental expense associated with the extra week and, more strategically, as we continue investing to drive innovation
SD&A increased as a percent of sales to 28.7%
We experienced higher expenses due to the extra week as well as investments in IT systems, higher IT depreciation, and higher compensation expense
We continue to expect full year SD&A to be in line with 2016 excluding the impairment charge as a percent of revenue
Turning to our results below operating profit, other income was $17 million versus an expense of $2.7 million last year
Other income was driven primarily by foreign currency transaction gains this year, versus a loss last year, and to a lesser extent, higher interest income
The underlying tax rate was 24.9%, down from 26.5% in the first quarter last year, and versus the 24.5% for the full year 2016. The quarter included $15.4 million in discrete tax benefits, primarily from our adoption of the new accounting standard governing stock compensation
As we discussed at Toy Fair, given the timing of Hasbro's equity grants, this impact is greatest in the first quarter
The $0.11 benefit was higher than we had forecasted in February and reflects the incremental benefit of our stock price appreciation over that timeframe
The anticipated EPS impact for the remaining quarters of 2017 is approximately $0.015 per quarter
However, as we experienced in Q1, that impact is ultimately dependent on our stock price
Diluted earnings per share for the quarter were $0.54. Our financial position is strong, including a healthy balance sheet with robust cash generation
We generated $411.9 million in operating cash flow in the quarter, and $916 million over the trailing 12-month period, ending the quarter with $1.5 billion in cash
Our capital priorities remain investing in our business, in particular, to enhance capabilities around the Brand Blueprint and returning excess cash to shareholders
In the quarter, we returned $81.5 million to shareholders through our dividend and repurchase program
On May 15, the first dividend at the 12% higher quarterly dividend rate of $0.57 per share will be paid
We repurchased 218,000 shares of common stock during the quarter at a total cost of $18.1 million
We continue to target repurchase levels for the full year in line with the $150 million we purchased last year
<UNK>epurchases are subject to market conditions and availability of U.S
cash
<UNK>eceivables at quarter end increased 1%, and day sales outstanding decreased one day to 72 days
Our accounts receivable are in good condition and collections continue to be strong
Inventories declined 10% in the quarter to $416 million
Overall, our inventories are in good shape, supported by disciplined execution from our team
With new merchandise coming in now, we're well-positioned for our second quarter focused on entertainment and new initiatives
In closing, our first quarter positions us well for 2017, with strong consumer engagement and takeaway, investments to drive long-term growth of our business, and new entertainment and innovations slated throughout the year
Now, I'll turn the call back to <UNK>
Morning, <UNK>
Well, everything else was kind of relatively consistent with the prior year, with the exception of we did have higher interest income this year, as we see rates going up a bit and with our cash balance, we do have higher interest income in that line
But the one thing that was different and we really don't forecast – it just is kind of what it is – is the FX gain and it was just a little bit higher than that
But your math is not that far off
So, we wanted to point that out
The other thing was the excess tax benefit, because the increase in our stock price, we had said at Toy Fair, we thought it would be about $0.08 in the first quarter and it was about $0.11. So, we wanted to make sure we highlighted that
And that was just the benefit that our employees got from when all of the vesting took place in the beginning of the – or during the first quarter
No, that falls into the tax line
But, our underlying -
I guess I'm still thinking about your question on our expectations versus not
We really tried to highlight and that was something that was different than our expectations that we laid out at Toy Fair and that is in the tax line
Yeah, we would say the only unusual thing that you really can't put your finger on is the FX gain
I mean, that's still dependent on where the rates are going
We hedged about 75% of our product purchases last year
And we're hedged a little bit less than that this year
The hedges are a bit less favorable than they were in the past, as rates have kind of leveled out this year
So, overall, we'll have a bit of a negative impact that impacts gross margin, but – and we'll take pricing to compensate for some of that as we go through the year
We still see our numbers kind of in line with what we set out for the full year, just as a bit of – because it's such a small quarter, little things can have such a big impact on our different percentages of revenue in the first quarter
But overall, for the full year, we still see our numbers in line with what we set out at Toy Fair
It's really hard to say
I mean, it's probably – most of our purchases come through in the third and fourth quarter, along with our sales
So, I would think that that would be it
But you probably just won't see it as much because they are such big quarters
Arpiné, let me address your first question
So, the extra week comes at the beginning of our fiscal year, which is the end of the calendar year
So it's essentially that week between Christmas and New Year
And really, a lot of retailers don't take a lot at shipments in that timeframe
Many of our offices are closed down
So, from a revenue standpoint, it truly is negligible, if we have any at all, but the expenses are fixed
Typically, we have to pay salaries
We pay things like that, rents
So our expenses are pretty much fixed
And that's why you get that extra week
It only happens once every several years
So, we don't talk about that much
But it's a 14-week period versus a 13-week period, and that's really why we highlighted that
So, <UNK>, I'll just grab the stock price one, quickly
We're just assuming a stock price similar to what we had around the end of our first quarter
So we've had some moderate box office before
Our share of T<UNK>ANSFO<UNK>ME<UNK>S, again, very modest share of box office, but that was booked in our Entertainment and Licensing segment and the box office related to this movie will be booked there as well
| 2017_HAS |
2017 | JCI | JCI
#Thanks, <UNK>, and good morning, everyone
Let me start on Slide 7, by providing an update on the integration
The new organization structure in Buildings is now in place
And we have selected the best athletes and have asked them to play new positions on the field
Region by region, business by business, we have completely realigned the leadership structure in order to eliminate cost and redundant layers of management as well to optimize sales and service productivity
Naturally, this degree of change in a merger of this size brings with it the potential for short-term challenges as the players familiarize themselves with the playbook
With this in mind, we made a deliberate strategic decision to move as quickly as possible to implement our new organizational structure, recognizing this may result in a few false starts in the near-term, but will result in a winning strategy in team in the medium and long term
We remain fully committed to achieving our synergy and productivity savings targets
And have made great progress during the quarter delivering roughly $80 million or about $0.07 in year over year savings
We continue to track towards the high end of the original $250 million to $300 million range in cost energies and productivity savings for the year
With roughly $0.18 achieved through the third quarter, we continue to expect to achieve $0.09 in the fourth quarter, which would total $0.27 in savings for the full year
I am proud of the work we've done across the organization and the significant progress we are making on achieving merger-related costs energies
As I review the regional performance in Buildings, I will touch on some cross selling wins
Let's turn to Slide 8. On a reported basis, Building sales in the quarter were flat versus the prior year at $6.1 billion, as 2% organic growth was entirely offset by the impact of FX and net divestitures
Our field business, which as a reminder represents about 65% to 70% of total Building sales, grew 1% organically year over year with mixed performance across the regions
We saw continued momentum in our global applied HVAC business, which grew in the mid-single-digit range
Fire and security, the legacy Tyco installation and service businesses, declined in the low-single-digit range partly due to a tougher comp with the prior year
Let me quickly walk through the regions, starting with North America
As many of you know, North America is the largest region for both legacy businesses and therefore creates the great opportunity for growth from both a top and bottom line perspective
This is also the region that has undergone the most significant amount of change
At the beginning of the third quarter, we put in place a new regional organizational structure, which combine fire and security with HVAC and controls with 27 [P&L] [ph] leaders
The structure eliminates an organization layer, while increasing our sales management and selling capacity
This now gives us an opportunity to make sure our processes are consistent, that we harmonize the way we go to market, where it makes sense and we take advantage of scale
These leaders are a mix of legacy Johnson Controls and legacy Tyco leadership, who know a lot about where they came from, but have a learning curve with the rest of the business
This added a bit of pressure to the quarter
Organic revenue growth was flat year-over-year, with orders down 4%
Keep in mind, order activity can be lumpy and when adjusting for the timing of large orders, year-over-year order growth was relatively flat
As we've now been operating in this structure for a few months, we are continuing to make progress improving the level of depth and expertise of the P&L leaders
Although there has been some short-term impact, I am very pleased with the progress that has been made over the quarter, including the success we have had with cross-selling wins
We designed and implemented a new sales operating model to enable our customers to buy, how they want to buy
For example, during the quarter, we won a large project in the healthcare vertical
The fire team secured the order to install a fire detection system in a new building as well as the retrofit work in two existing buildings
Embracing the one team approach, the fire team brought in their HVAC colleagues, who are able to successfully displace a large HVAC competitor
Moving to Asia Pacific, we had a strong quarter all around, despite the concerns of softening macroeconomic conditions both organic revenue growth in orders were up in the high-single-digit driven by China and Northeast Asia
Contributing to the growth was a strong increase in service revenue
We've added additional technicians in China and Japan
And we are seeing nice growth as a result
Additionally, the team had several cross-selling wins in the quarter, which contributed to the high-single-digit order growth
For example, the team secured a nice win in Hong Kong for cooling systems in 19 rail stations
By leveraging cross business relationships, the team was able to secure this win over a seeded competitor
Moving to EMEA, the macroeconomic indicators are mixed across the region
Within our businesses in Europe, low-single-digit growth in Continental Europe was partially offset by a decline in the UK, resulting an overall modest growth
The Middle East on the other hand continues to be challenged
However, the decline has moderated to the mid-single-digit
Lastly, Latin America continues to grow organically, primarily driven by our subscriber business
Overall, orders in the EMEA region were down modestly
Looking now at our product business, which represents remaining 30% to 35% of Buildings sales increased 4% organically year-over-year
A nice sequential improvement from the 1% decline we saw last quarter
We continue to see very strong growth in our North America residential and light commercial HVAC business, which grew high-single-digit organically, benefitting from a significant amount of new product launches, despite beginning to lot more difficult comparisons
Our Hitachi business also grew high-single-digits organically aided by a recovery in the timing of shipments, we discussed last quarter
Additionally, as expected our Fire & Security product businesses have stabilized and our holding flat with prior year
Trailing EBITA increased 7% year-over-year to $908 million
The segment margin expanded 110 basis points to 15%, a strong synergy and productivity savings modest volume leverage in favorable mix more than offset planned incremental product and channel investments during the quarter
Turning to orders and backlog on Slide 9, total Building orders increased 1% year-over-year organically, up 3% when adjusting for the timing of large orders, driven by 4% increase in product orders, which drove the revenue in the quarter given the book and shift nature of that business
Field orders were flat with the prior year and strong growth in Asia Pacific was partially offset by a decline in North America and EMEA, as I previously mentioned
In terms of the order pipeline, we are seeing continued momentum in the U.S
market, with stable growth in non-residential construction verticals year-over-year
And expect to see orders growth in our North American field business next quarter
Backlog of $8.4 billion was 3% higher year-over-year, excluding the impact of foreign exchange and M&A
In summary, the teams are coming together as well, having been very engaged with every member of the team through this process
I remain convinced that the strategy of this combined entity is going to continue to unlock significant value for customers, employees and shareholders
Tuning to Power Solutions on Slide 10. Sales increased 6% year-over-year on a reported basis to $1.6 billion, driven by the impact of lead pass-through, which benefitted powers top line by roughly 8 percentage points
Organic sales were down 2% driven by 3% decline in global unit shipments with declines in both the OE and aftermarket channels
OE unit shipments declined 6% versus last year with particular weakness in the U.S
and EMEA related to lower OEM production volumes, which declined at a similar rate
On the aftermarket side, which comp for roughly 75% of our volumes, unit shipments declined 2% year-over-year
Weakness in the aftermarket channel was more prevalent in EMEA and China, where customers delayed order decisions based on the drop in LME lead prices throughout the quarter
Given the typical restocking that takes place in the late summer months, we expect low to mid single digit organic growth in the fourth quarter
Global shipments of start-stop batteries continue to expand with 17% increase year-over-year, despite a difficult plus 22% prior year comparison, including another quarter of significant growth in China and the Americas
The decline in EMEA was tight to the lower level of production in Europe
Power Solutions segment EBITA of $304 million increased 8% on a reported basis, or 7% excluding foreign currency and lead
Power's margin expanded 40 basis points year-over-year on a reported basis, including a 120 basis points headwind from the impact of higher lead costs
On an EBITA dollar basis, lead was a slight tailwind in the third quarter
Underlying margins excluding the impact of lead increased $160 basis points year-over-year driven by favorable price mix as well as productivity benefits partially offset by lower volume leverage
Now let me turn the call over to <UNK> to walk through corporate and the consolidated financial details of the quarter, as well as our outlook for the fourth quarter
I would say that, when you look at the Buildings organization, you've taken two very large organizations
And although we talk about legacy JCI, legacy Tyco, we're running these businesses across the globe together
And so you can imagine from a leadership standpoint, the changes that had to occur
And I am more confident than ever, the way that the teams have come together
And the sales management, sales capacity that we've created, while taking out layers of management that, that is going to translate to accelerate the acceleration of orders and growth
Our pipeline, although we didn't convert in the quarter, we see a very nice pipeline built across the globe with opportunities and the quoting activity as a result of that pipeline is increasing
So I'm developing more confidence every day that as we put these organizations together, building off of the strong customer relationships that we had within the legacy structures, working together now into operating system, we're now seeing that coming through
Sure
So if you start - let me start with North America, because that's certainly the big focus area
At the new organization that we put together, we freed up a lot of resources that we took out the layers of management to put back into sales management as well as selling capacity
We're putting the businesses together, we got a little bit behind of our hiring plan with our sales force
But we're significantly increasing our sales capacity as we speak and then with the work that we've done, the team has done a nice job in putting together prophecies in the field
As we're now leveraging the existing customer base that we serve to be able to better serve the customers with a complete portfolio
And I talked a little bit about that in my prepared remarks, making it simpler for the customer to be able to buy from us the total capability
So when you look at the pipelines that have been developed across the globe within our direct channels, we're beginning to see that
Now there's a timing of conversion as we go through this
But it gives me confidence are based on what we see, we're going to begin to see an improvement on a go forward basis
And our product businesses, the team is done a really nice job, not only making sure that we've got, we're leveraging the channel - our direct channel, but also expanding our indirect channels across each one of our product businesses
So not only are we investing in our direct sales capability
But we're also expanding our channels, you'll see that some of the bright spots during the quarter and our DX business with a very difficult compare - last year were up about 17%, were up another 10% this year
That is really an output of some terrific work has been done in expanding our channel to be able to capitalize on the growth in the market share
So what I can tell you across the board, it's certainly a key focus and being able to not only get world class sales management but increasing capacity in our direct channel as well as our indirect distribution that will enable us to be able to capitalize on a broader part of the market
Yeah, <UNK>, this is <UNK>
As you said, we're getting really good traction with the new products that we're bringing to market
And when you look at the performance across our portfolio, I think that's beginning to show, whether it'd be in the residential, like commercial or across applied, as well as within our controls
And that's where a lot of the investments are being put in
What I see going forward as we continue to gain the momentum, we're going to continue to reinvest and look at incremental investments that we see as - given the success we've had in each one of these segments that we see a lot of opportunity with the investments we're making
So we're going to, obviously, take that into account as we're beginning to accelerate and gain market share, but it gives us a lot of confidence that with the investments we are deploying we are beginning to see the growth come through and it's coming through at very attractive margins
| 2017_JCI |
2016 | DHR | DHR
#Well the $0.40 should ramp during the year as we go after costs.
Again, we were able to get some more things done in December, and that was inclusive of Pall as well, so we're getting it out of the gate a little bit faster in Q1 from a margin perspective.
I think the offset, as you suggest, is the Industrial side.
So I think we'll get a nice accretion here in Q1, but it will clearly ramp through the year.
Thanks, <UNK>.
I don't have any great analysis on that yet.
Given our gross margin, raw materials tend to be less of a factor for us than a lot of other companies you might cover.
We are continuing to get price, still getting 60, 70 basis points, and it's hard not to think raw materials are helping us a little bit, but for us, it's really on the margin.
Well, <UNK>, there's a couple of different ways to come at that in the Middle East.
One is simply conversations with distribution partners, and a lot of what we do in the Middle East does involve some form of a distributor partner, and making sure that we have transparency as much as we possibly can into the opportunity funnels that those distributors are seeing, as well as making sure that the conversations we're having with our own Sales Team around those funnels as they roll up to our Leadership Team are as well pressure tested as possible.
The key thing about markets like the Middle East is, particularly in the businesses like ours, you have a fairly high level of project or tender-related business, and we found on the equipment side, and so really making sure that we understand opportunity funnels and are not overly optimistic about the timing within which funding will be released, as in many cases, that funding has some governmental influence to it, is really important.
It is easy to have a Sales Team get overly optimistic that the timing of funding release is going to be the same as it was a year ago or two years ago, when the reality is, things may have slowed down and tenders may be being let at a much slower pace, so being diligent about how we pressure test those funnels is key.
We're trying to be increasingly conservative as we see how government funding is being influenced.
It was interesting watching the course of the year.
Oil continued to drop, as you know, throughout the course of the year, and yet we actually saw our Middle East numbers hang in there reasonably well throughout the middle part of the year, and it wasn't until the latter part of the year that we saw a more acute shift in the Middle East, and so there was a little bit of a lag there, and it's taking a bit of time for the Team to fully recalibrate.
Thank you.
Good morning, Dean.
As you probably saw in the numbers that we put out, <UNK>, we're showing R&D down about 20 basis points, but the reality is that, that was primarily influenced by Pall, and R&D spending normalized for the Pall influence was actually up on the quarter, so we're continuing to make sure that innovation is a key priority for the businesses and that R&D spending is maintained to the greatest extent possible for the opportunities that we think have the greatest impact in the next year or two.
It was roughly the split you'd expect, 70%-30%, and that's 70% <UNK>aher inclusive of Pall.
Thanks, <UNK>.
Thanks, Leo.
Thanks everyone for joining us.
We're around all day for questions.
| 2016_DHR |
2016 | ILG | ILG
#When you say the timing, that number excludes inventory which shows up in the net cash provided by operating activities.
But I'm not sure I get your question on (multiple speakers)
I think it's reasonably constant.
Thanks, Operator.
I want to thank you all for your questions and participation on today's call.
We appreciate your continued interest in ILG.
Operator, please conclude the call.
| 2016_ILG |
2017 | JBL | JBL
#Good observation.
I don't think it's any of that.
I don't have a good explanation for you other than to think about 2Q to 3Q revenue is up, whatever it is, $150 million or whatever.
That business is in very, very good shape.
Could there be some circumstances where the reason margins are going up is because maybe for some small accounts or whatnot, if we weren't able to get some decent ROIC or whatnot, we walked away.
There might be some of that, but overall, <UNK>, that business is in very good shape at the moment.
So to date, we've returned about, what, $300 million, something of that nature.
So we're about a third of the way through, so pretty much on track.
Remembering that does include dividends as well as the stock repurchasing.
Hey, <UNK>, it's <UNK>.
So since mid-January, <UNK>, myself and other Management have probably been on about 60 to 80 calls from customers asking, hey, could we run some simulations, can we run some models, what if, what if, what if.
One of the things that we're not doing is is we're not offering the customers positions or thoughts about what may or may not happen in terms of tariff, tax, et cetera.
But I think we're in a great position to run a bunch of different what if scenarios.
One of the things we've encouraged our customers to do is run three, four, five scenarios so they get it into muscle memory.
And therefore, depending on whatever happens in terms of DC and the US government, we're ready to act swiftly.
I think we're very well positioned on an absolute basis and a relative basis.
If you think about business coming back into the US, Jabil has a significant amount of capacity in the US and resource and headcount.
We've also been building product in the US forever.
If you think about Jabil from a political standpoint, we're in NYSE, US domiciled Company.
So I think both practically and politically, we're in a very, very good position to help.
Then I would supplement that by saying our digital cloud-based analytic tools in terms of supply chain analytics are being exercised quite heavily at the moment, running a bunch of these different scenarios.
So for us, it's being well prepared, helping our customers be well prepared and we'll see what happens in the coming months out of Washington.
So, hello, this is <UNK>.
In terms of the upside this particular quarter, it was relatively broad-based.
I think it was only, what, $25 million, $30 million to our expectations.
So pretty broad-based, certainly given the number of customers in that EMS segment that <UNK> discussed earlier.
As we move forward into Q3, we're down 1% on a year-over-year basis, sequentially up 5%.
So it's in really good shape.
Again, we talk in percentage terms but it's a little bit of rounding in the revenue on a year-over-year basis than what $30 million or something of that nature.
So that business is performing well, really across all the business sectors, if you will, and with that very nice sustainable margin profile.
Can't talk about any new customers.
I think I would characterize both in the digital world as well as 3D print as well as new markets, I would characterize it as in all cases we're either at or ahead of plan.
So we feel pretty bullish about all those areas.
And again, none of those will have an impact in the back half of 2017 and they probably won't have much of an impact in early 2018.
I would guess that those type of businesses will start to be impactful the back half of 2018 and moving into FY19.
What gives me confidence is we've been ---+ we've had our pick and our shovel hand in hand grinding in the healthcare and packaging business for the last two and-a-half, three years.
The team is awesome.
Our value proposition has finally framed out to where it's being really well received in both markets, and the last couple years have been to me more of an investment phase.
So we've added resource, we've taken away from some of the income through increasing OpEx.
And Steve Borges and his group and Eric Hoch in our packaging group, they've put together what I'd characterize as pretty amazing teams and our value prop in both of those areas is taking hold.
So my confidence as I sit here today on the 20% CAGR from 2016 to 2019 is very high.
Thanks, Steve.
Well your observation is correct.
Again, <UNK>, you know this business as good as anybody on the call.
And you know the variables, you know the catalysts, you know the puts and the takes.
It's a high bet business, and I'll just say that, again, I think our team does an amazing job.
I think we're reasonably well positioned, and we'll see how it plays out.
But I feel pretty good about what we said in prepared remarks and, again, we'll know better after we get through the fourth quarter.
But as we sit today, things look pretty good.
No, not at all.
I think our DMS margins are exactly where we thought they'd be for the balance of this year.
I think that there was a question earlier that was around this topic, and I think we have a good opportunity to get DMS margins back in the 5% to 7% range as we move into Fy18.
You combine that with the EMS margins and things could look pretty good.
Thanks, <UNK>.
I don't think the uptick in the mobility space is tied at all to the CapEx number.
So the CapEx number, as we play out the rest of the year with money that we haven't spent yet, I think CapEx so far first half of the year is around $300 million.
Very little of any CapEx for the rest of the year is going into mobility.
Our assets are largely in place, and I would suggest that against everything you've heard today we could take a bit of an upside on the installed asset base that we already have in place.
They held their own.
That's a bit of a broad-based question because storage today is legacy storage and also cloud-based storage.
I'd say the cloud-based storage, the hyper data, is performing better than some of the legacy storage.
But overall, I'd say it's holding its own.
You're welcome.
Well, we haven't provided any outlook for FY18 yet.
So everything you're looking at is truncated at the end of 4Q, so it's hard to extrapolate that out.
I think we'll see.
I think we'll talk more about that in the June call, <UNK>.
But again, do I think the 5% to 7% range for DMS is achievable in 2018, I do.
And again, I've been very bullish on commentary around packaging and healthcare.
There's also a significant amount of business in our overall DMS segment that is unrelated to handsets, and you guys can make the judgment on how you feel about the overall handset market.
But we've made some commentary around the fact that we've got a substantial amount of fixed assets in place, and we feel like we'll get some decent leverage on those assets in the first part of 2018.
We'll talk more about that in the June call most likely.
Thanks, <UNK>.
Yes, I think that if I remember right in 4Q of 2016, EMS was around $4.4 billion.
I think next quarter, so 3Q of 2017, EMS will be about $4.4 billion.
And I think that as we move into the fourth quarter of 2017 for us to deliver a decent year relative to consensus, EMS revenues have to be up a decent amount.
So I think a good estimate there might be for 4Q in the $4.8 billion, $4.9 billion ---+ excuse me, for EMS, $2.9 billion range.
So Q4 EMS $2.8 billion, Q4 2017, $2.9 billion, somewhere in that range.
I think ---+ how would I want to answer that.
I think we're efforting ---+ our whole strategy around EMS is to grow cash flows and do it on a more predictable consistent basis.
I think we'll see if we accomplish that, I don't know that we're there yet.
But I think one good proxy would be the last five or six earnings calls around EMS and our commentary around EMS forward-looking, we've delivered to that.
So I think that's a pretty decent proxy.
I think as we get into the June call and the September calls, we'll give you better call an annual basis of where we think EMS will be.
Thanks, <UNK>.
Thank you, everyone, for joining us today on our earnings call, and we certainly will be here the rest of the evening and week for any follow-up calls with investors, analysts and the investment community.
So thank you again for your interest and participation.
| 2017_JBL |
2016 | WAB | WAB
#Good morning, <UNK>.
It's hard to predict right now, for us.
The visibility is not very good, and that's one of the reasons why we've really struggled the last two quarters in trying to get a forecast out there.
Projects keep getting pushed out, whether they are transit PTC-related projects, or just the spend by the Class I's.
We know what needs done to complete the implementation.
We also know what other enhancements we are going to be able to provide.
We do have good visibility on the technical support and MSAs, as <UNK> said.
The service agreements, we have couple of them signed and we're working on some others.
That will give us a lot more certainty on what the forecast and our revenue is.
But right now, it has been difficult.
I think that it should clear up later in the year, early next year, and we should have a pretty good estimate going forward.
But right now, it's hard to predict quarter to quarter, because of project delays and spending is just not being done in this particular area.
Again, it's a mixed bag, <UNK>.
In some countries there's good opportunities, like India.
As you know we won a large order for locomotives, freight locomotives, in India.
We are in the process of localizing the network.
We're investing in facilities there and we're building our resources and project team there.
So that's a very positive market for us.
We are seeing some improvement in Australia.
We still are delivering locomotive and freight industry equipment in South Africa.
Brazil is slow, but we do have an order for new bogie brake mounted equipment in Brazil.
And in Russia, they have announced that they want to retire all freight vehicles that are 30 years old, or more.
Which is a positive sign for us.
I wouldn't call it robust, the international opportunities, but there are some positive international opportunities that we are engaged in.
Hi, <UNK>.
We have a record backlog in transit, <UNK>.
On the transit side, we've won every major order in North America this year.
We continue to pick up small orders around the world.
We have very strong business in Fandstan, that's part collection, mainly.
We're getting ready to bid on the next two large orders in the North America market, the largest of which will be the next order in New York City.
On the transit side, it's very positive.
We just won a large overhaul order, another one in the UK.
We have very good market share in the UK, transit side and the overhaul business.
So both on the OEM and overhaul side, transit is very positive trend for us.
I think as far as the penalties, they haven't been explicitly defined by the government.
There was a deadline in 2015, and the penalties from that were an extension of 2018.
I can't predict what the government position will be when that time comes.
But what I can tell you is that our customers are working hard to implement.
I've recently visited UP and am heavily engaged with all of our Class I railroads, and they're working hard on the implementation.
As <UNK> said, that have cut back significantly their CapEx.
They are trying to balance their pros and cons in terms of expenditures and value, just like we are, in a tough market.
Again, it's a mixed bag, <UNK>.
The oil and gas hasn't improved, as you know, but we do have some other business.
We have business associated with power generation and power distribution.
We are building a plant in China, we spoke about that before, to deliver new equipment.
In the power generation area; that's thermal equipment.
We have a nice array of business in areas like ports for drilling systems, festoon systems.
With Fandstan, we have some commodity business that generates from things like our rubber business.
Again, I would say it's not robust but ---+ and there are certainly pressures on the oil and gas side that haven't recovered, but we do have some positive movement in the industrial side.
Good morning, <UNK>.
I'll take the first one and <UNK> can take the second one.
As we said in the text, as we've gone through this process over the 18 months, we've been nothing but happy with what we are seeing.
We are very pleased with their progress, and we are excited about the opportunities and hopefully we can provide a lot more color about that when we have our call after the close.
(multiple speakers)
We've modeled this a couple different ways.
The Faiveley family, if you read the press release, has some options and can elect a range of cash versus stock.
So if we just assume the most conservative view, that they take the most cash that they can.
We'll have a leverage ratio that will be approaching three times and which is a little bit higher than what we had originally said, but well within the comfort range that I think makes sense, especially considering the aggressive and the important deleveraging program that we will have is we get the companies combined and drive the results of the two companies and generate cash.
<UNK>, I would tell you that the length of the agreements vary three to five years.
That's about the time frame that we're negotiating.
The agreements are coming in from the Class I's, as well as, I think we mentioned, MRS in the past.
We are in the process of negotiating with all the Class I railroads.
We've closed a couple.
I don't want to mention them by name, but we believe that by the end of this year, we will have closed the ones for North America ---+ for the US.
I'm not so sure about that Canadians but for the Class I's in the US.
We have some revenue already that we are booking, and it will accelerate in 2017, yes.
The PTC sales were about $55 million, and the total train control including the signaling, was about $80 million.
You had about $25 million, in Q3.
As far as the margin, there's some of the businesses, similar to PTC.
When you get into some of the construction business, it's less than the PTC average.
It's a combination of a lot of incremental things.
We are continuing to address that cost side for sure, both in discretionary-cost areas, as well as headcount.
We have a forecasting process in place, that we are reviewing our forecast on a weekly basis.
We have some improvement on the revenue side that we are anticipating that is obviously going to bring additional EBIT.
There is no one big step change third quarter to fourth quarter.
There's a lot of weak ---+ small and weak suppliers that are falling out, that's for sure.
I don't think we are going to see any major consolidation in the market, <UNK>.
I think we need to do both organic development and acquisitions.
If you're talking about a $12 billion market, plus, and the opportunities are pretty broad if you look across the total signaling market worldwide, and are broad in terms of your definition, then you're talking about a $22 billion market across the European train management system, traditional mass transit signaling system, things like that.
We are trying to look at niche opportunities.
We are trying to leverage our capabilities that exist now.
For instance, some of that non-PTC related revenue <UNK> talked about, is in a controlled systems area where we could expand our central control and office products.
We could extend our diagnostics.
We have a data analytics system called Wabtec One, that we're putting in place.
We're looking at improving the vitality of our systems, so going from non-vital to vital systems.
So there's a lot of areas that we can continue extensions of our existing technology.
And then acquire businesses, but where ---+ you have two choices in the signaling area, either you go big bang and acquire a billion-dollar signaling organization that is full-fledged signaling across all market areas, or you do it in small incremental steps.
We, kind of, are pushing the latter.
Good morning, <UNK>.
I think in terms of run rate, I think about $75 million would be the right number there.
There is definitely some items that are in there that are discrete, that were to our favor.
About $70 million to $75 million is probably the right number going forward.
And next year, we're going to have to re-base.
Yes, we're going to have to re-base line with the Faiveley acquisition, but our portion of that would be the run rate.
If you look at what we've been able to do today and the drastic changes, next year there is, as we see it there should be some benefits of that restructuring and cost-cutting actions.
I think that we've been able to improve, and I think <UNK> mentioned it in his talk, we have actually improved our transit margins nicely throughout the year.
I think by doing that we've offset the mix effect of a lower margin business.
So I think that we should be able to continue that trend into the future.
And you're right, there are some negatives that will continue into next year.
The car build, and possibly the locomotive build.
The actual traffic will have a big dependent on what happens with the economy.
But I think some of the projects, our strategic plan execution, those ---+ there's a lot more positives than negatives.
I think in terms of storage, it's up around 25%, <UNK>.
As far as in or out, there's some pick up mainly the area of grain, it will be a record year for grain.
There is some pick up there.
I don't think there's ---+ is certainly not a dramatic change at this point.
We are not seeing any dramatic change.
I think it's trending in a positive direction, and hopefully we hit the low point in terms of traffic.
But it's not dramatic change.
I think if the traffic flattens out, it could be there or little less.
And if the traffic continues to drop, then I think you know what direction it will go.
We're hopeful that one of two things will happen if they don't build new.
That some of the overhaul projects that were identified and delayed will come back.
That's a very positive opportunity.
And frankly, more of a short-term opportunity than the OEM.
Thank you.
Thanks, Mike.
Thanks everybody for joining us.
We hope to talk to you next month after we complete the purchase of the family stake.
Have a good day.
Good bye.
| 2016_WAB |
2018 | FCPT | FCPT
#Thank you, Rachel.
During the course of this call, we will make forward-looking statements, which are based on beliefs and assumptions made by us and information currently available to us.
Our actual results will be affected by known and unknown risks, uncertainties and factors that are beyond our control or ability to predict.
Our assumptions are not a guarantee of future performance and some will prove to be inaccurate.
For a more detailed description of some potential risks, please refer to our SEC filings, which can be found on the Investor Relations section of our website at www.fcpt.com.
All the information presented on this call is current as of today, February 21, 2018.
And in addition, reconciliation to non-GAAP financial measures presented on this call, such as FFO and AFFO, can be found in the company's supplemental report available on our website.
And with that, I'll turn the call over to our CEO, Bill <UNK>.
Bill.
Thanks, Bill.
First, a few comments on our operating results for the fourth quarter.
We generated $26.8 million of cash rental income after excluding noncash, straight-line rental adjustments.
On a run rate basis, the current annual cash base rent for leases in place as of the end of the year is $108 million.
Our weighted average annual rent escalator remains at approximately 1.5%.
Cash interest expense, excluding amortization of deferred financing costs and other noncash interest, was $4.5 million, reflecting a full quarter of lower margins on our $400 million term loan and lower unused fees on our revolver from the recasting of our credit facility in early October.
There were no borrowings on our revolving facility during the quarter as we maintained a net cash position, which was $64.4 million at quarter-end.
Our net income FFO and AFFO per share results were impacted in the quarter by the short-term dilutive effect of the balance sheet cash, but we were pleased to have the capital available to fund the Washington Prime transaction and other transactions in our pipeline before the movement in interest rates over the past several months.
As we mentioned in the press release, the FFO per share results were impacted by $0.01 due to noncash interest expense in connection with the credit facility recasting in October and a noncash credit that benefited our results in 2016 related to hedge ineffectiveness.
On an AFFO per share basis, which we remind everybody we believe best represents the cash flow generated from the business, we reported 6.5% growth in quarter-over-quarter results.
In the quarter, we reported $2.3 million of cash, general and administrative expenses after excluding noncash, stock-based compensation, and $9.6 million for the full year of 2017.
This result was comparable to our cash overhead in 2016 even though we've added 5 great new members to the team since we've achieved savings in professional fees and our second year of operations, insurance and other third-party expenses.
We are providing guidance for 2018 of an annual cash G&A rate of approximately $11 million, again excluding noncash, stock-based compensation and acquisition transaction costs.
Turning to the balance sheet, and as mentioned by Bill, we ended the quarter well capitalized for 2018 with net debt to EBITDA of 4.6x, $64 million of cash and full availability on our $250 million, 4-year revolving credit facility.
We remain committed to maintaining a conservative balance sheet with financial flexibility.
With that, we'll turn it back over to Rachel for Q&A.
Great question, <UNK>.
I think, incrementally, with higher borrowing costs and a less advantageous cost to capital, we still think it's advantageous, just less than it was.
I think we're being a little bit more conservative, but I would generally say that we are not overreacting, it's not a knee-jerk type change in philosophy.
I think we've refrained from commenting on that, and I think we're going to continue to refrain from commenting on that.
I think there's always been ample competition in the one-off 1031 exchange markets.
But no, I don't think we're seeing much in the way from other folks.
It's an awful lot of work as you can ---+ if you trace the time of the WPG deal, it started approximately this time last year.
We worked diligently to get it signed up in September, 41 assets to due diligence.
And again, only some have closed so far, the rest will close in the middle of this year.
It's an awful lot of work.
So I think we're uniquely suited to do it given our specialized nature and the experience we've learned.
Learnings we have had from the WPG deal positions us well, and we're putting our back into it to replicate it.
Other than the competition that was already there on the one-off sales I don't think we've noticed any change.
We actually expected that there would be wrinkles and ---+ anything times 41 is a lot, right.
So we knew it going in, I don't think there've been any real meaningful surprises.
I think it's too soon to tell.
You would expect the tax rate and the ability to more quickly depreciate improvements to benefit our business.
We haven't seen it yet though.
We have said consistently 5.5 to 6x is where we view the ceiling.
That's been very consistent with our communications with Fitch.
We view that as an investment-grade balance sheet, and we feel like we have financial flexibility to close what we have in our near-term sighted and still be within that level.
I guess, <UNK>
J.
, the distinction I'm making is what's possible mathematically.
We've tended to be conservative.
We set that target over ---+ close to 2.5 years ago, and as you mentioned, we haven't gotten there.
We think it's really advantageous to maintain low leverage.
But we haven't put ourselves in a situation where we're backed into a corner having to raise equity at prices we don't find favorable.
I think we have seen some signs of that, <UNK>, but it hasn't been a dramatic effect.
Well, we have seen a strong interest in our properties, and we've historically done the 1031 exchanges so it's exactly the dynamic you discussed We still see strong interest on the property so that's, obviously, always an option for us with very compelling spreads between the price in which we sell and the price in which we exchange.
As you saw recently, we sold an asset at 4.7% and exchanged in properties with a 6.7%.
So we've continued to see that sort of dynamic.
But as far as accelerating that, I think it's too soon to have a significant change in our strategy.
We are monitoring this closely, it's been a couple of weeks.
Well, thank you, everyone, for joining.
I appreciate the support.
And we're always here to answer questions off-line.
With that, thank you very much.
Thank you.
| 2018_FCPT |
2016 | CDR | CDR
#Thank you, Nick.
Good evening, and welcome to the second-quarter 2016 earnings call for Cedar Realty Trust.
During the quarter and since our last call, we have made exciting progress on the leasing, redevelopment, capital migration, and balance-sheet fronts.
In addition, our second-quarter operating FFO of $0.15 per share allowed us to once again raise the low end of our full-year guidance to a range of $0.55 to $0.56 per share.
Before getting into more detail, I would like to take a moment and thank Team Cedar for their collective commitment to everyday excellence.
This team focus on excellence in all our endeavors is what has allowed us to post another quarter of solid results.
More specifically, I would like to acknowledge my senior executive colleagues who are with me on this call ---+ Phil <UNK>, our CFO; <UNK> <UNK>, our COO; Mike Winters, our CIO; Charles Burkert, our Head of Construction and Development; Lori Manzo, our Head of Leasing; and Adina Storch, our General Counsel.
These professionals certainly lead by example when it comes to being committed to excellence.
Although the four vacant anchors we have previously discussed continue to weigh on our leasing metrics, we are systematically pursuing leasing opportunities at all four.
Given our progress, we remain optimistic we will have these vacant anchor spaces fully leased in due course.
Notably, excluding the impact of those four vacant anchors, our same-store NOI growth for the quarter would have been over 3%.
As previously disclosed, we anticipate the lease-up of these vacant spaces, as well as the leasing of some associated space, to drive meaningful NOI growth in 2017.
More generally, on the topic of leasing, with a quarter under her belt, <UNK> has spent a fair amount of time putting her imprint on our leasing efforts, and I will ask her to elaborate on these in a moment.
On the topic of redevelopment and value-add investing, we are just about done with the construction of a new Aldi supermarket at our Groton, Connecticut center and are putting the finishing touches on our plans for two more significant redevelopment projects; and we anticipate kicking off in 2017 and 2018.
Given <UNK>'s track record and expertise in executing the sorts of large-scale redevelopments we have been ad<UNK>cing for a couple of years now, upon her arrival at Cedar, I asked her to take a step back to lend a fresh perspective to these projects.
I am pleased with the refinements she has made to these projects and am even more confident than ever that these redevelopments will yield attractive returns for the Company and its shareholders, which I look forward to describing more fully in the coming quarters.
Beyond these near-term projects, we continue to plan for the redevelopment of our recently acquired East River Shopping Center in Washington, DC, and are, more generally, creating a laddered pipeline of redevelopment and value-add investment opportunities that we hope will serve as a significant source of value creation and earnings growth for years to come.
In terms of capital migration, we closed on Glenwood Village during the quarter, which we announced before our last earnings call.
We are making solid progress on the lease-up at Glenwood and are pleased with its performance thus far.
More generally, we are seeing a number of interesting acquisition opportunities in our DC-to-Boston footprint that offer attractive, risk-adjusted returns and enhance our portfolio composition.
Mike and his team continue to successfully source off-market opportunities and, thanks in large part to their efforts, we have a very solid pipeline of potential acquisitions.
A recurring theme we see with many of the acquisition opportunities we are underwriting is that they present chances for us to leverage our platform by completing the lease-up of the subject property, either by taking over the final phase of leasing up and stabilizing a development project, or because of previous undermanagement.
These lease-up opportunities enhance our overall deal-level IRR and allow us to acquire what are generally low-cap-rate assets, while still leaving upside opportunity to create shareholder value.
Lastly, in terms of capital structure, I tip my hat to Phil for navigating our balance sheet to its current position.
With our soon-to-be drawn $100-million term loan and our roughly $40 million in to-be-drawn forward equity offering proceeds, coupled with our anticipated disposition proceeds, we are poised to enter 2017 with an essentially undrawn revolver and no significant debt maturities for the next two years.
One need only compare the debt summary from our supplemental in 2011 when Phil and I started here to the same page in our supplemental today, not to mention how it will read once we repay the five mortgages that are prepayable before year-end, to appreciate how much simpler and more flexible our capital structure is today.
With the uncertainty and volatility in both domestic and international markets, we appreciate that US-based REITs, such as Cedar, appear to have become recognized as safe havens.
This has been helpful in recent times and has allowed us to opportunistically access capital in a manner that is consistent with our prudent and thoughtful attitude towards risk management and capital allocation.
We have successfully driven down our cost of capital to a level where it is competitive with the other players in our target markets and have evolved our balance sheet to a point where we can continue to forge ahead in volatile markets with confidence.
This will serve as the foundation for much of the value creation at the asset level and capital migration at the portfolio level that we expect will occur in the coming quarters and years.
With that, I give you <UNK> to discuss her first full quarter at Cedar and some of the progress we are making on the leasing and redevelopment fronts.
Thanks, <UNK>.
On this call, I will highlight our operating results for the quarter, discuss our improving balance sheet, and update FFO guidance.
Starting with operating results.
For the quarter, operating FFO was $12.6 million, or $0.15 per diluted share.
This quarter did include $350,000 of lease-termination income.
While we frequently receive this type of income, the amount this quarter is higher than usual, so I wanted to briefly note it.
At the property level, same-property NOI growth for the quarter was 1.5% excluding redevelopments and 0.6% including them.
The lower growth including redevelopments was driven by temporary downtime and vacancy that often occurs early on in the redevelopment process.
As <UNK> noted, and consistent with prior quarters, excluding the impact of the four anchors that vacated in the fourth quarter of 2015, same-property NOI growth for the quarter was greater than 3%.
Now moving to the balance sheet.
We have worked diligently to strengthen our balance sheet and increase financial flexibility by reducing leverage, staggering and extending debt maturities, and growing unencumbered property NOI.
Most recently, we closed an equity offering on August 1.
This equity offering was completed utilizing a forward agreement, under which we agreed to sell 5.750 million common shares for net proceeds of approximately $44 million.
This forward agreement provides us with up to 12 months to issue the shares and receive the net proceeds.
We utilize this structure primarily to align the issuance of the shares and resulting proceeds with acquisitions and redevelopment expenditures over the next year.
This equity offering, along with our undrawn $100-million unsecured 7-year term loan, and disposition proceeds expected later this year, places us in an enviable financial position.
However, as these items are not reflected in our balance sheet at the end of the quarter, let we walk through their significant positive impact.
First, at quarter end our balance sheet shows approximately $135 million of debt maturities in the next 12 months.
After adjusting for just these items, we have no significant debt maturities for two-and-a-half years, and effectively an undrawn revolving credit facility.
Second, our reported debt to EBITDA of 7.4 times decreases by approximately half a turn with the expected disposition.
Further, while we generally plan to time the forward equity proceeds with acquisitions or redevelopment spend, it is instructive to note that if simply used to reduce debt, such proceeds would further reduce our debt to EBITDA by an additional half a turn, driving it down to about 6.5 times.
Third, our remaining $300 million of secured debt will be cut almost in half by year end, as we roll maturing mortgages to our undrawn 7-year unsecured term loan, after which approximately 80% of our property NOI will be unencumbered.
Hopefully, walking through the impact of these items that are not yet reflected in our balance sheet was helpful and highlights the additional strength and flexibility they will provide us.
Before leaving this topic, I should note that we did not just find ourself in this favorable position.
Rather, it is a result of actively managing our balance sheet in a manner similar to the approach we are taking with our property portfolio, which is proactively planning, maintaining a long-term view, and being selectively opportunistic.
And finally, guidance.
With another quarter behind us, we are once more raising the low end of our full-year 2016 operating FFO guidance to an updated range of $0.55 to $0.56.
This range does reflect our expected disposition in the second half of the year but does not include any additional acquisitions.
Again, this does not mean that we will not acquire any additional assets prior to the end of the year, but that we will update our guidance each quarter based on closed acquisitions.
With that, I'll open the call to questions.
I'll speak for Mike, here; and obviously, Mike, feel free to add.
We've maintained a pretty solid pipeline all along.
It happens to be that ---+ just, I would say it's actually probably coincidentally that a bunch of deals that we've been chasing after all appear to be breaking our way.
But we ---+ Mike and his team have really been pretty productive in terms of maintaining leads.
One thing that I preach to the team is that we don't have to do a lot of deals in the year.
We just have to make sure we do the right deals, and it appears that the right deals are breaking our way coincidentally at this time.
And so we're feeling pretty good about the pipeline.
But again, the discipline that we bring to all these processes is a willingness to cut bait at any time if these deals don't pencil.
And so we just continue to slog through the diligence process in the objective of trying to bring high-quality assets into our portfolio.
So broadly speaking, we target unlevered IRRs in the sevens on our acquisitions, and that's pretty consistent for pretty much everything we're looking at.
It gives us the flexibility to pull them down in multiple increments and different sizes.
So we'll align those throughout the next 12 months, more around redevelopment spend and acquisitions.
But it gives us a lot of flexibility.
We do not have to pull it all down at once.
It's a little tough because a lot of it will be driven by the acquisitions, and so that can be lumpy when it does happen.
If you're modeling it, I wouldn't do it any quicker than ratable.
You might even do it a little slower, might be prudent.
That's a great question, <UNK>.
I'll tell you what gets me excited, and then I'll let <UNK>, who's relatively new, speak to what's getting her excited, although one of the things that gets me excited is the fact that I have <UNK> on my team (laughter).
But look, we are very excited, really, on both fronts, and I'll tell you why.
We embarked on a plan now starting a handful of years ago to transform this portfolio.
And we've had a lot of success, and I really tip my hat to Mike and his team for both divesting, call it 80 assets when we first started this process in order to fix our balance sheet, and now to continue to cycle through our portfolio, migrating our capital from lower-density markets to higher-density markets.
And that really requires crisp execution on the sales side and just an incredible ability to source off-market opportunities in very attractive markets, which again is a testament to his track record and expertise.
Now, it's no secret that those transactions are dilutive to earnings.
And so the redevelopment piece is a critical piece to complement the capital-migration piece as a way to grow our earnings and to maintain and grow the net-asset value of the Company.
And that's where <UNK>'s introduction to the Company is incredibly important, because of her track record.
I'm very excited about the prospects for all these redevelopments as complements to what we're doing on the portfolio-transformation side.
But I'll let <UNK> speak to what's getting her excited about being here.
I would say that the redevelopment IRRs are at least 100 basis points higher, on average, than the acquisition IRRs.
And so when we think ---+ and <UNK>, we've spoken about this before, not necessarily on earnings calls, but ---+ we think about the suite of capital-allocation opportunities and decisions that we make at Cedar on a risk-adjusted basis relative to our underlying cost of capital.
And so when we look at redevelopment expenditures or, frankly, any expenditure at the Company, we think about achieving a warranted risk-adjusted spread to our underlying cost of capital.
And so we think that the return on a redevelopment expenditure should be greater than the return on just a stabilized asset acquisition.
It probably just has to do with sample size.
Phil is looking into the supplemental right now, but typically in any one quarter, we don't really have enough new leases to really extrapolate too much.
I don't know, Phil, if there's anything about any of the new leases that are worth highlighting.
Not in particular ---+ you know, the new leases in any given one quarter is not necessarily great for a run rate.
I'd look at it more on a kind of a trailing four quarters to get a larger sample size and a better sense of what those spreads are running, <UNK>.
Any one quarter, one deal can move it up our down.
So it's always better to look at a more kind of a trailing four quarters.
Hey, <UNK>, it's Phil.
At the beginning of the year, we laid out $100 million for dispositions.
Thus far, we've done one for $15 million.
I think the $100 million is still a good target, but the remainder will be late in the year.
Hi, <UNK>.
Let me answer that question in two ways, and I don't want to make <UNK> sweat on our first earnings call, but (laughter) I would tell you that the $20 million to $30 million is still a good number for modeling purposes.
In other words, we're very comfortable that that's a number that we can deliver.
And that's based, just to be clear, <UNK>, on visibility we had previously into the redevelopment opportunities that we were pursuing, that we expect we will start bringing on line.
Now, I've charged <UNK> with growing our pipeline of identified opportunities so that we could potentially grow that number in excess of $30 million and maybe get it up as high as call it 5% of enterprise value.
But that's more of an objective and not something that I would put into a model.
So I would stick with the $20 million to $30 million.
We're comfortable with that number, and I can only tell you that we hope to be able to deliver more than that on an annual basis.
But we're not there yet.
Keeping in mind that capital is fungible we're set for a good time.
So we generate free cash flow of $20 million, maybe a little higher now, a year, just from our current portfolio.
So that can really fund the redevelopments to a large degree, until they accelerate a little more with some of the larger ones.
And then if you just were to roll forward our line of credit, there's about $90 million on it at the end of the quarter.
There.
s $135 million of mortgages maturing.
We've got the $100-million term loan to take it down.
That will leave you with a balance of about $100 million, $125 million again.
And a disposition in the equity offering would take it all the way down to zero.
So we would be left, literally, with a completely undrawn line of credit.
That would give us plenty of dry powder there.
And then along with free cash flow to help fund the redevelopment, we're in good shape.
And absent something really large, we're covered for a while.
And <UNK>, just to amplify Phil's thoughts ---+ as we've discussed, our business plan, generally speaking, doesn't require us to tap the equity markets.
Our dispositions, generally speaking, fund our acquisitions.
Our free cash flow funds our redevelopment capital spend.
And so the equity offering was opportunistic.
We thought it was prudent, considering the run up in all the shopping center REIT share prices on the heels of Brexit to just over-equitize our capital strategy a little bit.
But it wasn't something that was necessary, and we'll again continue to be opportunistic while at the same time respecting the fact that our shareholders expect us to grow earnings per share.
And so we wouldn't just dilute ourselves willy-nilly.
Well, look, we have ---+ we've talked about how ultimately we're going to be divesting much of the bottom two quartiles of our portfolio, sort of our bottom-30 assets.
And I can tell you that just having sold as much real estate as we've sold over the last five years, some assets do better than we expect.
Some assets do worse than we expect.
And so I wouldn't broadly characterize the market for our assets as getting stronger or weaker.
I would say that sometimes we're pleasantly surprised, sometimes we're slightly disappointed.
But broadly speaking, we have a pretty good feel for what our stuff is worth, and it hasn't really violently moved from where it's been for the last couple years.
Thank you all for joining us this evening.
We wish you an enjoyable balance of the summer.
We look forward to continuing to deliver strong results for our shareholders and to sharing these accomplishments with you in the coming quarters.
| 2016_CDR |
2016 | TKR | TKR
#Thanks, Mike.
Good morning, <UNK>.
Our auto business in North America is heavy light truck; and in Europe, it's pass car.
And we're a very small player outside of those two markets around the rest of the world.
I would say, the automotive light truck outlook for the year today, is probably a little bit stronger than what it was to start the year.
So that's really where my comment was based.
And these are relatively small percentages that we're talking about, but good.
So that was the automotive market comment.
Yes, it is a capacity reduction.
But we've been running very low utilization levels across those bearing sizes.
And it certainly would not preclude us from being able to grow that business going forward.
No, I would say there isn't one.
We have a lot that we're looking at.
When you look across the markets, and then you have the OEM versus distribution, and then you look at the geographies, there's are quite a few different ---+ I think if you had to look at one (inaudible) metric, certainly industrial production globally drives a lot of our markets.
But when you're looking out three to six months, we're in touch with all of our customers.
We're looking at our inventory levels, their inventory levels, their orders.
And beyond that, generally using a lot of industry data on how many wind turbines are going in, how many cars are going to be built, et cetera, et cetera.
Yes, good question, <UNK>.
I think, as we think about the CapEx forecast for the year, it's a mixed bag.
As we talked about, we typically run maintenance CapEx generally, call it 1% a year for maintenance.
And then the remainder would be targeted toward either growth initiatives or margin improvement initiatives.
And I would say it's a mixed bag.
We've got the new plant in Romania, which is coming in.
That has taken a significant portion of CapEx.
We've got new wind gearbox capacity that we're adding in India to really serve that market, which has grown a lot for us over the years.
So those are a couple of examples where those going to add capabilities, reduce costs, and position us well for the future.
And then in our existing plants, we constantly work at improving the productivity by employing the latest technologies, et cetera, to increase margins and reduce volatility or cyclicality where we can.
So I'd say it's a mixed bag.
Do we have a wish list beyond what is in the guide.
There's always a list of things that are on the priority list.
But I think we feel comfortable with the CapEx outlook as it sits today and feel like we can advance the initiatives that are important to us.
And really strike a good balance between growth and pushing strategic initiatives, but also managing the balance sheet and cash flow well in this environment.
Yes, I think that's a good point.
I mean, that's a good way to look at it as well.
Obviously, people to run these projects.
Big CapEx projects require teams of people across the organization.
Obviously, there is a limit on the number of projects we can work on at any given time.
And there is a cadence involved, particularly when it comes to big projects.
So we do take that into account as well.
You're right.
We're not cash-constrained, per se.
But obviously, we're going to look at all the capital allocation options that are available to us ---+ not just CapEx, but M&A and share buybacks as well.
So we look at all three.
We look at the relative returns and make the appropriate judgments.
<UNK>.
No, I think you covered it well, <UNK>.
Thanks, <UNK>.
Good morning, <UNK>.
I'd say that the North American market has been a little soft.
Our business in heavy truck is relatively heavy aftermarket and fairly global.
So I think we are holding up better than certainly the North American truck OEM build rates.
But that North American side has been a relatively soft market.
We had, on one of the slides that <UNK> went through, our Asia-Pacific numbers were pretty bad first quarter of 2016 as compared to 2015.
And that's with our two biggest markets there are China and then India.
And India is doing pretty well.
So obviously that implies some pretty rough numbers in Asia.
Our big markets there are metals, construction and heavy industries.
There have been some signs from some customers there certainly that we could be bottoming and see some improvement.
But we certainly expect for at least the next couple of quarters that to continue to be a challenging market for us sequentially.
Yes, I'll talk generally.
Most of our wins don't come in the form of gear drives for the Navy and significant platforms, per se.
They come more in the size of a few hundred thousand dollars to a couple million dollars.
But I think when you look at our mobile industries revenue numbers the last couple of quarters and reflect into that the heavy mix that we have in construction, agriculture, et cetera, I think our numbers are stacking up very well there when you look at our large OEM basis.
And again, with DeltaX, we're looking to outgrow the market 1%, 2% a year, not 5%, 6%.
And I think our numbers would support that currently.
On the process side, a little tougher with the fragmentation of the general industries markets.
But when you look at our distributors reporting, look at the some of the tough comps here with oil and gas, et cetera, I think our organic numbers are stacking up well.
And I think we're on pace to outgrow our end markets this year ---+ not a sizable number, but slightly.
And doing so while managing price in a very challenging market.
I'm not quite sure I understand the question.
Yes, we went with the year-end 2015 levels, so really didn't change that relative to the guide.
So the euro, I think back then, was around $1.09 if I am not mistaken.
So I think if you looked at year-end 2015 levels, that would be basically what's embedded in the guidance.
Thanks, <UNK>.
Yes, I would say ---+ <UNK>, this is <UNK> ---+ our guidance would assume nothing beyond what we have done in the first quarter intellectually.
I would say, quarter to quarter to quarter.
We said first quarter would be the low.
I think we came into the year saying model it fairly closely to last year.
Last year's fourth quarter was probably a little bit abnormally high on the EPS side.
But to hit the midpoint of our guidance, we have to pick up $0.04 or $0.05 a quarter off the first quarter run rate.
And I think with flattish sales, we would be seeing numbers like that through the rest of the year.
I think I would say it's relatively accurate in the first quarter, but it's not accurate generally.
It does vary quarter to quarter based on where currencies are, based on the level of activity.
So there are a lot of moving pieces, so I wouldn't view that as a rule.
I would view that as kind of the result in the first quarter but would expect it to hit mobile as well.
But again, it all depends on where the currencies go from here and the activity that we see in the quarter.
I'd say it's generally what we expected ---+ maybe a tad a little bit better.
But I'd say generally in line with what we would have expected back in February.
I would say the same to a little better.
Or maybe building confidence in what we were saying before because we had some outgrowth baked in there in a stable-ish market.
And I think our confidence on that happening has increased over the last three or four months.
Thanks, <UNK>.
Good morning, <UNK>.
Yes, I think it's a split there, <UNK>, I think is the right way to think about it.
I mean, there is ---+ volume would tend to come through at a typical gross margin level, if you will.
And then obviously the price and mix would be additive to that.
I would say it'd be ---+ call it a relatively even split between the two.
Yes, I'd say we did say that price is looking at a 0.5%-ish for the full year, and that's an okay number for the first quarter as well.
As you look at our margin compression over the last year, mix has been a big factor in it, right.
The automotive and wind OEM businesses are good businesses for us, but mix is down.
Mobile is now higher on the top line; and process, as a general statement, that mix is down.
So mix is a big factor in that because we're doing a good job of getting the costs out.
Trailing it somewhat with the volume, but we're getting the cost out on term, protecting the pricing.
And mix is a big factor in there.
That would generally be netted in cost of production.
Yes, they're certainly lower, I would say, than the top line implies obviously because of the acquisition benefit that we have in our top line.
So again, volume down, sizeably organically in the plants, and then no inventory build, and expecting some inventory reduction through the course of the year.
We don't generally add up all the apples and oranges and give you one utilization number because of the variation in that.
Generally on smaller bearings that would have a lot of automotive presence, our utilization remains relatively low from where we've been over the years.
You get into the largest of bearings we make for wind turbines and specifically for that market, it runs relatively high.
Aerospace, relatively low.
And I would say, depending on the mixes there, between 50% utilization and 90% utilization.
Thanks, <UNK>.
Thank you.
This is <UNK> <UNK> again.
Thank you for joining us today.
If you have further questions, please call me at 234-262-3223.
And with that, we'll conclude our call.
| 2016_TKR |
2016 | CONE | CONE
#I think over the last several years, you're just seen the average length of all the deals that we've been doing increase.
I think the average length of the deal last year, was it nine years.
Seven years last year, nine years in the fourth quarter.
I just think that as people become more comfortable with that outsourced model, they are going to do more of it.
Actually, our energy bookings this quarter were consistent with the same amount of bookings that we've done per quarter over the last year.
The churn that we had in the quarter was related to a couple weird things.
One is we had some customers move out of ---+ and this is like what we saw last year.
We had customers move out of one facility, get out of a contract there, enter into a new contract into our facilities.
And the facilities that they were getting out of was lease contracts that where we're a sub-tenant of.
So we'll be getting out of those.
We'll get some bottom-line savings that go away once we get out of those leases as well.
Another customer actually gave us space back that's going to allow us to repurpose that.
This is a customer that's been in a facility actually in Cincinnati.
They've been in space that is about 30 years old.
We are going to basically be able to take back a space from them and with a fairly incremental amount of additional capital be able to repurpose that and earn three times as much as we were charging previously.
That also gets counted as a churn metric.
But even in the case of that particular customer, they ended up moving into a smaller space with us at the bigger power densities and entered into a 10-year lease agreement with us.
Here is the ---+ there is about 7 billion devices connected to the internet then and that number is going to get to 25 billion devices in just the next couple of years, so each time each device gets connected to the internet, the more data gets created; and all of that data is stored in the garages that we build.
We expect that ---+ the pace of growth in that is going to continue to increase and go up into the right and there's going to be more stuff going on in the future than we can never even imagine the opportunities in front of us, relative to where the digital age has gone over the last two decades.
It's going to be dwarfed by all of the new technologies that we don't even know are going to get created.
Our play in that is all ultimately just creating these digital garages that store all of this stuff.
The business is becoming more and more scale so from a competitive perspective, it's becoming the haves and the have-nots.
And I think what you saw last year in all the M&A that went on in the industry, which was the highest amount of M&A ever, all those deals traded to strategics.
And you just become larger and larger black holes and that type of nexus just becomes much more difficult to compete against.
And I don't see that going in an opposite direction at all.
I continue to see, just like every other industry, as industry matures, there's less competitors and you'll [cull a lash] around a couple of key players over time.
I think just given the underlying growth in this industry, there is still many years left before that happens but you kind of saw that with the wireless industry about a decade and a half ago, where consolidation really started happening and now we're left with a couple big players.
This space will eventually more to follow that similar type of consolidation.
One we know is going to renew with us.
That will be renewed.
The other one we are expecting that they are going to churn.
And that is the reason why we have assumed elevated churn levels in our forecast.
Thanks, <UNK>.
So yes, with respect to AFFO, I don't think we see anything particularly different going on there.
All of our leases, including the CME, need to be treated with the straightlining of rent but I don't think that, that's going to drive anything unusual in any future quarters.
With regard to filing the S3, we were just coming up on the limits of our prior registration and so it was time to refresh with the new shelf, and that's just a universal shelf that will last for years.
What we think in terms of capital is, I think really consistent with what we said at our investor day, which is that we could do $300 million of development using our retained FFO and debt and remain relatively leverage neutral because of the high returns that we earn on that capital.
To the extent we start exceeding that $300 million, then there's probably additional capital needed around that excess.
And then if we are involved in any kind of acquisitions, we would also look to finance those with some kind of combination of debt and equity in order to maintain a strong balance sheet.
For us, that's really a critical feature of our game plan.
<UNK> just talked about kind of this, as far as the eye can see growth, in the business and in demand for data and driving the need for data centers.
And so having a strong balance sheet is the way to compete for the long term for that business.
So within those parameters that I just described, we would raise additional capital if we start to exceed the growth that we have currently baked in.
So your point makes a lot of sense that longer-term leases if you have large rent escalators built in could result in a larger gap there for some kind of unique reasons around the structure of that lease, I don't think we're going to see a large gap developing there.
But as we lengthen the term of the leases, that might turn out to be the case that there is a little bit more of a gap between cash and GAAP rents going forward.
Thanks, Matt.
It's a good question.
So we remain in kind of almost continuous communication with the rating agencies.
That's kind of just how the process works, and in my background I've worked with a company that was investment grade rated, and so have familiarity with some of the folks at those shops and kind of know how they like to work.
We're kind of always in front of them telling them how strong our balance sheet is today, but also how we kind of intend to manage that as we move forward.
They, kind of then, will go through their our own process on that front in terms of determining what they think appropriate ratings are, in light of the credit metrics of the company, as well as their view of the industry.
My main issue, I would say there, is that I think they are going through a kind of learning process around the industry.
It's a kind of hybrid for them between tech and real estate and they don't necessarily know how best to analyze it relative to those other comps.
As they think about the tech component of it, they look at leverage one way and if they think about the real estate component, they look at it another way.
And even within the firms, they kind of have discussions but I'm not sure that they fully have been able to come up the curve yet, just because it's a relatively new thing for them.
But I think over time, they will come to appreciate what the points we're trying to make here on this call, and that we really believe, which is that there is consistency in the cash flow, that the escalators provide growth in that, and that the overall industry continues to grow.
And as we've positioned our portfolio, we've diversified in every which way you could diversify and all of that is deserving of better ratings than we currently have.
We're actually very close to completing on a couple of those but they were not commissioned during the quarter.
Those got pushed out just for that.
But it wasn't really a resource thing at all.
The other thing I would mention here, is that as we complete some of those facilities, we will ---+ it may take a period of time then to sell into those spaces so the stabilized portion of that will kind of get delivered as the leases materialize and then the construction in progress piece will kind of remain there until those portions are leased up.
No.
Actually, we had our strongest bookings, I think, from that business was this quarter so that should continue to go.
The challenge though is that you are doing these bigger deals and the proportion of the IX relative to the bigger deals is smaller.
Even though the growth in that continues to go up, it's we're doing a lot of other deals that aren't bringing as much ---+ proportionally as much IX revenue too, so Josh has got to work harder.
We're going to putting out more pieces on that.
Our customers have been very resistant to explaining exactly what types of products and services we can announce there until they're ready to do that.
We've just got an agreement with them that we can announce that we have them as partners as part of this.
And as we roll those out, we will have press releases that explain exactly what each company is wanting and is planning to offer there.
Thanks, everyone.
Appreciate you taking the time to talk with us this morning.
We really enjoy you learning more about our business.
And just to kind of reiterate what I said earlier, everyone in the industry is doing phenomenally well, and I think over time, we are going to continue to see this asset class continue to provide superior investor performance relative to some of the other asset classes that real estate investors have to choose from.
So thanks a lot.
See you next quarter.
| 2016_CONE |
2016 | HQY | HQY
#Thank you
So if it wasn't obvious already, June 21, 8 AM until 12:30 PM, greatest show on turf.
Well, probably not.
Probably there will be no turf.
But in all seriousness, we are putting effort into this.
I don't want to build it up too much as an investor day, but we are putting effort into this.
We know it's the first time we've done it.
In particular, I want to say that one thing that is really nice about this is that <UNK>, <UNK> and I will not be doing much of any talking, other than perhaps in the wrap-up and in the introductions.
And you will hear mostly from, and have opportunities to engage with, other members of our management team, some of whom you've heard on these calls and elsewhere, and some of whom you haven't, as well as members of our network partner base and, of course, Ms.
Orman, who I will say, she has an incredible track record on this HSA stuff.
She is on it and has worked with a number of employers, including a number of our clients, to really try and think through how this stuff works for a consumer, and is really impressive on the topic when she gets going.
So I'd encourage you to come.
I'm sure that it will be, as <UNK> said, worth your time.
And with that, thanks, everyone, and we'll see you in a couple weeks.
| 2016_HQY |
2015 | JNPR | JNPR
#Okay, let me start, <UNK>, and then I'll pass it over to <UNK>.
The outlook that we had provided on our routing business over the next three years was essentially 3% to 5% in revenue growth.
And I believe that's achievable because of a number of different things.
First, just based on the merits of our product portfolio.
The dynamics in the routing business are such that, in order to grow, you need to take market share, and in order to take market share, you need to have better products.
We just introduced a router that has three times the performance of anything else that's out there in the industry, today.
At a time that traffic is growing substantially, and our customers care about the economics of routing.
We have a product that truly demonstrates to them what we're capable of doing, in moving that amount of traffic cost effectively.
That's why I think we have confidence in our ability to achieve these projections.
And then, as far as the restructuring cost that you are talking about, let me just start, and I'll pass it over to <UNK>.
The most important thing that I think you need to understand is, yes, last year was a year of restructuring for us, but going forward, I think we're going to make sure that the investments we make in OpEx are going to be commensurate with the revenue growth.
We're not going to get ahead of ourselves, as we have done in the past, quite frankly, in terms of how we invest in the business.
We have to see the growth that will give us the freedom, if you will, to invest in the business, not the other way around.
<UNK>, do you want to add anything.
Yes, thanks, <UNK>.
Firstly, I'm very pleased with cost performance in the quarter, and also the year-over-year declines that we've actually achieved this quarter in terms of the costs.
I think also, just amplifying what <UNK> said, clearly we put out in October that 25% is still our goal in terms of operating margin over this next three year period, and we are focused on doing that in a balanced way.
We want to make sure that we continue to invest in the future of the Company, which is obviously the innovation that we're delivering to market.
And we will, as <UNK> said, grow OpEx outside of this year slower than we grow revenue, and so that's how we will continue to expand operating margins, just like we did in the first quarter, on a year-over-year basis.
So that is our strategy, and we're continuing to do that.
So the other side of that, <UNK>, is that we are always looking for cost improvements.
A lot of those will be invisible because you have to actually take costs out to even keep its flat in any sort of environment.
So, we are very focused on the cost side, but in a balanced way.
Yes, thanks, <UNK>.
Last year was a busy and a tough year, quite frankly, because we have to make some difficult decisions about which particular product areas we're going to remain in, and which ones we would divest, and which ones we would unwind.
That work is effectively behind us at this point in time.
So, I feel very good right now, that we are not stretching ourselves too thin, that we are investing in areas, and investing sufficiently in those markets that we are playing in, in order to differentiate, to compete, and to win.
It's that simple.
So, at this point, the focus really is on ---+ the focus in our strategy that we have to grow topline, and we'll go from there.
We're in execution mode.
And if I can just add, as well <UNK>, the work that Vince did on the go to market side is also, obviously, yielding results.
And if you look at our strategy more deeply, in terms of the vertical focus that we have, it's obviously clearly focused on those customers that differentiate the network or run their business on the network across cloud, cable, carriers, as well as on strategic verticals in enterprise and government.
And so, we're very pleased with that, and partnering is a key element of making sure that we continue to get the growth rates from a revenue perspective, and continue to drive operating margin expansion as well.
Yes, <UNK>.
I think cash flow generation is a core strength of the business model that we have here at Juniper.
I think that operating cash flow in particular does follow the operating margin and the expansion of that will obviously lead to more cash per revenue dollar being generated.
And so, we're very pleased with our cash flow, and for the first quarter, and even for the whole of last year.
And that enabled us to continue to drive the investments that we made, going forward, and also deliver a healthy return for our shareholders in terms of the capital returns that we've been committed to.
Let me start, and then I'll see if <UNK> wants to add anything.
I'll just go back to the commentary we had made.
We do expect, just based on the two factors that we've outlined, service provider spend in general ---+ and I'm talking telco spend, in general and specifically here in the United States, should improve in the second half of the year, and then also, the further diversification of our business across the different key verticals that includes cloud, that includes cable.
Based on that, we do anticipate the second half to be better than in the first half, and also better than the second half of last year.
<UNK>, anything else.
I agree with, obviously, everything <UNK> said there.
I would also point out, and I mentioned it in my CFO commentary, that we actually had a good routing quarter in Q1 in enterprise, as well.
And that just speaks to not only the diversification of the revenue, but some of the key strategic pivots that we made last year around the data center.
So, obviously in enterprise as well as in cloud data centers and the service provider world, there's an element of routing that's in those solutions as well.
And so, we're pleased by that performance, we saw some good wins and some good revenue on the enterprise side of routing, as well as the SP side.
But to confirm, we do expect service provider routing to improve through the year, as well.
Yes, <UNK>, you're absolutely right.
There is a transformation that's happening right now in the industry, where the packet world, if you will, and the optical world are moving closer together.
You're also right about the velocity at which that's happening.
It's not happening very fast, there are all sorts of non-technology barriers that are in the way that will prevent it from moving very fast.
As far as our own strategy, we do have a small, but very effective optical team in-house at Juniper that I do expect will grow over time, that has the capability of taking off-the-shelf optical components that are available to anybody, really, and integrated them into our routing products.
But I also do believe that, where most of the innovation is going to be on the packet optical convergence topic, it's going to be in software.
It's going to be around the ability to look across layers, and to make optimal decisions how to move information from place A to place B, leveraging optical and packet technology as efficiently and effectively as possible.
And we have now a product called the Northstar controller, which is essentially our WAN SDN controller that does exactly that.
Honestly, I think we have some the best minds in the industry right now, that have developed algorithms that have the ability to optimize these paths across layers in ways that's very meaningful to our customers, and we are engaging with a number of different customers on these products.
It's still early days, early stages, but I'm encouraged by the progress that we are making.
Yes, thanks <UNK>.
So, our goal for this year, as I stated last year, sorry, last quarter, is around stabilizing the security business.
If you take a look at our SRX business in Q1, it was more or less flat with Q4.
The part of the business that's in decline, and that will continue to be in decline, is going to be the legacy screen OS business.
We're still in work-in-progress mode, if you will, on security.
I did mention that we pivoted our strategy.
We're now working on a security strategy that's very highly aligned with the rest of our product portfolio, and offering domain level solutions that have a strong security element to our customers, and we are executing on a very high leverage engineering strategy.
So, just last week in fact, we announced the industry's fastest firewall.
That's 2 Tb/s for cloud operators that are trying to protect massive cloud infrastructure, and for mobile operators that are trying to protect their mobile users, their mobile infrastructure.
That's very, very meaningful, and it's only possible because of the silicon innovations that we've already developed in-house for our other product lines, and it just demonstrates the power of the synergies, if you will, from a cost standpoint that exists in the organization.
So in summary, we're focusing on a narrower part of the market, it's the network security space, tightly aligned with the rest of our products, and we believe we can in fact innovate to differentiate and win there.
It's just going take a bit of time.
Well, as CapEx improves for service providers, I expect that to help all of our business.
I don't know whether it's specifically for the second half, it will have an effect on security.
We haven't broken it out in that way.
The enhancements that we are making right now to our Junos Space security products, I want to make clear, are certainly very compelling for the service provider space, but is also compelling for large-scale enterprises.
So, those that are building large enterprise clouds will benefit from the performance and scale that we are adding.
And of course, it doesn't stop there.
We are also continually enhancing our virtual security products and assets, which is very meaningful for the enterprise space, because at the end of the day breaches will always happen.
You're always going to be able to overcome any security barriers you put at the perimeter.
Once that happens, the key is to prevent the spread of malware inside of the enterprise, and our virtual security products are now being used by enterprises to do exactly that.
So yes, our strategy is very much around SP and enterprise.
The scale in performance helps both, certainly more on the SP and the cloud infrastructure space, but also in the enterprise side.
And finally, virtualization is something that will certainly help both SP and enterprise
And just to underscore that, I made the comment before about routing and data center and the enterprises.
The same was true in the quarter for security.
The high end was up; again, nothing to write home about yet, because it was flat overall ---+ SRX flat overall, sequentially.
However, the area that did grow nicely was actually the data center space, in the enterprise in the first-quarter.
So it's early days, but our overall aim for this year is to create stability in that business this year, and then go from there.
Hi <UNK>.
We haven't broken that out.
We can consider doing that at some point.
I will say that the fact that we are seeing strength in cloud and cable and government is not an accident.
It's a deliberate part of our strategy.
So we are, in fact, listening very closely and making sure that we weave in the requirements from all of the customers in these verticals into our products, and I feel good that that's going to continue.
I will tell you again, that the products that we have just announced that will be shift throughout this year, were all developed with a deep understanding of specific requirements in these verticals, that others that might not have the strategic relationship that they have with these customers would have implemented.
So, I expect that that part of the business will continue to do well, and certainly the telco side will do well, as there is improvement in the CapEx environment there.
I just want to add one more point, <UNK>.
I think the diversification of the revenue is a core strength of ours.
This quarter one of the stats I'll leave you with is, of our top 10 customers in the quarter, 5 were carriers, 3 were outside of North America.
We had 4 customers in the top 10 that were either cloud or cable, and one enterprise customer.
So to me, that is ---+ it's really good in terms of the diversification and it's not something that happened overnight.
That's been a work progress by the team for quite some time.
It speaks to the strength on the go-to-market side, as well as the relevance of the products across multiple customer types.
So we're pleased with that progress.
Yes.
So, OpEx as we talked about before, for this year, for 2015, we set a goal of $1.9 billion plus or minus $25 million.
As we move forward, we said earlier that we're committed to the 25% operating margin over the next three years.
As we grow revenue, OpEx as a percentage of revenue will start to come down.
And so, we've talked about that for quite some time.
The structural actions that we took last year, and the cost areas that we continue to work on are a testament to that.
So, we're committed to doing that in a balanced way, so that we can continue to grow the business over the long term.
Yes, sure.
Thanks <UNK>.
On the switching side, let me sort of try to break out the business, and then probably shed some light on some the observations that you've made.
There is a service provider and enterprise component to our switching business.
The service provider side, especially as it pertains to cloud, has actually performed quite well.
And that includes performance in the Q1 timeframe, the quarter that we just wrapped up.
The enterprise side is a bit of the mixed story, which is what you're seeing right now, or observing right now in the numbers.
Cloud, as it pertains to enterprise, so private cloud type deployments as well as enterprise IT data centers, has actually done quite well.
So that area of the business, I think because of the focus and some of the newer product introductions, has helped us grow in that area of the business.
On the campus side, you have to understand that we've just sort of done a bit of a campus pivot in our switching business, or in our strategy all up, that includes taking some of the products that we had in-house, take our SSL VPN business, our Pulse business, the wireless LAN business, and we pivoted there to a partnership approach.
And I think that strategy needs to play out over a number of quarters before we get to some sort of stability and return to growth, if you will.
Once that happens, I think that will create the environment, if you will, for all up growth in switching.
Last but not least, clearly we have been competing even in the data center without a complete portfolio of products, which we're just about to plug, if you will, with the innovations and the QFX 10K product line that we have just announced that we'll start to introduce into our ---+ for our customers in the middle of the year.
That gives me more confidence, again, that I think that switching can be a good growth engine for the Company, going forward.
Manny, are you still there.
We don't break it down, but I will say that they both represent pretty meaningful portions of the overall switching business, <UNK>.
Well, I mean, at the end of the day, these are just words, and it's the number that are going to have to prove our thesis, if you will, of our competitiveness in the space.
But, all I'll tell you is that we have learned tremendously, tremendously from the lessons of introducing the products into the market that are in the market today.
Whether they be on the EX side or the QFabric side and so forth, and we have taken all of those lessons and applied them over the last couple of years as we were developing this new product into the development of those product lines.
And we have now been talking to many of our customers about this product line for quite some time, and so far what we've heard from them, and in fact some of them have had early access to the products in terms of an ability to actually kick the tires on them.
The feedback has been quite encouraging.
Now, we have a lot of work to do to finish up testing, ramp up production, and get these products into the market.
We're doing exactly that, right now.
But I feel really good about the prospects of this product line.
Yes, well, look, fortunately I don't consider this a hole, at least not right now.
Now, things could evolve in certain ways, but at this point in time, I'm very close to the Aruba executive team, I've talked to their CEO.
That partnership continues.
The foundation of that partnership is one that is based on open interfaces between our technology and their technology.
So, having the ability for our customers to choose best of breed technology is fundamental.
Anybody that loses sight of that will lose just because our customers will not accept anything else, and I think that's the thing that makes this solution, A, long-lasting, but more importantly or just as importantly, it gives our customers the ability to interchange, either Juniper or the Aruba side with different types of technologies.
I think we have time for one more question.
Okay, thanks, <UNK>.
Let me start.
So, we're pleased with our enterprise performance at least from a sequential standpoint.
There are couple of dynamics here.
First and foremost is, from an industry vertical standpoint, government is actually helping, here.
We are seeing good strength in some projects that we have with government agencies, and this helps us in switching, it helps us in routing.
It also helps us to some extent in security as well.
Beyond that, the focus that we have on this transformation that's happening towards cloud-based service delivery is very important.
So, we are working right now with a large Fortune 500 company in building out their cloud infrastructure around the globe, and that is a testament to the strength that we have in our MetaFabric architecture, in the switching product that we've introduced into the market.
It's also a beautiful example of how security ties in really effectively to complete the cloud solutions that we offer to our customers.
I expect that to continue.
It starts in the second quarter, but it actually goes throughout the second half of this year.
Thank you, Manny.
Thank you, everyone, for joining us today.
We appreciate your participation and your great questions.
Before I close, I just want to give a shout to the Juniper IR and FP&A team that worked on the new format for today's call.
We hope you found it helpful, and we'd love to hear your feedback.
Thanks, everyone.
<UNK>k to you soon.
| 2015_JNPR |
2015 | FLIR | FLIR
#<UNK>, this is <UNK>.
I'll just add one other thing to <UNK>' comments that has merit relative to FLIR FX, is that from a technology standpoint it's also a platform for us to develop things like cloud connectivity, which the FLIR FX has, mobile apps, it's got a broad suite of mobile apps that go with it, and also a recurring revenue model.
Those are all platforms that are important for us as we go forward and broaden that product line to include thermal and other capabilities that will spread across the total security business.
<UNK>, this is <UNK>.
We made really good progress in this business.
The segment required some work, I think, to get it aligned with the FLIR model.
But a couple of things specific to the questions in terms of customer base.
We saw quite a good response in Q2.
If you take out the program and CRAD portion of this business and just look at the standard product sales, bookings were up north of 50% in that segment during Q2.
The other thing that we've been doing there is fairly aggressive product development program of which we'll start to see the fruits of that emerge in the second half of the year.
So overall from an operations standpoint and a product development standpoint, we're bringing it much more in line with the way we conduct our business in the other segments of FLIR.
I'd add to that also that <UNK>' group has been quite active there, as well.
The detection segment for FLIR, I think, was fairly under-marketed prior to <UNK>' arrival.
He's got a vertical marketing director focused on it.
They've done quite a bit of work.
And if you look at the outward facing promotions associated with our detection segment and products, the activity there is markedly improved versus the past.
<UNK>, do you want to add anything else to that.
Thank you, everyone, for joining us on the call today and for your continued interest in FLIR's growth as a Company.
I'd also like to thank the nearly 3,000 FLIR employees around the globe for their continued focus, dedication and execution against our vision of making FLIR the world's sixth sense.
We're very excited about the opportunity ahead of us and we look forward to updating you relative to our progress on that front at the end of Q3.
Thank you, everyone.
| 2015_FLIR |
2015 | SBSI | SBSI
#Thank you, [Vicky].
Good morning everyone and thank you for joining Southside Bancshares first quarterly earnings call.
The purpose of our call is to discuss the Company's results for the quarter just ended and our outlook for upcoming quarters.
A transcript of today's call will be posted on southside.com under Investor Relations tab.
During today's call and in other disclosures and presentations, I'll remind you that any forward-looking statements made are subject to risks and uncertainties.
Factors that could materially change our current forward-looking assumptions are described in our earnings release and in our Form 10-K.
Joining me today to review Southside Bancshares' third quarter 2015 results are <UNK> <UNK>, President and CEO, and <UNK> <UNK>, Senior Executive Vice President and CFO.
Our agenda today is as follows.
First, you'll hear <UNK> discuss an overview of financial results for the quarter, including loan growth, oil and gas exposure in our loan portfolio, an update on our securities portfolio and an update on efficiency and cost savings subsequent to our merger with OmniAmerican Bank in December of 2014.
Then <UNK> will share his comments on the quarter.
I will now turn the call over to <UNK>.
Thank you and good morning everyone.
Welcome to Southside Bancshares third quarter 2015 earnings call.
We had another successful quarter with net income of $11.8 million, a 93% increase over the same period in 2014.
Net income for the nine months was $32.3 million, a 30% increase over the same period in 2014.
Our diluted earnings per share increased 48% to $0.46 per share for the quarter ended September 30, 2015 compared to 2014.
During the third quarter, we reported loan growth of $59.3 million or 10.8% on an annualized basis.
This is in line with our expectations for loan growth for the next several quarters.
It's important to note that over 65% of this loan growth occurred in September and as a result, we expect to realize the full net interest income benefits of this third quarter loan growth during the fourth quarter.
We continue to experience roll-off from the acquired indirect auto loan portfolio, which decreased approximately $18 million during the third quarter.
Since December 31, 2014, the balance of this portfolio has decreased 39% and was approximately $93 million at the end of the third quarter, and is declining at an average monthly rate of $6 million.
Because Southside is a Texas-based bank, we're continually asked about the oil and gas exposure in our loan portfolio.
I can tell you that it is minimal and that it is our intention that it will remain minimal.
The direct oil and gas exposure at the end of the quarter was $33.5 million or 1.48% of the loan portfolio.
Total direct and indirect oil and gas exposure at the end of the quarter was $61.1 million or 2.69% of the loan portfolio.
At the end of the quarter, we did not have any oil and gas loans in non-accrual status.
Loan loss provision expense during the quarter of $2.3 million was a little higher than we anticipated.
During the quarter, we renewed one purchased impaired credit that required an additional reserve of approximately $400,000.
At renewal, this purchased impaired credit was restructured and is now reflected in non-performing assets, which is the reason for the increase in non-performing assets this quarter.
We also determined during the third quarter that a credit placed on non-accrual during the first quarter required an additional reserve of approximately $600,000.
This combined with the reserves required with respect to $59 million of loan growth during the third quarter accounted for most of the provision expense.
Next, I'll provide a brief update on the securities portfolio.
At the end of the quarter, the securities portfolio reflected a decrease of approximately $75 million from the prior quarter.
The duration of the portfolio is 4.72 years, up just slightly from the prior quarter's duration of 4.69 years.
The average balance during the quarter increased $52 million from the second quarter and the yield increased 1 basis point as premium amortization decreased approximately $280,000 during the third quarter due to decreased pre-payments.
During August and September, we sold approximately $75 million of CMOs where continued prepayment risk was a concern and book yield was near zero.
We anticipate continuing to use a barbell approach for our purchases utilizing CMOs for the short end and US agency CMBS and Texas municipal securities for longer end.
Our net interest margin decreased 4 basis points on a linked quarter basis to 3.35% during the third quarter.
We believe that since a large portion of our loan growth occurred in the latter part of the third quarter and our loan pipeline for fourth quarter looks very healthy, combined with the changes we made in the securities portfolio during the third quarter by selling very low yielding CMO securities, the margins should hold in the fourth quarter or may improve depending on loan growth.
A couple of comments on non-interest expense.
During the third quarter, depreciation expense which is a part of occupancy expense, reflected a normalized level.
During the second quarter, we made an adjustment of approximately $600,000 reducing occupancy expense and non-interest income to adjust for the depreciation expense associated with the basis step-up of the leased building we acquired in Fort Worth.
This depreciation expense reduced that lease income.
In addition, during the third quarter, we converted all of our debit cards to another processor and incurred approximately $400,000 in unexpected losses during a short period of time.
The issue that caused these losses was corrected during the quarter.
This amount is reflected in other expense.
We are extremely pleased with the cost savings achieved as a result of the merger with OmniAmerican.
Cost savings realized to-date of approximately 37.5% have exceeded our initial projection of 30% to 35%.
We have also undertaken a project to identify other operational efficiencies, cost containment opportunities and non-interest income revenue generating opportunities which should be complete by the middle of 2016.
I will now turn the call over to <UNK>.
Thank you for joining us this morning.
As <UNK> just outlined, we have good news to share this quarter.
We're very pleased with the 10.8% annualized loan growth during the third quarter.
Our Fort Worth and Austin markets are doing exceptionally well and we continue to see strong quality loan demand from both of these markets.
Our East Texas market continues to grow but at a more measured pace and loan demand there remains good.
With the pace of the indirect auto portfolio roll-off slowing and the rate at which the loans we have committed are now funding, we believe annualized double-digit loan growth could be sustainable well into 2016.
Our third quarter loan growth was driven by $46.6 million increase in construction loans, $36.3 million increase in commercial real estate loans and $5.9 million increase in municipal loans.
Several of our construction loans have long-term leases from highly rated national tenants as collateral.
The growth experienced in both construction and commercial real estate loans is diversified among our market areas.
Our merger with OmniAmerican was approved in December 2014, and our systems conversion was completed in March of this year.
As with most bank mergers, we have made systems selections across the bank and through the hard work of our dedicated staff, it was a relatively smooth transition, completed only four months after closing date.
Basically, the merger transaction is complete and has gone far better than expected.
Again, it was hard work by our North Texas and East Texas teams that have made the transition go so well.
Not perfect, but I'll say close.
We knew there were significant synergies and a similar credit culture from the start.
And through this integration process, a true partnership has emerged as we worked closely together and analyzed various expenses and the appropriate centralization of several functions.
We continue to fine-tune processes to ensure quality customer service, as well as a focus on additional efficiency.
We are focused on loan growth with a long-term target of moving loans to comprise approximately 70% of balance sheet assets.
It may well take three to five years to accomplish this, but we are beginning to see through progress.
The indirect automobile portfolio [we've acquired] in the recent acquisition of OmniAmerican continues to roll off and the total balance outstanding now is under $100 million.
That roll-off clouds our actual loan growth numbers and obscures what we believe is solid loan growth, especially over the past several months.
Our target loan growth remains 10% to 12% annually.
Fortunately, as <UNK> indicated earlier, our exposure to oil and oil-related industries is nominal.
Neither the Austin nor the Fort Worth economies are centered in oil production and as a result, we have seen no deterioration in either market due to the current oil pricing downturn.
On the acquisition front, we anticipate beginning to look for opportunities in early 2016.
Our focus market for an acquisition remains a triangle from Tyler to Fort Worth to Austin and back to Tyler.
Our preferred target bank would be above $500 million in assets.
At this time we will conclude our prepared remarks and open the lines for your questions.
Vicky, if you would open the lines, please.
That's correct.
It just ---+ it looks like ---+ if you look at second quarter to third quarter, it looks like the expense ---+ non-interest income expense went up, and really, it just normalized because if you look at first quarter to second quarter, it went way down and it's back up but it's at a normalized level.
That's correct.
With the loan growth we're anticipating, it would certainly be higher than the second quarter's provisioning expense.
The credits that we had to ---+ to put additional reserves against our credits that we've been ---+ one of them is a credit that was from the merger that we had discounted fairly heavily coming in at merger date when we restructured it.
We [didn't] need to put an additional reserve on it and then the other one is the credit from first quarter.
So it's not new credits that are popping up.
It's those two credits.
So, at this point, we believe that the provision expense is going to be driven by loan growth.
For the most part, yes.
Yes, I think there is probably a little bit of shock on the part of the bankers right now also.
As you know, when we start looking, we kick a lot of tires.
We anticipate that we will start that process in '16.
We had not started yet.
Obviously, our focus has been on the transition of OmniAmerican and as we've said, it has gone very, very well.
But we will start to look.
We realized there is not a lot going on in the market right now because of the oil situation I think.
So we'll see what's out there.
We made an acquisition in 2007, we made our second acquisition in 2014.
I doubt seriously [it'll be seven years] before we pull the trigger, but we do take a lot of time and we want to start looking ---+ because there might be opportunities and if there are, we want to be able to take advantage of that.
Well, it obviously could be in the middle (inaudible) that's just kind of a basic triangle we use ---+ we might slide outside of the triangle a little bit, but I doubt we would slide as far as Houston.
We want to stay in that triangle if we can.
We feel like we're in probably two of the strongest markets in the country, in Fort Worth and Austin, and so we don't want to get too far away from that.
I think so.
I think it is.
We have hired new lenders in Austin, so that skewed a little bit of the costs base, but that occurred during the third quarter and they are already beginning to produce and book loans but, yes, I think that is a good number to use.
Yes, I think it's a little too early to quantify that, but we do believe that there are some nice ---+ and quite frankly a lot of it is revenue-driven we believe in non-interest income.
So, but we think it's a little too early to quantify that.
Probably, we'll be able to do that sometime in the first quarter.
I would hope that if loan growth continues at this double-digit pace that we should see the margin start to gradually climb during 2016 as investments become a smaller percentage of the earning asset base and loans become a higher percentage of earning asset base.
I think they'll kind of remain stable for a while and then we'll see what happens in the marketplace and that will really be more driven by what the market dictates as far as securities go.
If it is the market dictates that we need to shrink the securities portfolio, then we will.
If we continue to have a really (inaudible) we may hold the securities portfolio where it is.
It's normalized also because basically the $600,000, $300,000 of it had to do with the first quarter and $300,000 had to do with second quarter because it was a basic adjustment on that building in December that basically we finalized during the second quarter and so the non-interest income is basically in more normalized level in the third quarter as well.
In 2016, I'm thinking that we will be in the high teens in 2016, most definitely.
The reason we're in this mid teens is really driven by the first two quarters when we have a lot of the merger costs still priced in and so that's basically an annualized tax rate, it goes close through all four quarters.
Let me jump in and then <UNK> can jump in after me, but I think we're hopeful that we will be able to achieve double-digit loan growth.
As we see the roll off continue and with the way things have been moving the past several months, I think we have a good shot at seeing double-digit loan growth.
With that, <UNK>, what are your ---+ any difference.
No, I think that's correct and that's really where we're anticipating that our growth is going to come from, unless something unusual happens in the marketplace.
I don't really see asset growth coming on the investment side to any great extend.
You might see a little bit but we could also see some decline and it really just depends what happens to the investment environment.
A lot of that were existing relationships that we had committed back, some in the first quarter and second quarter that we're just now ---+ they had put in their equity funding and we're just now starting to fund those projects.
I think <UNK> mentioned several of them have leases as collateral that are from highly rated corporations.
Lot of projects are very, very strong.
It's right around 8 basis points and I can get you the amount, but it's right around 8 basis points.
Probably, as we said, we're working with some national firms, lot of things that are coming out of the Austin market.
We are seeing a lot of flow I think too out of Fort Worth.
I think probably to talk about specifics, as we said, both of those markets have really shone brightly the last few years and so we are continuing to generate a lot of growth out of that.
Some of the projects are not necessarily in the State of Texas also.
Some of the projects maybe outside of the state.
So, I don't know if that really gives you the color you want.
<UNK>, you may be able amplify more on it.
I think most of the CRE projects are probably in the market that we're in and we have strong LTVs, strong debt coverage ratios, things of that nature, fully leased up, good solid tenants, that type of things.
The only project in terms of construction that we have I think outside of Texas are related to these national tenants that we have leases as a collateral that if we told you the name of the tenant, it's someone that we all know and we'll be very comfortable with.
So, those are the type of projects we're looking at.
It's really a combination of both.
Its office and retail.
We have a project down I think in the Austin area that is a retail project where ATB is anchor tenant in it and it's the big retail center, it's a great project and it's fully leased out and very successful.
So, it's a combination of both retail and office.
Yes.
It has to do with an updated not so much appraisal but re-evaluation of the collateral position and that was the reason for the additional provision expense.
Thank you, Vicky.
We would like to thank you for being on our first earnings call today.
The earnings are beginning to fall into place as we had hoped.
Our loan growth has started to ramp up and we expect it will continue.
The merger is in reality completed and it was far smoother than we anticipated.
Asset quality is strong.
We operate in two dynamic markets and one very stable solid market.
The fourth quarter looks promising.
And we're excited about 2016.
See you soon and thanks again for joining us.
| 2015_SBSI |
2016 | CASY | CASY
#We're excited about Ohio.
Now these ---+ the sites that we're choosing right now in the western side of Ohio and when we went out there, we noticed that it was a very similar demographic to some of our more seasoned states, like Iowa, Missouri, and Illinois.
A lot of very small communities, very close by for efficiency of distribution of groceries.
So we think we have a tremendous opportunity there in Ohio.
Currently looking into the state of Michigan.
Right now we don't have any sites under contract in Michigan, but we continue to look there, and that will be a state that we will penetrate in the relatively near future.
And in addition to that, <UNK>, we will continue to penetrate Kentucky, Tennessee, Arkansas, and Oklahoma.
Yes, right now we have about 400 ---+ well we'll start with 24 hours.
We have about 980 or so stores that deliver 24 hours.
On pizza delivery, we're about 420, and then on major remodels, we about between 400 and 420 major remodels.
Sure.
Credit card fees for the quarter were $23.5 million.
For the year they were right about $101 million, which is relatively flat to last year.
It's slightly down.
Yes, it's in the prepared food category.
Pizza slices was the big one.
We also took up specialty sandwiches, and then also some of the ---+ what I will call the specialty bakery items as well.
Well it's not so much cost increases because commodities have been in our favor necessarily.
It's just we do monthly pricing surveys on key products throughout the year, and obviously, pizza and a lot of the other prepared food items are key products for us.
So we always look for opportunities to maintain competitive structure with our peers.
We just happened to see an opportunity to strategically raise the prices to be in line with some of the people in our area.
It wasn't necessarily to offset costs.
Yes, we've not seen any elasticity from that price increase.
It's obviously early, but in my time, honestly, I've not seen any elasticity from any of the price increases we've taken.
We're very calculated when we take those price increases to make sure that we are not out of the market.
We are.
We are doing that.
We have a couple small partnerships currently, just a handful of stores right now in that partnership.
But as we get more penetration easterly, that really don't cover the Hy-Vee fuel area, we will look for opportunities to our partner, yes, absolutely.
Thank you
I don't have that information with me, as far as the number of people that download the app relative to the number of people that actually order a pizza.
I think probably the direction I would give you is coming back to the comment we made in the opening narrative: about 7% penetration of whole pie orders right now.
And so that's a number that we continue to look at moving forward.
So obviously, that's one of our goals to get higher penetration.
Well, the leap year would be one I would mention there and we'll bring that up when we get to that time period.
Outside of that, there's really nothing else there.
You're always going to have, in a monthly basis as you probably know, calendar shift time to time that can skew a monthly number, even a quarterly number.
Your ---+ from time to time, you're going to have some weather anomalies that might skew that.
But as far as a one-time thing, there's really nothing outside that leap year.
No, not yet.
We'll continue to monitor that, that's a great question.
But right now, we have not seen any type of trend in that area.
Here's how we handle that, <UNK>.
We put a discount cash-flow model for every site, and when I say every site, every store.
So if it was a 10-store chain, every store in that chain will have a DCF.
With respect to the fuel margin, more times than not, we have stores in that area.
And so we know what the fuel margin environment's like there and we will use of the three-year average of that.
If we don't have stores in that area, we're going to get their financials and look to have some confidence level of their three-year financials with respect.
We rarely take the 12 month, because you never know if there's just an anomaly in a year's time that's going to skew that.
And you hate to pay a multiple on top of a cash flow that may or may not be there; so that's what we do.
You bet.
I'd just like to thank everybody for joining us this morning and look forward to speaking with you in the future.
Have a good day.
| 2016_CASY |
2016 | STE | STE
#As I have expressed on many occasions, I don't have really what I would call a margin target per se.
I generally speaking do not like seeing things that are under 15% and over 20%, I start thinking about whether or not we are investing appropriately or working appropriately.
But we don't have a cap on margin and we don't have a minimum.
Our job is to try to improve them and create the margins we can create.
We have tremendous value creation capabilities in the life science space and those margins are reflecting that.
They are also reflecting a mix shift, another mix shift which we have been shifting over the years significantly, which is why the margins have improved, to the consumable business.
And then of course, GEPCO is an entirely consumable business, so we saw another step function up in that mix shift.
So I would not characterize that we are trying to move our margins down to 20%.
So we will continue to do the best we can on the production side, the operations side and develop new products that are good for our customers and charge the appropriate prices for that, and as a result create value for them, which creates value for us.
We do, I mentioned earlier on our cost reductions and on product development, we do always try to pass some portion of that back to our customers because we think that is the appropriate thing to do for the long-term.
So it is not like every dollar we save we put in our pockets.
Every dollar we save we either put back into R&D, put it into price ---+ get value creation in price for ourselves, or value creation and price reduction for our customers.
It is a combination of those things.
The only thing I would say different---+ obviously you have the GEPCO acquisition, so you have to put the acquisition into the mix ---+ but the balances of the ---+ so there is an organic, inorganic component.
So the inorganic component popped it up significantly.
But they just had good, strong growth; and you know that we have historically struggled in capital, and capital also grew.
So we had, I will call it the normal growth, I will use the word normal loosely because they had good growth in both service and in consumables.
But we also saw growth in capital, which does not always happen.
Obviously that is an area of opportunity for us in terms of margin improvement.
And since I have already told you I don't like things necessarily under 15, and I start thinking about them over 20, we will be working to improve those margins.
But that is a mixed business, there is laundry in that or linen ---+ the historic linen business of Synergy's in there.
There is historic business that was purchased in the US, and there is a nascent business we are trying to grow in the US.
So it is a mixed bag.
We do anticipate improving those margins over the course of time but part of that is we want to make sure we don't under invest in the growth parts of that business.
All of the ---+ I will call it ongoing businesses, have objectives to improve their margins, some of which is volume, some of which is growth, cost improvement that comes along with growth.
But, we are also making investments in those businesses as we go forward.
We are not going to get into that much detail in Synergy.
We gave the year because in total we had a lot of pressure in the fourth quarter to provide a number and we felt that giving the year was probably the best perspective that we could give.
So I would say the quarter would be no more or less than the year, so it would be similar in that regards.
And pro forma is a difficult term because as you know, in the last five months we have been mixing and matching STERIS and Synergy.
And it is difficult enough for us to determine what is Old Synergy and Old STERIS that we changed our bonus program in the last three months of the year, because we don't feel like we can make those determinations cleanly enough.
And when there is a cost reduction as a result of Synergy, is that Old Synergy or Old STERIS.
When there is revenue growth as a result of us working together, is that Old Synergy, Old STERIS.
The answer is we don't know.
But orders of magnitude as best we can give you, we have given you the STERIS legacy business, and orders of magnitude, we have given you the Synergy legacy business growth rates, total sizes in growth rates and the number for next year, legacy Synergy.
Although there are two reasons there is a range there.
One is there is always a range in forecasting, and the other is it is getting harder and harder for us to tell what is Synergy and what is STERIS, which is a good thing.
That is the power of putting the businesses together.
Sure.
I think you correctly captured the general direction that we have tried to lay out for you for the business as you described.
On the HSS business as I said, we do think ---+ I am going to separate HSS Europe which is largely UK but also has some European component and the HSS business US.
So the HSS business in Europe is a well-established, strong growing business.
We think there is good upside opportunity for both growth and profit growth in a strong business.
There is always some trade-offs in timing and currency right now ---+ currency is not helping us because since that is an all inside the UK, or inside Europe, or largely inside the UK/Europe business, and the pound has not been strong for those two, that has hurt us on a reported basis.
But we do think there is opportunity for growth in both those businesses and it is more routine type of work.
In the US there is an acquisition, acquired businesses in the US, and those businesses are some pieces that we think are good and some pieces that are clearly not having the kind of returns that we would want them to have---+ and we will work to improve those.
And then we have this, for lack of a better term, nascent business that is just getting started, and we are investing more into that than we are getting back out of it.
And that is normal in a startup kind of a business.
So when you put all of that together, I think that is a good description of those businesses.
And we do anticipate improving the profitability of those businesses and growing revenue in those businesses probably more in later years than in earlier years.
But that is our thinking at this point in time.
I think, in the linen businesses which are also in this segment, and as is often the case, that is a tale of two cities.
And Dr.
Steeves, if you look back at his comments over the course of the years, it seems like one year or two or three, the UK business was stronger.
And one year, two or three, the Netherlands business was stronger.
And clearly in this case, the UK business had a strong year and the Netherlands business had a tough year.
And as you have heard from Dr.
Steeves, I think the last year or two, the Netherlands business there is overcapacity in the space, and we are working to reduce our costs appropriately and manage that appropriately.
But, that is a tough business right now.
We didn't see any significant change in our business model or businesses if you will in the UK in the Synergy space, and because that tends to be a turn business if you will, it is a consumable kind of a business, you don't tend to have as much fluctuation in that as you might some other things.
Now we have seen some delays in timing in terms of working on new projects and signing up projects, as there have been changes in NHS.
So there has been that kind of a delay.
But that does not really affect us on a routine basis.
So in the quarter we didn't see anything significant.
<UNK>, as it turns out we were somewhat optimistic in our forecast as we had anticipated that the favorability in the tax rate that we were experiencing through the third quarter would continue and obviously you know that it did not.
In addition, we had the geographic mix and the negative impact of discrete item adjustments or the timing of the discrete item adjustments which we had underestimated their impact on the rate for the quarter.
Part of those discrete items as I gave you an example earlier about the FIN 48, I mean that was just a natural process we were going through in integrating Synergy as we were doing balance sheet, detailed balance sheet reviews.
And obviously with them being on IFRS and now transitioning to US GAAP, there were some variances in the tax rate reserves that we needed to record and needed to record when we had discovered those.
So we really didn't have any opportunity to move those out.
It was really recognize those and put the reserves on when they were discovered.
I can tell you that since November 2, we have obtained the tax benefits from the combination with Synergy and these items that we talked about, the discrete items specifically and also the geographic mix having a full-year of Synergy and understanding their tax positions going into the full-year, we are as confident as ever that the 25% rate will be withstood in fiscal year 2017.
<UNK>, I would argue we will see a bit more variability in our tax rate over the course of the year because these things don't ---+ just the way taxes are recognized, we may get some variation quarter to quarter.
And as a result both of what you are asking the mix issues because we are much better at forecasting what we will sell in general geographic regions or in countries for a year than for a quarter and we are terrible at forecasting it for a month.
It gets harder and harder as you move down because again, our turn business tends to be more stable but our capital business can move pretty significantly.
What we do is when if we are building product it is pretty easy to shift if we are a little light in I will just say the UK and we have shipments for the UK but we can ship that to the US or vice versa, we do that.
And so even though that hits our total numbers correctly on an operating profit, it will shift our tax rates from quarter to quarter or month to month.
But on an annual basis, we will be much better at that than we ---+ where we don't have to phase it, time it and all those things we did this past year.
The problem with that, <UNK>, is we have discrete item adjustments almost every quarter and we are not going to get into that level of detail.
I mean they are not always negative.
In Q2 this year we had a large positive discrete item adjustment which favorably impacted the tax rate.
We are not going to book keep those, we are going to book keep the total adjusted tax rate on an external basis only.
Sure.
First of all, <UNK>, hopefully I tried to at least answer a portion of that question.
We saw our backlog increase roughly $20 million in the quarter year-over-year quarter so that gives you an order of magnitude of the change.
So obviously our orders grew $20 million more than our shipments for the year so for a yearly change that gives you that view.
Secondly, as Mike mentioned or Mike or I both I think mentioned, we have seen somewhat of a shift and this shift happens, it is not an infrequent happening, it happens all the time between major projects, things where we are selling $0.5 million or bigger projects at a time versus individual orders.
I would not say that those orders independently have changed size significantly.
That is the project orders are staying roughly the same size and the replacement orders are staying roughly the same size.
It is just we have seen a shift to more of those project orders.
And Mike, I think you may have the details on that.
We started seeing that about ---+ this is the second quarter in a row we have actually seen that shift which is obviously one of the reasons we are actually seeing the increase in backlog in addition to the level loading.
So we are on about a two quarter trajectory at this point in time and that we made the note of it because it is at this point a change that we have not seen for probably the last year or so.
And then a follow-on on the international things, we are actually seeing some improvement in the pipeline in international but we think it is a little early to call it success so we are being cautious there.
But it at least seems that we have hit the bottom in international in general and now so we are seeing some positive things in the pipeline but we are not ready to declare victory there yet.
We do have some increases in our international business in our plan but they are modest in scope.
There is obviously currency effect.
I want to hold that aside, it is not a big, big number but there is a currency effect.
The second component is we are continuing to see the kind of growth rates we have and would expect to see in the AST business in the high single-digit kind of numbers both on the Synergy side and on the STERIS side or now you really have to characterize it as both on the US business and the O-US business.
So we are seeing that kind of growth and expect to continue to see that for the long-term which is why we are investing in growth capacity in those businesses.
In the linen business, we are not seeing that, we are seeing growth in the UK and actually shrinkage in the Netherlands side of the business so that is not a trivial piece of the business.
And then in the HSS business again, there is the growth in the UK international piece.
We have seen a bit of a slowdown, we do not think that in any way is integration related.
We think it is just the nature of the business at this point in time.
We do expect to see that growth rate pick up over time back to more traditional levels.
When you go to in the US, we are clearly going to be sorting between some of those businesses that is not as that is not as profitable as we would like and the businesses that are more profitable than we would like.
And so just like we have in the past for example in life science, sometimes it is better to shrink a little to grow your profit a little and we are going to be doing that so we can invest appropriately for the growth business that we see as a possibility on the US side.
I think at a high level that is the answer.
I don't think there is any significant disruption if you will as a result of the integration going forward.
I think it is absolutely fair to say for both companies that the 15 months we spent trying to figure out if we would get to come together clearly created ---+ we were both running two plans, what if we do and what if we don't.
And so in those businesses where there is more interaction both the AST business and the HSS businesses, there was some slow down or you had to do two things instead of one thing and so that 15 months we might have lost a little bit of ground on both sides of the business but I don't think it is significant and I don't think it will play significantly going forward.
So it is not something that gives me great concern.
Great questions, <UNK>.
Maybe I will walk three steps, try to break it into three questions.
One, the cost synergies.
Two, what we see in the major chunks of the business, and three, any differences in our views.
First, on the cost synergies, they always come out different from where they are than what we think but they are still coming out to the same number.
So whether it is this department or that department or this item or that item, we continue to feel that the $40 million is achievable.
I personally feel that may even be a little light if you give us a little longer time but we feel the $40 million is achievable.
Timing may not be exactly perfect and I will come back to the why on that a little bit.
The $20 million from this year and from last year let's call it and this year in total we fully expect that we will achieve that so we are not concerned about that at all.
The next year's worth, if some of it slid a little bit, it wouldn't surprise us.
We are getting into finding out that more and more, as is often the case a lot of central office type stuff is IT related and you can only do so many IT things at once.
And so we may have some delay in 2018 or 2019 but we are not talking significant numbers in our view at this point in time so we are not concerned about that at all.
Again, we do feel that we achieved the $40 million ---+ my personal expectation is we do a little better.
In terms of the ---+ so now moving on to that topic in terms of the three big buckets of integration.
The first is I will call it the central office kind of stuff, the relatively easy things that we have done and it is behind us and that is quick.
The longer term central office things are clearly more IT related and it is just work and they were anticipated taking longer time, they were all put out in the 2018 time period and they were predominantly put out any 2018 time period.
But there is a lot of work and we are going to work through it.
We think we will get there, no big surprises, no big deal but it might take us a little bit longer than we anticipated.
On the I will call it the two major business components, quite clearly the AST business that I have already indicated it was in my view and always has been my view that it was the easier integration in that basically you had a US business and an O-US business.
The people in the businesses have known each other, we have not been competitors and so they've known each other for a long time, they go to the same conferences, they do the same things.
So many of our people knew many of their people fairly well and we have a long-term leader in that business, Dan Carestio, who has been in our business for a long, long time, 15 to 16 years.
I may not be quite right but I am close and so that is going I think very well.
I think the upside there is even greater than we anticipated.
On the HSS business, clearly the laundry issues in the Netherlands that Richard Steeves has talked about now for a year or two is clearly there and we think it will continue and we have work to do to improve that.
And then in the US business, I have always felt that there is different people's views on how that is going to go.
I have always talked the nascent business I have always felt it is going to take time and I do still believe it is going to take time to have a material impact on the business.
But I think it is a very, very nice potential long-term opportunity so I don't know that there is a change there but clearly in terms of my view, it is very similar.
I'm trying to think through if there is anything else of significance in those three.
So if I were a betting person, the AST business probably gets a little quicker start than we might have thought and does a little better in the long-term.
The HSS business I think will do as well as we thought but it is going to take a little longer than we thought.
But orders of magnitude hopefully it will be in the same ranges.
And then the currency, probably the biggest issue is currency changed on us.
It was 18 months or now almost two years ago when we were putting this thing together and when we did the deal, the currency clearly changed on us.
The good news is that the deal was constructed in such a way that we paid a cash portion in pounds so we had a partial hedge against that currency change but that has clearly had an effect when you go through the operating segment.
But high-level, that is it.
I think as large integration goes, this one is going about as well as one should expect.
Yes, I would say that our priorities for cash remain the same as <UNK> talked about earlier; dividends, reinvesting in our organic business, M&A if the opportunity does exist or does come forthright.
Obviously we have had a little hiatus on doing any type of M&A activity but the pipeline is still strong and we are probably getting a little more active as we have Synergy under our belt now for the last five months.
And then debt repayment, as we have talked about, we have added that into our prioritization and again as I spoke earlier, we are at about 2.7 times debt to EBITDA and barring any other large M&A opportunities or acquisitions, we would think that over the next 18 to 24 months we would get that back down to more of a STERIS historic level.
Then obviously since we have included no dilution and assume no dilution and our FY17 plan, if nothing else we would try and recoup some of that dilution by potentially repurchasing some shares.
I would say that our combined depreciation and amortization is around $145 million, $150 million.
Obviously we have a significant amount of investments this year.
Those investments as you know and you have followed us for quite some time, we tend to over invest one year, under invest the next.
So I would say again for modeling purposes, I would still use that $150 million-ish as a good guide in total.
| 2016_STE |
2017 | LKQ | LKQ
#Thanks, Rob, and good morning to everybody on the call
I am delighted to run you through the financial summary for the quarter before touching on the balance sheet and then addressing our upward-revised guidance for 2017. When taken as a whole, our financial performance in the first quarter of 2017 was excellent and slightly ahead of our expectations
We experienced solid revenue and earnings growth, headlined by the best margins our North American business has achieved in several years
My comments this morning will focus on the results from continuing operations which exclude the two months of activity for the PGW automotive glass manufacturing business which was sold on March 1, 2017, for $310 million
Consolidated revenue for the first quarter of 2017 was $2.3 billion representing a 21.9% increase over last year
That reflects a 21.7% increase in revenue from parts and services, aided by 25.9% increase in other revenue
I will provide a bit more detail on the organic growth of each business as I walk through the segment results
As noted on slide 12 of the presentation, consolidated gross margins improved 10 basis points to 39.7%
The uptick reflected significantly improved productivity in North America, offset by a decline in Europe, largely resulting from the inclusion of Rhiag which has lower gross margin structures and a decline due to our Specialty segment which has the lowest gross margin structure of all of our businesses
We gained about 10 basis points of efficiencies in our operating expenses largely due to lower facility and warehousing expense as a percent of revenue, reflecting the inclusion of Rhiag in the 2017 results as it has lower facility and warehousing expenses than our other businesses
Segment EBITDA totaled $290 million for the first quarter of 2017, reflecting the $54 million or 23% increase over the comparable quarter of 2016. As a percent of revenue, segment EBITDA was 12.4%, a 10 basis point increase over the 12.3% recorded last year
During the first quarter of 2017, we experienced a $12 million decrease in restructuring cost compared to the prior year, but a $17 million increase in depreciation and amortization, the latter of which was due largely to the Rhiag and PGW acquisitions
With that, operating income for the first quarter of 2017 was up about $50 million or almost 27% when compared to the same period last year
Interest expense increased $9.4 million due to the increased borrowings to fund the Rhiag and PGW acquisitions
Non-operating expenses improved by about $7 million over last year as the Q1 2016 results included some one-time items related to the Rhiag and PGW acquisitions
With that, pre-tax income during the first quarter of 2017 was $213 million, up $47 million or 28% compared to the first quarter of last year
Our net tax rate during the first quarter was 33.9%, up from 32.1% in 2016. The 2017 rate reflected an effective rate of 35.25% and some discrete items that reduced the reported rate, the most significant of which is the excess tax benefits associated with stock-based compensation
The effective rate of 35.25% excluding discrete items is higher than last year due to a shift in the geographic mix of our earnings
Diluted earnings per share for the first quarter was $0.45, which was up 25% compared to the $0.36 reported last year
Adjusted EPS which excludes restructuring charges, intangible asset amortization, the tax benefit associated with stock-based compensation, and other one-time unusual items, was $0.49 in the first quarter of 2017 versus $0.42 last year, reflecting a 17% improvement
Stronger scrap prices added slightly more than $0.01 to EPS in Q1 2017. And as anticipated, the translation impact of currencies had a negative impact of $0.01 a share during the quarter
As highlighted on slide 13, the competition of our revenue continues to change due to the varying growth rates of our different businesses and the impact of acquisitions
Since each of our segments has a different margin structure, this mix shift impacts the trend in consolidated margins
And with that, let's get into the details on the segments
Revenue in our North American segment during the first quarter of 2017 increased to $1.208 billion, up 11.8% over 2016. The overall growth in revenue resulted from a combination of 10.4% growth from parts and services and a 25.5% increase in other revenue, the latter of which was due primarily to higher prices received for scrap steel and other metals
The 10.4% growth in North American parts and services was the result of a combination of 1.8% organic growth plus 8.3% acquisition growth, and an additional 20 basis points of increase from the FX impact due to the strength of the Canadian dollar
There is no doubt that another very mild winter had an impact on our revenue
Rob mentioned the CCC statistic that repairable claims were up on average of only 1.1% in the U.S
during the first quarter of 2017. Indeed, 23 of the 50 states reported declines in collision and liability repairable claim volume on a year-over-year basis
Gross margins in North America during the first quarter were 44.4%, a recent high and up 180 basis points over the 42.6% reported last year
The strong results reflected the benefits of procurement initiatives in both our salvage and aftermarket operations, offset in part by the inclusion of the PGW aftermarket glass operation which, structurally, has lower margins
With respect to operating expenses in our North American segment, we lost about 50 basis points of margin compared to comparable quarter of last year
Almost all of the increase in expense as a percent of revenue was due to the inclusion of the PGW aftermarket glass operation in the North American results in 2017 and with almost $6 million of shared PGW corporate expenses for the first two months were recorded as continuing operations even though these expenses went with the glass manufacturing sold on March 1. These shared costs will no longer be incurred by the PGW aftermarket operation
In total, EBITDA for the North American segment during the first quarter was $176 million, a 20.9% increase over last year
As a percent of revenue, EBITDA for the North American segment was 14.6% in Q1 of 2017, up 110 basis points from the 13.5% reported in the first quarter of last year
Again, these are the best margins the North American segment has reported in many years
As noted, scrap prices were stronger than anticipated in the first quarter of 2017 compared to last year and added slightly more than $0.01 to Q1 EPS
Assuming prices stay at the current levels, we will not get the same level of positive impact during the rest of the year
Moving on to our European segment, total revenue in the first quarter accelerated to $821 million, up from $547 million, a 50% increase
Organic growth for parts and services in Europe during the first quarter was 8.5%, reflecting the combination of 6.8% growth at ECP and 3.4% growth at Sator
Note that the Easter holiday fell in Q1 of 2016, but Q2 of 2017. So some of the European countries picked up extra selling days in Q1 of 2017, which increased the reported organic rate
This will reverse in Q2 as there are less selling days in some of the countries in April of 2017 compared to last year
On a per day basis organic growth in Europe was approximately 3.4% in the first quarter of 2017. New branch openings at Rhiag since the acquisition contributed to the overall European organic growth rate in the first quarter of 2017. And all of Rhiag will be fully blended into the organic growth results next quarter, albeit with a few less selling days
Gross margins in Europe decreased to 37%, a 110-basis-point decline over the comparable period of 2016. While both ECP and Sator reported the highest first quarter gross margins each has achieved in several years, the inclusion of Rhiag weighed down the consolidated European margins
As mentioned in prior calls, given the three-step distribution model in Italy and Switzerland, Rhiag has a lower gross margin structure than either ECP or Sator
And the shift in the revenue mix negatively impacts the consolidated European margins
Now that we have reached the one year anniversary of the Rhiag acquisition, this mix impact will largely disappear going forward
With respect to operating expenses as a percent of revenue, we experienced a 30-basis-point improvement on a consolidated European basis
On the positive, we benefited from the inclusion of Rhiag, which structurally has lower operating expenses than our other European business, and we also benefited from improved SG&A leverage in the UK
Offsetting these items were increased facility cost related to additional branches, the new T2 national distribution center in the UK, and the inclusion of <UNK> Page, which is still losing money while we need to operate under a hold separate order issued by the Competitive Markets Authority (sic) [Competition and Markets Authority] (22:47)
European segment EBITDA totaled $79 million, a 36.9% increase over last year
Relative to the first quarter of 2016, the pound declined 13% and the euro declined 3% against the dollar
So on a constant currency basis, EBITDA growth in Europe was 47.5%, which we believe is quite robust
As a percent of revenue, European EBITDA on the first quarter was 9.6% versus 10.5% last year, a 90-basis-point decline
Approximately 70 basis points of the decline relates to the impact of <UNK> Page and the incremental cost in 2017 related to the new T2 facility
Note the CMA is still reviewing our <UNK> Page acquisition under the UK competition law
And it appears it could be moving toward a Phase 2 review for some or all of the business
That will likely extend the review time line for any portions referred into Phase 2 by an additional six to nine months
Turning to our Specialty segment, revenue in the first quarter totaled $315 million, a 6.7% increase over the comparable quarter of 2016. The organic growth rate of 6.3% reflected the continued strength of sales of truck, towing, and RV parts, offset a bit by lower levels related to performance part sales
Gross margins in our Specialty segment for the first quarter decreased 240 basis points compared to last year, largely due to lower supplier discounts, unfavorable product mix, and higher warehouse cost capitalized into inventory due to the two new distribution centers added last year
Operating expenses as a percent of revenue in Specialty were down about 230 basis points as we continue to see the leverage from integrating the acquisitions into our existing network
EBITDA for the Specialty segment was $35 million, up 6% from Q1 of 2016. And as a percent of revenue, EBITDA for the Specialty segment was flat with the prior year at 11.3%
Remember this is a highly seasonal business and the first quarter is typically pretty strong, as demonstrated by the graph in the lower right-hand corner of slide 18. Consistent with normal seasonal patterns, you should assume these margins will moderate as we move through the back half of the year
Let's move on to capital allocation
As presented on slide 19, you will note that our after tax cash flow from continuing operations during the first quarter was approximately $176 million as we experienced strong earnings and only a moderate increase in working capital
During Q1 we deployed $117 million of capital to support the continued growth of our businesses, including $41 million to fund capital expenditures and $76 million to fund acquisitions and other investments
The largest capital changes reflect the paydown of $326 million of debt, largely funded by the net proceeds derived from the sale of the PGW glass manufacturing business
At March 31, we had a little more than $3 billion of debt outstanding and approximately $265 million of cash, resulting in net debt of about $2.8 billion or approximately 2.6 times LTM EBITDA
We have more than $1.3 billion of availability on our line of credit, which together with our cash, yields total liquidity of over $1.6 billion
Finally, as noted in our press release, we have provided updates to guidance on a couple of our key financial metrics for 2017. As it relates to the organic growth for parts and services, we continue to be comfortable with the range of 4.0% to 6.0% for 2017, essentially consistent with our recent experience
Our range for adjusted earnings per share from continuing operations which excludes restructuring expenses, the after tax impact of intangible amortization, and the excess tax benefit related to stock-based compensation, was increased to a range of $1.82 to $1.92 a share, with a midpoint of $1.87, up $0.02 a share
Based on our shares outstanding, that range implied an adjusted net income of approximately $565 million to $595 million with a midpoint of $580 million
Our assumed effective tax rate before discrete items for 2017 is 35.25%
Our guidance for cash flow from operations is approximately $615 million to $645 million with a midpoint of $630 million, while the guidance for capital spending remains constant at $200 million to $225 million
Finally, page 23 sets forth the updated chart included in the Q4 call materials, which bridges the actual 2016 earnings per share from continuing operations to the midpoint of our updated 2017 guidance
You will note that with the exception of the growth in the base business, which increased by $0.02 to $0.19 a share, all the other items are on track with the levels anticipated at the time of our call back in February
And at this point, I'll turn the call back over to Rob to wrap up
Good morning
Sure, Ben
Obviously, the improvement in the North American gross margins are coming from really all parts of the business, whether that's the full-service salvage, the aftermarket parts, as well as our self-service operations and the like
The key there is the procurement
It has less to do with selling prices
It all has to do with improvements from a procurement perspective
The activity at the auctions continues to be very strong as far as product flow
We're buying good product at good prices
We're focusing on getting a few more parts off of each of those cars because, ultimately, we earn more money when we sell a part than when we send it to the crusher, if you will
Clearly, the improvements and the focus on aftermarket procurement that we put into place about 18 months ago is really helping
Again, the total productivity initiatives, which includes things beyond just cost of goods sold items was over $9 million in the quarter
We are about $9 million last year or last – in the fourth quarter of last year as well
So, we're annualizing now at about $35 million, $36 million
All of that helps
All of that helps drive down the cost of goods sold and improving the margins
Well, we are doing a little bit better than we were in the fourth quarter when we initially acquired the business
But we still have to operate under the hold separate order
And so, there's only so much, Ben, we can do as it relates to the day-to-day activities at <UNK> Page
Our goal is to keep the losses to a minimum until we can get full control of the business
Thanks, Ben
So, the North American organic of 1.8% is consistent with what we signaled during our fourth quarter call
At that point in time, we said that for the year, we were looking at 2% to 4% in North America
We anticipated that the first quarter in particular was going to be at or below the low end of the range, at 1.8%
That's exactly where we came up
The reality is January and February were tough, March was the best month of the quarter
From a growth perspective, March tends to be a stronger month, in general
So, we are cautiously optimistic with respect to what that could mean for the rest of the year
We're still comfortable with the 2% to 4% range
Again, at the low end of the range, if we just do 2.1% for the back nine months, we'll hit 2%
To get to 4% we need to be at 4.7%, on average, for the back nine months
We probably need some help from the industry trends to get us to the upper end of the range
But again, it's still – in theory, it's still within reach
At the midpoint of the range, if we do 3.4%, we'll annualize out at 3.0% for the year
So, at the end of the day, the trends – Rob talked about the 1.1% increase in repairable collision and liability claims, that's as low it has been for quite some time
The reality, I mentioned the 23 states were actually down
The states that had the largest increase included locations like Montana, North Dakota, South Dakota, Idaho
I mean, it's great that they're up significantly but there's no cars in those states
So, it didn't really help us very much
So, again, we remain cautiously optimistic that the trends will improve through the year and coming off of a relatively slow start
It's really – we anticipate that we're going to fall into our guidance from a growth perspective, that the margins will continue to be pretty strong
Again, we did a little bit better than we anticipated in Q1. Now, we also know that a penny of that was the higher scrap prices which we did not anticipate
And we don't think we will get the same uptick on scrap in the balance of the year
Again, you got to remember scrap prices in Q1 of last year were in the $92 range or somewhere thereabouts
So, it was a pretty big lift on a year-over-year basis
Again, we were anticipating scrap at $125 a ton or so coming into the year and it was a little bit better than that
So it's a combination of consistent growth, consistent with our guidance, and good margins
Sure, <UNK>
And I can assure everyone the search process has been launched
We've retained a firm
The initial feedback from prospective candidates has been incredibly positive
We've reviewed dozens of candidates on paper over the last couple weeks
We'll move into the next part of that process very shortly
I'm highly confident that finding capable candidates is not going to be the issue
The key is going to be finding somebody who fits LKQ from a cultural perspective
When you think about the attributes, clearly somebody who has public company experience would be helpful, either as a sitting CFO or as a strong number two
If we could find somebody with distribution and/or automotive experience, that would be a plus obviously
A big part of our business is overseas, so some international experience would be helpful
We do a lot of M&A work, and so somebody who has been part of that process again would be helpful
Capital markets expertise
The fact that we are going to continue to grow business quite rapidly, and we're going to need to fund that growth
And ultimately, we're looking for the best candidate with the best fit
But if we can find a diverse candidate, that would be an added plus
So you put all that into the mix
We doubt that anybody is going to fit all that perfectly
But that's kind of what's on the wish list, <UNK>
Yeah
So, <UNK>, this is Nick
The first half kind of balances it out
It really had to do with the Easter weekend in Europe, where you had the biggest impact
Easter was in I believe the last week of March or towards the last week of March in 2016. Obviously impacted Q1. Some of the European countries, it's basically a day off, both on Good Friday and on Easter Monday, the Monday after Easter
That fell into April this year
So when you look at the first half, it should basically cancel each other out
So a little bit stronger growth in Q1. It would be a little bit softer growth in Q2 on a reported basis, just because of the impact of the Easter holiday
But it should all wash out
We talked about in the Q4 call, last year was a leap year
And so there's one less day on the calendar
That really manifests itself in the U.S
Actually the way the calendar falls from a working day perspective, it doesn't pop out till the third quarter, if you will, where we're down one day
So hopefully that helps
Well, one day on a quarterly basis is about 1.5%, right? Because in the U.S
we tend to have about 63, 64 business days in a quarter
So if you take one day out, you're about 1.5%
So yes
The scrap gave us a little bit more than $0.01. A $0.01 is about $5 million of pre-tax
So, that's probably the best way to think about it
Yeah
Yeah
The trends were actually pretty similar, if you will
Again, the salvage side of business really serves both markets, right
Obviously, we sell sheet metal and the likes off of a recycled vehicle, but the most valued parts of the engine and the transmission which go into the mechanical side of the business
And again, the growth of the aftermarket and what I'll call the core collision aftermarket product, the hoods, the fenders, the lights, the bumpers and the like, was pretty comparable actually to the growth of the salvage business
And Rob is not going far
He's going to stay as a consultant with us, and I've got all sorts of ideas as to how to keep him plenty busy
Yeah
And the other thing CCC mentioned is they believe that the uptick in the total loss rates is directly tied to the age of the car part
The reality is when we're buying a car that's 9, 10, 11 years old at auction, we're not buying it for the sheet metal, we're not buying it for the hoods and the fenders, and the doors, if you will, because most of those cars aren't getting repaired anyways
We're buying it for the mechanical components, the engine and transmission, because the sweet spot there is really cars 7- to 14-years model years old
And so, the more of those cars we can buy, the better we will be to service our customers
I think that's (53:11)
Yeah
So, the best gauge we can tell you is our experience on reman engines because we have a pretty active business there
And the margins there are very consistent and very strong of gross margins relative – north of 40% range, which is consistent with our North American business
And we fully anticipate that our margins in the reman transmission business will be in that same zip code
So, as we announced last quarter, we have the 26.5% ownership position in Mekonomen are publicly held entity over in Sweden
We actually have two board members, both John Quinn and Joe Holsten, our Chairman, serve on the board of Mekonomen
We're very happy with our current position there
We believe it's a terrific company
They're working through some growth issues as well, but we're going to remain a very interested shareholder and, again, we're happy with our current position
Good morning, <UNK>
Yeah
Nobody should anticipate a significant uptick in margins, if you will, in the back half of the year
The growth will help
We have – our business is a little bit seasonal, part of the reason we put in the historical margins on a quarter-by-quarter basis for each of the businesses into our chart is so folks can take that into account, if you will
Clearly, if you just track historically, Q1 and Q2 tend to be good quarters
The third quarter tends to be a little bit softer and then we pick up again – generally, pick up a bit in Q4.
| 2017_LKQ |
2015 | GPS | GPS
#We are still working on it on the inside.
Old Navy has something that they will be testing.
I'm not quite sure of the timing yet, but certainly within the course of this calendar year.
And then I am focused on our international expansion, as well, and in particular for both Old Navy and Gap.
The store size is a big opportunity for us in terms of opening up smaller, more productive real estate spaces where we otherwise wouldn't actually necessarily be able to open a store.
So it is ---+ I'm not ready to make a pronouncement on this one.
But it hasn't lost any of its importance and it certainly is being backed across the Company with a high degree of urgency.
Sure.
So the inventory increase, <UNK>, is really mostly due to the [intransigent] issue related to the port.
We told you guys we wanted to goal ourselves at the beginning of the year, excluding the port, something like slightly down to flattish.
And I would say we are pretty much there excluding this port issue that puts us up four.
And then you see that we try and get back with the guidance in Q2 of getting back to tighter inventories, slightly up.
And the reason we are giving ourselves a little bit of wiggle room is with those late inventories coming in, we don't want to do anything unnatural if goods aren't really liable to just force the sell-through to get to an EOQ.
But it is still fairly tight when you think about it to be slightly up when last year we are lapping only an up two.
So overall, I would say we are comfortable with our inventory levels and will continue to manage them quite tightly.
And your second question was ---+
Oh right.
Yes.
So that opportunity really begins with summer flows because we told you we bought our ---+ when we bought our spring flows, cotton really wasn't down yet.
And so, yes, we hope to capture ---+ and we feel confident that in the second half we should get some tailwind.
The magnitude of that we have also talked about isn't ---+ it's a low single-digit, certainly.
Because the simple math that we try to help you all with to be illustrative is that if cotton prices were down 20% when we placed those orders, broadly you would expect, with nothing else changing, you would expect AUC down about 2%.
But of course there is always some mix and a little bit of reinvestment here and there.
But that is sort of directionally what we are trying to capture in the back half.
Yes.
I mean it's a pretty simple conversation, I would say right now, which is that we are always looking at real estate opportunities, whether it's a store that we should be in, because the center has ---+ is no longer relevant, whether its an opportunity to down size or reposition.
And so that's part of the normal ongoing part of how we (inaudible - background noise).
And that's really the work that the team is doing all the time.
And it's obviously here in North America where we have the most mature business.
But we're obviously doing that all around the world across all of our fleets.
So not really ready to say anything more about it right now in any form other than it is part of how we view running the business in a responsible way.
<UNK>, I don't know if you want to add anything more to that.
That's right.
I mean reviews on the fleet are done on an ongoing basis.
And obviously we look even more deeply when brands are underperforming.
Overall, historically Banana Republic has had very high returns and they have a pretty tight fleet size.
So work underway more to come, I would say.
But yes, it's always on our radar and its an ongoing initiative.
I'd like to thank everyone for joining us on the call today.
As a reminder, the press release, which is available on www.gapinc.com, contains a full recap of our first quarter results as well as the forward-looking guidance included in our prepared remarks.
As always, the Investor Relations team will be available after the call for further questions.
Thank you.
| 2015_GPS |
2016 | SNPS | SNPS
#Well, the reason customers signed long-term deals is maybe financial, but in most cases it's really because one is looking at a collaborative partnership that has the potential to create additional differentiating value for the customer.
And over the years from time to time we have done very engaging ---+ built very engaging relationships that have demonstrated that working closely together cannot only impact the way our tools are used presently, but also hone it for the specific situation that the customer has.
And so, although of course when you do a multi-year deal, you always make sure that it is balanced for both parties, you also make sure that one creates something that is beyond what would be just a customer supplier relationship.
This is <UNK>.
I would stress that not only were the deals large, but they were quality deals.
We did see run rate grow in Q1.
Yes, the over achieve on EPS is really expense story.
We were light on expenses.
Typically we started the year behind in hiring and this year was probably more, more in common with that.
We'll be catching ---+ we'll try to catch up on our hiring for the rest of the year.
If you look at our head count, it was pretty flattish versus the end of the year.
That's where the upside came from.
Well, by definition, when you have consolidation, that means that some customers are becoming larger, assuming that you continue the business relationship, which we have.
And so I think that is not a new phenomenon and that will continue.
At the same time, I've always been a believer that in times of consolidation, you can't look at it as a maturation of a market, or you can look at it as the beginning of a next phase.
And the reason we're emphasizing and we're investing along the lines of working with both semiconductor systems and software developers is precisely because we see an evolution in the market that we will continue to emphasize this increased role of the intersection between software and hardware.
And so we are well positioned for that.
Obviously, on the hardware side, we go as deep as anybody down into the silicon.
On the software side, we have put down new gambits in the software sign-off, software integrity space.
And then in the middle, we have a large business that deals with the intersection of those two, be it in verification or even some in the IP side.
So I think we're well balanced, and I try to express that by saying we're trying to sort of follow the sweet spot of the industry, and in that context, of course, the players do change over time.
But I think we're ---+ we have solid roots down and I think good opportunities looking up.
Well, I think it\
So let me start with your automotive question.
The first reason why, of course, automotive is in so many discussions is because somewhat surprisingly so, almost overnight it has turned into the poster child of what digital intelligence can do.
And this, I say surprisingly so, because automotive in the past has been a relatively slow adopter of silicon technology for many good reasons, because safety was absolutely paramount.
And so it demanded a lot of very specific long-term design.
I think this is changing radically, meaning that suddenly automotive is now on the clock tick of Silicon Valley, so to speak, of software combined with most advanced silicon.
And therefore, many of the capabilities and tools and IP that we provide is front and center.
Now, to your specific question of our position in automotive, we have a remarkably complete set of capabilities that is well vested in a number of automotive-specific techniques, such as making sure that chips are designed with provable safety and verifiability in mind.
So in that context, we, I think, are very well positioned and very engaged at, by the way, all the levels that you mentioned.
So semiconductor companies, Tier 1s, even some automotive companies specifically.
I don't want to go overboard the enthusiasm here either.
It's an industry that doesn't ship as many cars as their cell phones.
So the numbers are somewhat moderated by that.
But it is an industry that suddenly has caught the bug of how do they differentiate themselves in this new space, and I think the race is very much on.
So <UNK>, this is <UNK>.
Your question regarding the geographic growth and the product growth, I wouldn't read into any correlation between other geographic growth and product growth.
We see both emulation and IP as growth areas for us long-term and that's pretty broad-based.
We wouldn't ---+ we're not expecting that necessarily comes from any one geography.
It would be broad-based growth.
Q4 to Q1---+ In emulation, that would be partly the case, whether it's quarter on quarter.
Yes.
<UNK>, we have said for a while that where we are heading is toward the mid-20s.
So these numbers are all in that space.
At the same time, one of the things that we decided to do a couple of years ago, is to invest specifically in a new emerging area.
And, and we did that with the belief and understanding that a lot of functionality would move into software, that the software was quickly going to reach the issue of complexity, and then security issues, that would become enormous, and we continued to invest in that.
Of course such an area initially is not particularly profitable.
But it has potential.
Secondly, we have seen that the investments that we've made recently, through some of the acquisitions, initially bring about a small hair cut and those are the small differences that would make up or explain what you were mentioning.
Be it as it may, our objective is very clear.
Our objective has always been how do we deliver shareholder value over the long-term, with a fairly consistent pattern so the intent is not to surprise anybody, but at the same time, to also not be hesitant to put our chips down if we see some opportunity.
And that is exactly what we are continuing to do.
You have noticed that in the last couple of years we have not been hesitant to also utilize our balance sheet towards buybacks, as we found them to be appropriate and have done so again this quarter.
So the balance of those things is how we're managing the company.
Well, you know, the emulation business is difficult to characterize because they are multiple players with multiple sort of cycles of product and there is some degree of ---+ I wouldn't say seasonality as just things go up and down from one quarter to another because it's somewhat lumpy.
Lumpy was the word I was looking for.
Having said that, the reason that we are bullish around emulation is actually a broader one.
Which is that we are strong advocates and we think we strongly deliver around a vision of a verification continuum that allows to use emulation in the context of many other tools as appropriate for the task at hand.
And without going too technically deep here, the reason this is important is because we are dealing with a space that goes all the way from verifying strictly some hardware to verifying some chips with embedded software all the way to people wanting to bring up entire operating systems and some application software on hardware that has not yet been built.
And so in that context, the collection of technologies assembled in a platform that we have is truly quite amazing compared to where we were just five or six years ago.
And we have seen that the take-up in system companies that are now hitting this intersection has been particularly positive and that was visible in some of the Q1 growth.
Well, as mentioned, the overachievement was mostly on light expenses and most of that's timing, still early in the year.
We are definitely focused on the full year, full year EPS targets.
At this point, we feel pretty good about the guidance.
Thank you.
Okay.
Well, <UNK>, you probably know that we never respond to specific M&A questions.
But in general terms, if you watch Synopsys, we have found a balance between using repurchase mechanisms and M&A as the two ways to leverage our balance sheet.
When we look at M&A, invariably it's driven by two things.
Either mechanism to increase the strength of our SAM, meaning purchase companies that have either technology or market position that we think we can do better with or that strengthens our position, or just as importantly, maybe even more important, is opportunities to create new TAM for us.
And so in that sense, the last 18 months have been interesting because we've done a number of acquisitions, starting with a company in the software quality space.
The reason that one is important is because that is the fundamental platform to analyze software.
And then just in the last I think eight or nine months or so, we've acquired four security companies that can all pretty swiftly be integrated into the overall software analysis platform.
And so these are all good examples of how we utilize our cash on an ongoing basis.
Now, are there waves of these.
Yes, there are.
Sometimes they are driven by the state of the market, but in general, I would tell you that many of these things are often on the radar scope for many years and the moment has to just be right to be able to acquire something both from a seller point of view and a buyer point of view.
And there's quite a bit of dating that goes around before marriage.
So in that sense, we're always busy.
Sure.
Well, in general, as <UNK> alluded to, at the end of the day, revenue growth is the single best recipe to grow margins, and in that sense, we are heading there.
And as mentioned, based on some of the past acquisitions and recent investments, we see that the haircuts will gradually fade away and our continued growth and diligent expense management will get us there.
So to me the issue is not can we get there or not.
Yes, we will.
And we have been committed to that for quite a while.
Well, in general, I would observe two things.
The most advanced nodes by definition are always the ones that get adopted by the people that have both the skills to use them, but most importantly, have the business opportunity to leverage differentiation of faster, much more dense, lower power chips.
Initially, that is invariably a small number, as the foundries themselves hone these processes to gradually grow the yields, meaning bring down the cost per chip.
The most advanced design companies spend most money because they have an economic return on that differentiation.
If you look back at only three or four years, the belief was that FinFET would be the reality for only three or four companies.
Well, that is most definitely not the case.
We are seeing actually a rapid increase now, as the proof points of solid FinFET technology are there by a broader set of companies, and interestingly enough, a set of companies that one would never have thought about in the past, the automotive companies, are suddenly interested here as well, as they want to introduce digital intelligence in their products.
So I think the push will continue, which is not to say that it gets easier or much cheaper, but the value of differentiation is quite high, and we will continue to work with those most advanced customers.
As said, we also work equally much with the system houses that integrate these chips and each would have an understanding of the insides of the chip and the software that runs on it.
So it's actually a fairly broad field of companies that we touch that are deeply involved with FinFET.
The services line.
It's right in the range, <UNK>, so when you look at the services line, it's relatively flat at 61 versus the last quarter, and the nature of that business, that's where a lot of our IP consulting business does flow through.
So it can move around quarter to quarter, depending on the revenue signature and the project schedules.
You're welcome.
Well, again, thank you very much for attending our earnings release.
I think the first quarter was particularly positive as a start to the year and I think many of the issues that were alluded to last year actually quite mitigated.
So we have a strong outlook going forward.
Thank you again for your time and we'll be available after the call for the analysts.
| 2016_SNPS |
2018 | TRST | TRST
#Good morning, everyone.
I'm Rob <UNK>, President of the bank.
<UNK> <UNK>, Mike <UNK> and Kevin Timmons are with me on the call today.
We'll start with a brief summary of the year, then <UNK> <UNK>, our CFO, will detail the numbers, and <UNK>t will talk about our operations.
We had a pretty good year at TrustCo Bank.
2017 was a year with many changes, especially in the second half of the year.
Sure you're hearing that a lot.
Year-over-year total deposits were down overall at the bank.
The decrease was driven by runoff in the money market and time deposit categories.
We had very good growth in the checking category.
The bottom line is we did what we had to do with deposits, not chasing the higher cost categories, growing the lower costs customer accounts.
Makes for slower but hopefully longer term cheaper growth.
Loan growth was good in 2017.
We ended the year in a very good position with most of the growth coming in the residential mortgage area.
Commercial loans were down year-over-year, but that portfolio is much more stable than in the past.
Some credit lines were down, but we still view most of that runoff as being captured in our residential mortgage portfolio.
The residential category is not a big part of our business.
Our efforts seem to have paid off in the form of continued margin expansion to 3.29%.
That was up 13 basis points year-over-year.
We ended 2017 with total assets over $4.9 billion, an increase in shareholders' equity to $458 million and a capital ratio of 9.3%.
Net income was $43.1 million in 2017, up from $42.6 million in 2016.
This was impacted negatively by $5.1 million as a direct result of the tax change at year-end.
Mike has more detail on this.
We are pleased to report a net income increase even with significant adjustment at year-end.
As we do with most things, we're trying to take a long view with regard to the new tax policy.
Instead of focusing on short-term spending and enhancement, we would rather see the benefit fall to the bottom line for long-term shareholder value.
Ratios were certainly impacted by the adjustment at year-end.
ROA and ROE were 0.6% and 6.4% at year-end, and our efficiency ratio showed improvement year-over-year to 53%.
We opened a branch in Mahopac during the quarter, bringing our total branches back to 145.
We will probably open 2 offices in Florida during 2018, and we have 2 planned relocations elsewhere.
We continue to have a pretty good cash position and the investment portfolio has relatively short maturities.
Our trust department had a decent year with a nice increase in income.
We're still operating under formal agreement with the OCC and hope to be in the final stages.
Nonperforming loans, assets and net charge-offs all showed improvement in 2017, and the allowance grew to over $44 million, resulting in a coverage ratio of 181%.
We look optimistically to 2018.
Our business model is strong, which should put us in a good position for the future.
Now Mike will give us some detail on the numbers.
Mike.
Thank you, Rob, and good morning, everyone.
I will now review TrustCo's financial results for the fourth quarter of 2017.
As we noted in our press release, the company saw an increase in net income to $43.1 million for the full year of 2017 compared to $42.6 million for 2016.
The year-over-year increase in net income came despite the impact of the revaluation of the company's deferred tax assets resulting from the recently enacted tax legislation.
During the quarter, on December 22, the Tax Cuts and Jobs Act was signed into law, which included a reduction of the federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018.
The lower tax rate will have a significant beneficial impact on results going forward but also require revaluation of the company's deferred tax assets.
As a result, the company reduced the value of net deferred tax assets by $5.1 million and recorded the reduction as a charge to income tax expense.
For 2018, the company is expecting its combined effective tax rate to be approximately 23.5% based on currently known information.
This effective rate could be impacted once the tax law changes are fully implemented during 2018.
Income before taxes were $76.7 million for the full year of 2017, an increase of 12.4% compared to $68.3 million for 2016.
Income before taxes was also at $19.7 million in the fourth quarter of 2017, an increase of 12.9% compared to $17.5 million for the fourth quarter of 2016.
Net income for the fourth quarter of 2017 yielded a return on average assets and average equity of 0.60% and 6.3% compared to 0.89% and 9.87% in the fourth quarter of 2016.
Now on to changes in the balance sheet.
We saw continued strong loan growth during the fourth quarter of 2017.
Average loans were up $203 million for the fourth quarter of 2017 compared to the fourth quarter of 2016.
As expected, the growth continues to be concentrated within our primary lending focus, the residential real estate portfolio.
That portfolio increased by $68 million or 2.24% on average during the quarter compared to last quarter and $234 million or 8.16% from the fourth quarter of 2016.
This, as noted before, continues the positive shift in the balance sheet from lower-yielding overnight investments to higher-yielding core loan relationships.
The loan portfolio expansion was funded by a combination of utilizing a portion of our strong cash balances and cash flow from investments as well as growth in funding from customers.
Total average investment securities, which include AFS and the HTM portfolios, decreased $61.1 million or 9% from the fourth quarter of 2016.
As discussed in prior calls, our focus continues to be on traditional lending and conservative balance sheet management, which has continued to enable us to produce consistent earnings.
In regards to our investment portfolio, we'll continue to take advantage of opportunities as they present themselves during 2018 and beyond, keeping in mind the current rate environment that has seen rate hikes back in December 2016 and again in March, June and December of 2017, with a likelihood of more to come.
As a result, we continue to carry on average $539.7 million of overnight investments, a decrease of $82.9 million compared to the fourth quarter of 2016.
In addition, we expect the cash flows from the loan portfolio to generate between $400 million and $500 million over the next 12 months, along with approximately $130 million to $140 million of investment securities cash flow during the same time period, all of which will be able to be invested at higher rates.
This continued to give us significant opportunity and flexibility as we move into 2018.
During the quarter, we did have $5 million of securities which matured at a yield of approximately 1%.
This was offset by purchases of $20 million of agency securities at a yield of approximately 2.3%.
On the funding side of the balance sheet, total average core deposits increased to $77.1 million from the fourth quarter of 2016.
During the same period, our cost of interest-bearing deposits remained unchanged at 36 basis points.
We continue to be proud of our ability to control the cost of interest-bearing deposits during a period which saw multiple rate hikes.
We feel this continues to reflect our pricing discipline with respect to CDs and non-maturity deposits.
Our net interest margin increased to 3.29% from 3.13% compared to the fourth quarter of 2016.
This increase in net interest income comes from both the asset side of the balance sheet as a result of the continued growth in the loan portfolio, the Fed rate hikes, as mentioned before, and the continued control of funding costs over the past 4 quarters.
The impacts of the growth of the balance sheet, coupled with the changes in the net interest margin, continue to have a positive impact on taxable equivalent net interest income.
For the fourth quarter of the year, our taxable equivalent net interest income increased to $39.3 million.
Provision for loan losses decreased to $300,000 in the fourth quarter of 2017 compared to $550,000 in the third quarter of 2017 and $600,000 in the fourth quarter of 2016.
The ratio of loan loss to total loans was 1.21% as of December 31, 2017, compared to 1.28% at December 31, 2016, and reflects the continued improvement in the assets' quality and economic conditions in our lending area.
<UNK> will get into the details how we would expect the level of provision for loan losses in 2018 will continue to reflect the overall growth in our loan portfolio, trends in loan quality and economic conditions and our geographic footprint.
Noninterest income came in at $4.3 million for the fourth quarter of 2017, a decrease of $566,000 compared to $4.9 million last quarter.
The decrease over the third quarter of 2017 was related to the fees earned on several large estates settled by our financial services division during the third quarter of 2017.
Our financial services division continues to be the most significant recurring source of noninterest income.
Financial services division had approximately $890 million of assets under management as of December 31, 2017.
Now on to noninterest expense.
Total noninterest expense, net of ORE expense, came in at $23.1 million, down approximately $100,000 from the third quarter of 2017.
ORE expense came in approximately $400,000 for the quarter, which is up $126,000 from the third quarter of 2017.
This continues to be an encouraging sign of the stabilization of the housing markets in our territories.
Given the mix of ORE expenses and the current level of gains on the sales of ORE properties, we're going to lower our anticipated level of expense to the range of approximately $300,000 to $800,000 per quarter.
All the other categories of noninterest expense are in line with prior quarters and our expectations.
As we enter into 2018, we expect the total reoccurring noninterest expense net of ORE expense to continue at the levels seen during 2017, which is in the range of $23.2 million to $23.7 million per quarter.
The efficiency ratio in the fourth quarter of 2017 came in at 53.13% compared to 54.65% in the fourth quarter of 2016.
As we've stated in the past, we'll continue to focus on what we can control by working to identify opportunities that make the processes within the bank more efficient.
And finally, the capital ratios continue to improve.
The consolidated tangible equity to tangible assets ratio was 9.33% at the end of the fourth quarter, up from the 8.88% compared to the same period in 2016.
Now <UNK> will review the loan portfolio and the nonperforming loans.
Okay.
Thanks, Mike.
The bank's loan growth for the fourth quarter was strong.
Overall, total loans increased by $58 million or 1.6%.
Year-over-year, they have increased by $206 million or 6%.
Virtually all of the $58 million in growth for the quarter was in the residential portfolio, with commercial loans down just slightly.
Mortgage growth in the quarter was spread throughout all regions.
Purchase money business remained solid and that, combined with the relatively low level of refinance activity, led to strong net growth.
Some equity credit lines declined by $2.5 million, which is offset by a $3.5 million increase in our fixed rate home equity loan product this quarter.
Our loan backlog at year-end was solid.
It was down from the third quarter, which is normal given the time of year, but up over 10% from the same point last year.
While the first part of the year is typically slower, we are optimistic about posting continued net growth on the quarter.
Our current 30-year fixed rate is 3.99%.
The recent enacted federal tax laws contain several provisions regarding the deductibility of mortgage interest.
However, given our relatively low average loan size and the fact that we are not big originators of jumbo loans, we are not anticipating a significant effect upon our overall loan activity.
Our asset quality metrics remain strong.
Nonperforming loans were down slightly in both the quarter and the year.
Nonperforming assets were up slightly on the quarter and down $1.7 million year-over-year.
Charge-offs have reached extremely low levels.
For the fourth quarter, the net charge-off of $212,000 equates to a 0.02% annualized net charge-off ratio, nonperforming loans to total loans of 0.67% versus 0.73% last year and finally, the coverage ratio or allowance to loan losses to total nonperforming loans stands at 180%.
Rob.
Thanks, <UNK>.
We're happy to answer any questions that any of you might have.
Yes, Alex.
I was saying, it's down at year-end.
The pipeline was down from the end of the third quarter, which is normal because of the time of year.
But year-over-year, we're up about 10% from where we were last year.
It's still too early.
There are certain CD categories that have become more competitive, Alex, but overall, no, not a tremendous amount of pressure.
I don't think so.
I think they're handling the maturities.
The people that are very aggressive with regard to the pricing appear to be in the ---+ like the 15 to just shy of 2-year mark.
And it looks like they're trying to keep what they have.
Personal opinion, I don't really have any direct knowledge of that.
Thanks for your interest in our company and have a great day.
| 2018_TRST |
2015 | FELE | FELE
#Thank you, <UNK>.
Third-quarter revenue, down 16%, was a couple of percent weaker than anticipated due to 2 factors.
First, the translation impact from the further weakening of emerging market currencies.
And second, the further weakening in the price of oil and gas, which depressed demand for Pioneer brand pumping equipment and for mud tanks manufactured in the UK at our fueling business in the [years in] North Sea oil production.
However, with reduced input costs, restructuring, and other cost take-out initiatives, [headwind] mix, and some price, we were able to hold the reduction in adjusted operating income to 17% and our operating income margin of 12.7% was equal to Q3 last year.
This is a marked improvement from our second quarter.
On a sequential basis, while our third-quarter revenue declined 6% from the second quarter, our adjusted operating earnings increased 18% and our earnings per share increased 29% as compared to the second quarter.
Now turning to end markets.
With more quote normal weather in the US, we have seen our groundwater business stabilize and we are gaining traction with the reset of our distribution as residential pump sales are approaching last year's level.
However, with the record rainfall in the second quarter, irrigation pumping system sales, while recovering a little from Q2, remain depressed, down over 20%.
And inventory levels in the central region of the country, while improved, are in our view still above normal.
Demand for our surface pumps in the US and Canada market continue to be weak.
Our wastewater and water transfer pump sales were below last year, in part due to a tough comparison and also due to a weak demand in Canada, exacerbated by the weak Canadian dollar.
(inaudible) is a normal season for this business this year.
In Europe, water system sales in local currency continued to be flat to last year, with no real catalyst driving the market.
In the Near East, after a solid first half, our business in Turkey has been negatively impacted with the political unrest in the country.
In Latin America, we continue to do well ---+ up 8% organically.
As we move into the summer in the Southern Hemisphere, our business in Brazil is up in local currency, holding up well in very weak economy.
The integration of Bombas Leao is going right on plan, and through pricing actions and productivity gains, we have recovered some lost margin.
Our Southern African and, to a lesser extent, Australian water business are being negatively impacted by the reduction in metal prices, particularly copper.
Copper mines are being shuttered and mining activity in Southern Africa and Australia is generally not robust, impacting the sale of Pioneer brand products.
Excluding Pioneer sales, our Southern Africa and Asia-Pacific water businesses had another solid quarter, up 7% organically.
Turning to fueling, excluding the impact of foreign currency translation and reduced demand for storage tanks that support North Sea oil production, fueling system sales grew organically in the quarter.
In the US and Canada, fueling system sales growth accelerated from mid single-digits in the first half of the year to 8% in the third quarter.
In the rest of the world, sales were up slightly, with weakness in China, India, and Europe being offset by growth in other regions.
With tight expense control, our fueling system's operating margin expanded, even with the 4% decline in reported revenue.
Looking forward, we anticipate fourth-quarter revenue to be down 10% to 12% as compared to the fourth quarter last year.
Similar to the third quarter, we expect the decline to be directly attributable to the impact of exchange rates and weak demand for oil and gas drilling.
Outside of these two factors, we are expecting continued organic growth across both segments.
With this revenue profile and with cost improvements, more favorable mix, and some price, we believe adjusted operating income will be up significantly and adjusted earnings per share will be in the range of $0.34 to $0.37.
I would now like to turn the call over to <UNK> <UNK>, our CFO.
Thank you, <UNK>.
Our fully diluted earnings per share as reported were $0.43 for the third quarter 2015 versus $0.46 for the third quarter of 2014.
As we note in the tables in the earnings release, the Company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature.
We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance of the Company.
Non-GAAP expenses for the third quarter of 2015 were $1.7 million and included $1.3 million in restructuring costs, primarily related to the continuing European restructuring and the realignment in Brazil.
There were $0.4 million of other non-GAAP expenses related to business realignment costs, primarily severance, and targeted fixed-cost reduction actions and retired executive pension cost.
The third-quarter 2015 non-GAAP adjustments had a net EPS impact of reduced earnings by $0.02.
There was a $0.04 reduction in EPS for non-GAAP items in the third quarter of 2014.
So, after considering these non-GAAP items, third-quarter 2015 adjusted EPS is $0.45, which is down 10% compared to the $0.50 adjusted EPS the Company reported in the third quarter of 2014.
It is worth noting that the Company estimates its 3Q 2015 adjusted earnings per share was negatively impacted by $0.06 due to the translation impacts alone of foreign exchange.
As <UNK> noted, we saw a significant deterioration versus the US dollar of many key currencies which we do business in, including the euro, the Brazilian real, the South African rand, and the Turkish lira during the quarter.
This duration causes the earnings in these units to be translated back to fewer US dollars.
Water system sales were $173.5 million in the third quarter 2015, a decrease of $43.1 million or about 20% versus the third quarter 2014 sales of $216.6 million.
Sales from businesses that were acquired since the third quarter of 2014 were $2.4 million or about 1%.
Water system sales were reduced by $24.2 million or about 11% in the quarter due to foreign currency translation.
Excluding acquisitions and foreign currency translation, water system sales declined about 10% compared to the third quarter 2014.
Water systems operating income after non-GAAP adjustments was $24.5 million in third quarter 2015, down $6.5 million versus the third quarter 2014.
The third-quarter operating income margin after non-GAAP adjustments was 14.1%, down 20 basis points from 14.3% in the third quarter of 2014.
Fueling system sales represented 25% of consolidated sales and were $59 million in the third quarter 2015, a decrease of $2.5 million or about 4% versus the third-quarter 2014 sales of $61.5 million.
Fueling system sales decreased by $3.2 million or about 5% in the quarter due to foreign currency translation.
Fueling system sales were up about 1% after excluding foreign currency.
Fueling system's operating income after non-GAAP adjustments was $15.4 million in the third quarter of 2015 compared to $15.7 million after non-GAAP adjustments in the third quarter of 2014, a decrease of about 2%.
The third-quarter operating income margin after non-GAAP adjustments was 26.1%, an increase of 60 basis points from the 25.5% of net sales in the third quarter of 2014.
The Company's consolidated gross profit was $76.8 million for the third quarter of 2015, a decrease of $12.4 million or about 14% from the third quarter of 2014 gross profit of $89.2 million.
The gross profit as a percent of net sales was 33% in the third quarter of 2015, and increased about 90 basis points versus 32.1% during the third quarter 2014.
The gross profit margin increase was primarily due to lower direct material costs and an improved sales mix of water systems product.
Selling, general, and administrative, or SG&A, expenses were $47.7 million in the third quarter 2015 compared to $55.6 million in the third quarter of the prior year, a decrease of $7.9 million or about 14%.
The Company's SG&A expenses decreased in the quarter, primarily due to lower marketing and selling-related expenses as well as lower costs for incentive compensation.
Approximately half of the lower SG&A expenses was related to foreign exchange.
The tax rate before discrete events was 27% in the third quarter 2015 and we believe 27% is a good estimate for the full year 2015.
The Company ended the third quarter of 2015 with a cash balance of $84.9 million, which was $25.8 million higher than at the end of 2014.
The cash balance increase was attributable to cash generated from operations of about $60.3 million or 105% of the year-to-date reported net income.
The Company had about $20.5 million of borrowing on its revolving debt facilities at the end of the third quarter 2015 and had about $45.7 million of borrowings at the end of the third quarter of 2014.
The Company purchased about 1.3 million shares of its common stock for approximately $37.1 million in the open market during the third quarter 2015.
Currently, the total remaining authorized shares that may be repurchased is about 2.5 million.
This concludes our prepared remarks prepared and we would now like to turn the call over for questions.
Yes.
As we've discussed a little bit earlier, the residential is down single digits; ag down a little over 20%.
And that is in the US market.
Excuse me.
I think your question related to US and that is the US market.
Sure.
At the end of the year, people are looking at their overall volume and targets.
But as you point out, certainly for this year, it has not been robust in the markets and there's just generally less incentive for people to do that.
Yes.
The fueling business, as we have been discussing for the last several quarters, has done a really nice job at leveraging their fixed cost.
And so even though their revenues, after the impact of currency, are not up significantly this year, they haven't grown their fixed cost in a dramatic way.
So we would say that the margin improvement that you see there is a combination of some mix shift, for sure, but it is also a combination of leverage on fixed cost.
I would remain cautious about fueling margin above 25%.
That is not where we have think for the long term they will be.
But somewhere in the low 20%s is a reasonable expectation for that business unit.
Yes, <UNK>.
I think yes, maybe a little better than normal.
I'd say a little bit better than normals last year.
As they are going into the fourth quarter last year, currencies were changing dramatically; end markets were changing for us in the US marketplace.
And so that's why we're saying the business is really stabilized now.
And we are seeing recovery of our North American residential business.
We are seeing ag is not down as much, even down as much as the [synertivic] guys talking about.
For us, again, we are more of a replacement market there.
We are seeing European business stabilizing ---+ or relatively flat.
But the Middle East, there has been a lot of disruption over the years.
And so, again, if there is ---+ at a near-normal conditions there, we expect that to kind of continue to be okay.
Brazil has slowed down in the second quarter.
We are beginning to see that picking up a little bit; activity coming in the back half of the year.
Our groundwater business in Brazil has continued to post record revenue.
The one we acquired ---+ Bombas Leao.
Again, Southern Africa has been relatively soft because of commodities.
We would expect that to, again, be balanced to recovering slightly.
So really what we are doing is we are lapping a lot of the headwinds in currency, we are lapping the headwinds in oil, we are lapping the headwinds in our distribution reset, and we are expecting something more of a normal level here next year.
Well, I think that generally, distribution, given the year, has been pretty cautious about buying.
And so there is still end demand pulling through.
I think outside of the center of the country, inventory levels are normal.
So it is really in the center and I would think that would bleed through here yet this year as a carryover to the first quarter.
It is a little tough for us to have that visibility.
But I think that with everybody ---+ with the dramatic decline in irrigation, I think everyone has been cautious.
So I don't think there is a whole lot of interest in building inventory.
I do think there has been an orderly bleed-down out of it.
Now <UNK>, what we said on the fixed cost, as you saw, when we talk about fixed cost in the Corporation, we are talking about the combination of low fixed costs that are in our cost of goods sold, fixed manufacturing costs, plus SG&A.
That in its entirety is down about 14% when we look at it in third quarter, quarter over quarter.
That improvement is a combination of some of the restructuring actions that we have taken, including discrete fixed-cost actions at some of our business units that have had the most significant revenue challenge, have taken actions relative to their fixed-cost selling and marketing and other costs.
And then of course, a portion of it is FX as well.
So we estimate around 50% or thereabouts of that 14% reduction is related to FX.
As we look forward, for the full year and then beyond, we are hopeful to be in a fixed-cost range ---+ a combination, again, of those two categories.
Somewhere in the $302 million to $305 million annual run rate is kind of how we see ourselves ending this year.
So now, there is going to be some give back in 2016.
There is a portion of that that is variable compensation that we'll have to add back.
You will start to lap some of this FX.
That will have some impact.
But when you compare that to the 2014 total of about $324 million, we are significantly below and we feel like we will be positioned significantly below that.
So the key question for us is: what are the right things to add back, perhaps, for example, on R&D.
We cut back a little bit on some of the R&D effort that we had intended this year simply because of the year we were having.
Some of that will come back.
And ---+ but ---+ the point is, we are still ---+ we feel like in a much better run rate position as we end 2015 and enter into 2016 on that total fixed-cost base.
Yes.
I would say, <UNK>, that we haven't started to talk about 2016 yet.
We will do that more in our fourth-quarter release.
We are working on some roll-ups of that right now.
I think generally, some of the things that are in our thinking are one: we are going to lap some FX, specifically the euro.
We have seen the euro drop, but maintain or be pretty steady.
The developing region currencies are a little more difficult, as you know, to try to predict.
But we will lap some of that FX in 2016.
We can't imagine that we would have a weather quarter or a weather year in the United States like we had this year.
As we have discussed, it was extreme from our perspective.
So hopefully, we are not going to see that in 2016.
Fueling: we have a lot of confidence in.
There is some choppiness this year in terms of China, India.
But that business is well positioned for organic growth, at least in the mid single-digits, if not the upper single-digits.
And then the final thing is that you ask about oil and gas.
And we are not real confident there.
We don't see an inflection point that is going to drive the growth of that Pioneer brand of equipment significantly higher in 2016.
So that remains a headwind for us.
So after giving you any specific advice, I would say, unless <UNK> has some others, those are the key things that are kind of in our minds right now is we are thinking about 2016 top line.
I don't think we will take ---+ we will initiate new cost actions, Dave.
But I think what you will see is sequentially, us get better in cost of goods sold on an input material basis as we sequentially move through the balance of this year and into 2016.
Most of the restructuring efforts that we have announced will start to pay back more.
We will complete what is happening over in Europe with the final move of a couple areas ---+ manufacturing areas to the Czech Republic.
As <UNK> said, the integration and the actions that we are taking in Brazil are on track.
And every quarter that we go into the future, we'll get a little bit more benefit from that.
So I wouldn't characterize it, though, as incrementally new initiatives to take fixed cost out.
Yes, <UNK>.
This certainly will be hopefully the last time you ask the question.
Where we had some pockets of weakness, which were the upper Midwest, we now have covered and also in ---+ so that is in place.
And then in central Texas, just kind of the last piece, we are working on some things there that will be in place, we expect, by the end of the year.
So yes.
We have the geography covered to our satisfaction and our team is now focused on regaining some share.
And we mentioned in our second quarter that we had seen a little bit of share loss.
We are seeing the recovery in residential.
Ag will come, but it has been clouded, obviously, with the weather conditions that we have had this year.
Sure, <UNK>.
We have a really good business in Brazil.
We started in Brazil ---+ well, back up.
Franklin has been in Brazil through other pump companies back in the 1980s and the 1990s.
As a matter of fact, one of the reasons that we were very interested in acquiring Motobombas Schneider in 2008 is because they had at one point about 20% of the Brazilian groundwater market ---+ residential markets ---+ with Franklin Motors.
So they had distribution reach.
And Motobombas Schneider has a great residential and surface water business.
And again, they have about 5,000 dealers that they do business with around the country.
And so we knew that we could very quickly bring in our products from offshore and take them through that market.
So we are gaining share in the Brazilian market with Motobombas Schneider's branded products.
I would say that we did see that shift up meaningfully in the second quarter.
And that is where I think we said that we got ---+ the Brazilian economy caught up with us.
But we are seeing Schneider beginning to get more traction.
We're moving this summer and that product line is doing very, very well.
Leao, the company that we acquired last year, is right in our fairway.
It's a groundwater business.
We saw the opportunity that with our leadership team in Brazil operate that business, we could take what has been recognized as a leading brand in Brazil in Bombas Leao And really driving it forward.
And so we are seeing that today.
With the integration and the coordination between the two businesses, two brands, and one operating team, we are seeing really strong results with Leao, bucking the economy.
And I don't know details about the agricultural business in general in Brazil, but we are finding our Leao business is doing very well.
Well, gravity catches all objects.
But with that said, I think that we are going to see is that the residential business will follow the economy.
We are believing that we are, through market share gains, softening that effect on the residential side.
With the groundwater business, we had a company, again, that has a great brand; 50-year tradition.
It just needed some leadership and some capital and some investment in inventory.
And we are doing that.
And I think that that, along with the macro trends, that Brazil has got this enormous agricultural economy.
They have enormous access to underground water ---+ groundwater.
So it is a natural export from Brazil is water through agricultural goods.
And also through beef and so on.
So we think that we are in a pretty good situation with our businesses there today.
The ---+ we have an active pipeline.
Many of the opportunities we look at are in countries outside United States and Western Europe.
And when you have a major change in exchange rates, people in those countries are often thinking kind of in US dollar terms.
So that makes valuations very difficult to have a meeting of the mind.
And we expect that that will ---+ that is going to take a little while for people to kind of readjust their thinking to what are the new exchange rate realities.
So we have deals in the pipeline and we have an active pipeline.
We continue to look.
It has been a little quiet this year with everything else that has been going on.
<UNK>, this is <UNK> <UNK>.
I will speak to that.
There has been some pricing pressure on Pioneer as particularly as rental fleet companies that tried to liquidate some of their products.
Initially, that was outside North America.
Now some of that is coming back into North America.
So that has put some pressure on those products.
But in truth, those products really are not in high demand now because most of those were oil- and gas-related.
So that business wasn't really going to be there for us anyway.
Yes.
Sure, <UNK>.
We are seeing that the gap ---+ the weakness in residential has diminished in Q3.
Again, we saw a pretty abrupt decline in demand in Q2 with both ag and residential, particularly in the center of the country.
So residential, we are seeing it moving back near more normal rates for us.
We have addressed a couple holes in our distribution that we are seeing.
That is helping us.
With the ag business, again, the decline was not as dramatic as Q2.
It is still down.
We were hoping for a little bit more of a season, but effectively, there just wasn't a lot of demand for irrigation as compared to last year, particularly because of the center of the country.
With that said, one advantage we have relative to capital equipment providers in this industry, the ag industry, is that we are a replacement item.
So when pumps get turned on, the ones that are already installed, and they fail, then we are going to get that replacement business.
And that is where <UNK> was commenting earlier that we get to some kind of more near-normal weather, people may not be putting in new systems, per se, but they still got to maintain their existing systems.
And we have always used as a target, our [roll on is] about 80% of our business is replacement.
So we would expect to see more normal volumes in the next year.
<UNK>, I think we have seen a nice move, as you pointed out, sequentially.
We went from $220 million in the second quarter of combined consolidated inventories to about $209 million in the third quarter.
I don't know that the inventories are necessarily going to be that impacted by the distribution reset.
As I am sure you know, the inventories are a bit seasonal, so you see a run up in the second quarter and third quarter, generally, to accommodate the northern hemisphere of businesses.
I think that the more significant thing that you are going to see is that just a better job in terms of managing inputs, managing our finished goods inventories.
This concept of availability and emergency replacement parts is very important to the value prop that Franklin has.
But I think we all agree that we can manage these inventories a little bit better.
I think you are seeing that in a variety of different ways across the Company.
So we will continue to see incremental inventory improvement, but I don't know if I would attribute it to a particular end market as much as I would just management's attention and effort to manage it a little bit better.
<UNK>, as you are talking about energy, I am thinking about you are talking about oil and gas, and you are talking about the exploration side.
So I am not going to address this from the fuel dispensing part of our business, where we are.
The underground systems related to use of automobile.
So then you look at the oil and gas sector and you say, okay, where Franklin touches that space, it is principally through our Pioneer brand product line.
And we had some challenges, actually ---+ scaling, in our own case, last year.
We saw some costs in scaling last year to address the surge.
So in our own case, we sacrificed margins to deliver revenue because we didn't want to expand our footprints beyond what we have in place already.
So that our footprint is pretty well sized for the business it is today.
That piece is now, as you pointed out, gone years before that industry recovers.
But for us, in the case of our Pioneer business, we were looking for the diversification and getting Pioneer deeper into mining, which has also been a little bit weak, as we pointed out and you all have commented to.
But Pioneer is also involved in municipal sewer bypass and these are businesses in the US that are pretty upbeat.
I think that there have been others in the industry have talked about the municipal investment that is required over the next decade.
So for us, we are feeling pretty good about the business where it stands today.
I think your broader question related to oil and gas is probably better served asking people that are a little deeper in that business.
Because we are going to continue to put out, again, new products and we are going to continue to innovate across Franklin, including Pioneer, to address our underlying demand.
But if you are scaling, as you pointed out, the niches that people play in, I think it is probably ---+ you ought to be directing or somebody that is deeper in that space will have a better answer for you.
Oh, absolutely.
And again, in the case of Pioneer, we had this tremendous volume run in the last couple years and the top blown off of that.
But now we got a business that because of the lack of revenue in the oil and gas space, it is a much more diversified business.
And it's a sustainable base that we can grow from, so we are going to roll with it across the globe.
And as I said, municipal and in the construction industry and mining industry.
And again we have a number of new products.
A lot of it is not even (inaudible) product niches we have in Pioneer as well.
Well, I think there is a couple things.
<UNK> pointed out earlier from the standpoint of comps, that we were going to be lapping on the [news] comp.
From our point of view, that made these developing regions less expensive to buy businesses going forward.
Again, there has got to be a meeting of the minds, but we are patient and we know a lot of people in this industry.
And people know us as a good acquirer.
So it makes those businesses less expensive in dollar terms potentially to acquire.
It also reduces the cost base for our Company because you may know that ---+ you tracked this for a couple years.
You know that we've moved a lot of our manufacturing into lower-cost regions and made it even more competitive.
So we don't have as big a cost footprint in the US or in even Western Europe.
So that helps us from a cost point of view.
But at the end of the day, 5 billion people are in developing or growth regions of the world.
They need water.
They need fuel.
They are going to move in the middle class over time.
When they do that, they consume more water; they consume more fuel.
And that is all good for us.
So I don't know if it is going to be a year or 5 years or 10 years, but we feel we are well positioned.
We have a good cost base that has been helped by this situation.
We can potentially move some manufacturing around, even further help it.
And we are inside these countries doing business, not trying to import into them, and that is also good for our business.
I think that you are talking about our new distribution footprints.
Is that your question.
Yes.
Because we're no longer doing business with Preferred.
So we are doing business with other distribution.
And if you go back in history, these are individuals that have ---+ our owners-operators that have known us over the years.
We have done business with them in the past.
We've maintained relationships with these people in the past.
And they have maintained relationships with the end market.
In this industry in the US, there is not a whole lot of examples of exclusive distribution.
Distributors carry often more than one line and contractors often buy from more than one distributor.
So we maintain these relationships.
We reestablished business with several partners.
We expanded business with several partners and we have believed that they have also expanded their business.
We are seeing our numbers with the end contractors.
So the short answer is that it has been well received.
We thank you for following the Company and look forward to speaking to you after the first year on our Q4 results.
Have a good day.
| 2015_FELE |
2017 | D | D
#Good morning
Strong operational and safety performance continued at Dominion in 2017. All of our business units either met or exceeded their safety goals in the first quarter
I'm pleased that our employees set an all-time OSHA Recordable Rate of 0.66 last year, and we have a goal of improving on that record this year
Our nuclear fleet continues to operate very well
The net capacity factor of our six units during the first quarter was over 100%
Now for an update on our growth plans
Construction of the 1,588-megawatt Greensville County Combined Cycle Power Station continues on time and on budget
As of March 31, the $1.3 billion project was 30% complete
All three gas turbines, the gas turbine generators as well as the steam turbine generator and casings have been placed on their foundations
All three heat recovery steam generators have been set with modules loaded
With the major equipment on-site, the risk to the schedule is greatly reduced
Greensville is expected to achieve commercial operations late next year
We have a number of solar projects under development, and continue to see demand for renewables from our customers including data centers, military installations, and the state government
In total, we have announced 408 megawatts that will go into service this year and expect to add another 200 megawatts by the end of next year, bringing our gross operating portfolio to about 1,800 megawatts, about 700 of which will be in Virginia and North Carolina
We have begun the process to seek operating license extensions for our four nuclear units in Virginia
Earlier this year, the Virginia General Assembly enacted legislation establishing that the spending on these efforts, which could be up to $4 billion reaching into the next decade, will be recoverable through a separate rate rider
The general assembly also stated the construction of one or more new pumped storage electric generating facilities in Southwest Virginia is in the public interest with cost also recoverable through a rider
We are evaluating a number of options and expect to have sites selected later this year
We have a number of electric transmission projects in various stages of regulatory approval and construction
$784 million worth of these assets were completed in 2016 including our new system operation center
We plan to invest $800 million in our electric transmission business this year
Our strategic underground program continues at Dominion Virginia Power
Earlier this year, the Virginia General Assembly confirmed its support for the program and clarified the standards by which distribution lines would be prioritized
We plan to invest up to $175 million per year in this program to reduce the number of outage locations and their duration during major events
We're seeing improving prospects for electric sales growth in Virginia
New customer connections at Virginia Power in the first quarter were 17% higher than last year
We also connected three new data centers in the first quarter, two more than in the first quarter of last year, and anticipating connecting eight to nine new data centers each year through the end of the decade
In addition, anticipated increased federal spending on defense will provide strong support for the Virginia economy which is the largest recipient of defense dollars in the nation
All of these factors support our expectation that annual electric sales growth of at least 1% will continue
Progress on our growth plan for Dominion Energy continues as well
Our Cove Point liquefaction project is now 89% complete
Engineering and procurement is essentially finished
Structural steel and large diameter piping installation are coming to completion and the post-installation pipe testing is about 60% complete
Over half of the project systems are now in the commissioning phase, on line with schedule
As we work toward commercial in-service later this year, we will be commissioning the power block this quarter and begin to ramp down the construction-related labor
Last month, FERC approved our request to begin flowing gas to the site in order to begin firing the two auxiliary boilers as a (14:57) step in the power block commissioning
The boiler first test was successfully completed last week
Third quarter will bring the project to a state of ready for start-up, and construction will reach essentially complete status
We have filed a request with the Department of Energy to export LNG produced during commissioning
Finally, the fourth quarter will provide a period of sustained production of LNG prior to achieving commercial in-service late this year
We're continuing to work toward the commencement of construction on the Atlantic Coast Pipeline and the related Supply Header project
FERC issued its draft environmental impact statement in December
The report was favorable and concluded that all environmental impacts will be effectively mitigated and that there would be no significant public safety impacts
The public comment period ended in early April
And this week, we filed responses to FERC information requests and all of the comments received during the public comment period
After receiving the final EIS this summer, we expect to receive the final permit from FERC by late summer or early fall
We're in the process of securing all the necessary water crossing and other federal and state permits and expect to complete that process later this year
ACP and Supply Header have essentially completed the design and engineering, executed the construction contract, and completed over 80% of materials procurement
We remain on track to start construction in the second half of this year and expect completion of the Atlantic Coast Pipeline and the Supply Header in the second half of 2019. We have an additional six pipeline growth projects underway with $700 million of investment
Five of these projects are expected to be completed this year
We're seeing continued interest in pipeline expansion projects driven by new power, industrial, and LDC load throughout our system
We believe a federal policy that supports infrastructure investments will increase drilling activity and gas demand from industrials and other sectors
Importantly, it will also expedite approvals of gas infrastructure which will, in turn, accelerate investments in needed pipeline expansions
Based on these factors, we expect to secure at least three or four new growth projects this year and significantly more through 2020 throughout our entire footprint, including our traditional Appalachian Basin, our new Western system and our expanding Eastern footprint which has direct access to the fast-growing Mid-Atlantic and Southeast U.S
markets
So to summarize, our business has delivered strong operating and safety performance in the first quarter
Construction of the Greensville County project is on time and on budget
Construction of the Cove Point liquefaction project is also on time and on budget
We continue to work toward FERC approval for the Atlantic Coast Pipeline and the Supply Header project
And as we complete our major projects, we will deliver strong earnings and dividend growth starting next year
As <UNK> stated earlier, we expect earnings growth of at least 10% in 2018, and a diverse set of positive factors will support continued growth in the years to come
Because of our unique MLP structure, our superior cash flows will also allow a dividend growth rate at Dominion higher than 8% per year for the foreseeable future
Finally, this will be the last earnings call for Dominion Resources
Following a shareholder approval at next week's annual meeting, the company's name will change to Dominion Energy in recognition of our focus on the evolving energy marketplace and to unify our brand after last year's merger with Questar Corporation
The new logo is shown on slide 17. Our electric and gas distribution companies will unify under the single brand and change their doing business names in Idaho, North Carolina, Ohio, Utah, Virginia, West Virginia, and Wyoming
The names of our operating segments will change as well, to the Power Delivery group, the Power Generation group, and the Gas Infrastructure group
We will begin using these names in our reporting of operating results next quarter
The name of our master limited partnership will change to Dominion Energy Midstream Partners
The ticker symbols for both companies remain the same
Our company and our employees are proud of the work we've done in delivering energy for 119 years, and of the reputation we have built through reliable and affordable service
With that, we will be happy to take your questions
Question-and-Answer Session
Good morning, <UNK>
<UNK>, we're nearing the end of the Connecticut Legislative Session, as you know
They're scheduled to adjourn at the end, I guess, of the first week of June, June 7. Occasionally, that carries on a little bit as they finish up their budget negotiations
We've been in touch with folks in Connecticut
We're keeping keep close contact with it
We've said all that we're going to say about Millstone at this time
But there's no question that continued support of Millstone is very important for us to be able to make continued improvements to that facility, look at potential relicensing in the future years, as we are in Virginia
So it's an important outcome for us, and we're paying very close attention to it
I think the answer is a complicated answer to a very straightforward question, I think, because partly, it depends on what assets you're talking about
The assets that we're developing through our regulating customers here in Virginia and North Carolina, we have full intention to continue to own those
In fact, the way some of them are structured that are now under contract, we will own in the future once (22:41) certain period of time
And as far as harvesting part of the portfolio that's a little bit older, I'll let <UNK> answer that part of the question
Well you have the existing riders that have been around since 2007. For example, the GENCO riders like Greensville County
There was a clarification of the law to make sure that very significant investments that may be necessary to extend the lives of our North <UNK> and Surry Power Stations to 80 years will be recoverable through riders
We have our undergrounding distribution or undergrounding rider that covers 4,000 miles
Now we have 56,000 miles of distribution lines in Virginia but about 4,000 have a higher likelihood of extended outages when we get significant storms because of the topography or the trees that are in the neighborhoods or whatever
So we've been working on those
The new one
I'm not sure, folks, on the fact that we actually own 60% of and operate 100% of the world's largest pumped storage facility in Virginia at our Bath County Power Station
It's the closest thing to a real battery that can work with renewables of any scale
We've been looking in the South Western part of our state that could use continued economic development, and those will be subject to riders as well
So and then if you're continuing to operate a coal facility and you need expenses around environmental spending to keep that plant operated, for example, coal ash ponds, remediation, et cetera is also recoverable through a rider
So there's lots of opportunities and, as we've said, the Virginia economy is beginning to perk up a little bit
New connects were 17% higher in the first quarter and the sales growth is strong
<UNK> can give you the details on that
The budget that has been agreed to through September includes significantly more dollars for defense spending which many have been asking for in Congress for years now
The case, of course, does not involve Dominion; it involves APCo
Its impacts would likely impact Dominion
We're not going to comment on that since the Supreme Court has it and they'll issue their opinion in the summertime
<UNK> <UNK> runs our newly called Gas Infrastructure group
She can comment more fully on that
It'll be over $1 billion
It's part of our overall growth plan that we've been talking about since 2015. As we've said, whenever we've given out these growth plans over the years the later part of the period is – We know where all the gas projects are in the first two, three years, and as we go through the period we start filling up the bucket later in the years
That's what <UNK> was just speaking about
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Got you
And is there any commentary that you can provide on Blue Racer and the status of natural gas liquid processing in the Southern Utica and how that business is progressing?
Good morning, Greg
Okay
We'll write them down as you go
Good morning, Steve
Well, as we've mentioned in the past, we're shifting our focus away from these contracted assets, the assets we've been buying out, particularly in the West
I think we got a couple more to do this year
<UNK> will comment on those
But we're focusing in North Carolina and Virginia, our regulated customer base, and we filed a new integrated resource plan document, and for the first time, solar passed the economic test in any significant amounts and that IRP says you could logically build up to 5,200 megawatts of solar over the next 15 years
Now, as you know, as you build more renewables like that, that comes hand-in-hand with pipelines and gas-fired peakers to support the renewables when they are unable to operate
So, we'll have to see how that all goes over the next few years, but that is becoming a real increasing possibility
Thank you
Thank you, Angie
| 2017_D |
2017 | IPG | IPG
#Thank you, <UNK>
Good morning, everyone
As a reminder, I’ll be referring to the slide presentation that accompanies our webcast
On slide two, you see an overview of our results
Organic revenue growth was 2.7% in the first quarter, 2.9% in the US and 2.2% in our international markets
Excluding a small increase in pass-through revenue and related expense, organic revenue growth was 2.5%
Q1 operating profit was $30 million, an increase of $7 million compared to last year in our seasonally small first quarter
Diluted EPS is $0.05, which compares to $0.01 as reported last year and compares favorably to $0.02 per share as adjusted for items a year ago
Turning to slide three, you see our P&L for the quarter
I’ll cover revenue and operating expenses in detail in the slides that follow
It is worth noting here that Q1 2016 includes the reclassification of $2 million of pension expense from salaries and other income, reflecting the adoption of the new pension accounting standard
The impact was approximately $800,000 in Q1 2017. Further down the P&L, it’s also worth noting that we had a tax benefit in the quarter against our seasonally small Q1 pretax earnings
That is a result of our mix of profit and loss by tax jurisdiction around the world and the excess tax benefit of share based compensation in our first quarter
We continue to expect that our effective tax rate will be in the range of 35 to 36% for the full year
Turning to revenue on slide four
Revenue was $1.75 billion in the quarter
Compared to Q1 2016, the impact of the change in exchange rates was negative 1% while net dispositions were negative1% as well
Resulting revenue increase was 70 basis points as reported and organic increase of 2.7%
As you can see on the bottom half of this slide, organic growth was 2.2% at our integrated agency network segment, which is good performance against 7.6% growth in Q1 2016 with contributions from all the IAN disciplines and across a range of agencies
CNG grew 4.6% organically led by Octagon, Golin and Weber Shandwick
Moving on to slide five, revenue by region
US organic growth was 2.9% and was 2% excluding increased pass-through revenues in the US
Again, growth was broad based across disciplines in agencies led by R/GA, Mediabrands, Jack Morton, Hill Holliday and McCann
Leading clients sectors were healthcare, food and beverage, auto and retail
We also had strong growth in our other category paced by energy, and industrial clients
Turning to international markets, the UK grew slightly on an organic basis but UK organic growth was 4.4% excluding the decrease in pass-through revenue
We had notably strong growth in McCann UK once again, along the growth at Weber Shandwick and Mediabrands
It’s also worth noting that acquisitions contributed another 3% to growth in the UK but the dollar pound relationship decreased our reported UK revenue by about 14%
Continental Europe increased 6.7% organically
Among our largest markets, we were led by strong results in Germany and Italy while France and Spain were flat compared to last year
In Asia Pac, we had an organic decrease of 2.7%, reflecting lower spending from a number of our clients in China where we were lapping exceptional growth in last year’s first quarter, as well as a decrease from Australia
We continue to see very good growth in India and Japan
LatAm grew 3.7% organically on top of 11.6% a year ago
We continue to have strong performances by our agencies in Mexico, Argentina and Chile, which offset lower revenue in <UNK>razil
Our other markets group increased 7.8% organically in Q1, which is also notably strong performance on top of the 7.4% a year ago
This reflects growth in South Africa, the Middle East and Canada
On slide six, we chart the longer view of our organic revenue change on a trailing 12-month basis; most recent data point is 4%
Moving on to slide seven
Total operating expenses in the first quarter increased 30 basis points from a year ago, compared to reported revenue growth of 70 basis points
As a result, our operating margin expanded 40 basis points
The ratio of salaries and related expenses to revenue in Q1 was 72.7% this year compared with 72.8% a year ago
Comparison reflects improved leverage on our other salaries and related expense, mainly due to lower expense or earn-outs offset by base payroll and incentive comp
The total headcount at quarter end of approximately 50,200, which has increased about 1% from year-end 2016. We continue to invest on growth areas in the portfolio such as digital, media, advertising and PR, and to support our new business wins
On the lower half of the slide, our total O&G expense in the first quarter was essentially flat against last year, generating 20 basis points of operating leverage
On slide eight, we show our operating margin history on a trailing 12-month basis with the most recent data point of 12.1%
On slide nine, we turn to cash flow
Cash used in operations in Q1 was $372 million, compared with $654 million a year ago
As you know, our operating cash flow is highly seasonal
Our business typically generates significant cash and working capital in the fourth quarter and uses cash in the first quarter
During this year’s first quarter, cash used in working capital was $439 million, compared with the use of $695 million in Q1 a year ago
The improvement was due to the timing of our working capital cash flows, which we had also referred to at the time of our fourth quarter call
While we have lower seasonal cash generation in Q4, this is the offset in Q1, lower use of cash in the first quarter
Investing activities used $33 million in the quarter including $25 million of CapEx
Financing activities generated $64 million, due to an increase in short-term borrowings of $225 million
We used $71 million for our common stock dividend and $55 million for share repurchases
Our net decrease in cash and marketable securities for the quarter was $320 million compared with $831 million a year ago
Turning to the current portion of our balance sheet on slide 10. We ended the first quarter with $778 million in cash and short-term marketable securities compared with $680 million a year ago
It’s worth noting that our cash level seasonal tends to peak at year-end and decrease during the first quarter
On slide 11, we show debt deleveraging from a peak of $2.33 billion in 2007 to $1.92 billion at the most recent quarter-end
In summary on the slide 12, we are pleased with solid revenue growth and profit performance in the quarter, which represents a good start in terms of achieving our financial objectives for the full year
With that, let me turn it back over to <UNK>
And on a question around contracts, <UNK>, it primary relates to events business
We are trying to address new clients and move them into an agency relationship as opposed to a principal relationship, existing clients very difficult to shift
So, this will take some time; it’s not having a meaningful impact on margins
| 2017_IPG |
2016 | OGE | OGE
#Thank you, <UNK>.
Good morning, everyone, and thank you for joining us on today's call.
As a Company, OGE is doing quite well and had another solid quarter.
This morning, we reported third-quarter consolidated earnings of $0.92 per share.
The third quarter is critical to the Company from an earnings perspective as it accounts for 55% of the utility earnings.
Our utility OGE contributed $0.80 per share, and our ownership interest in Enable contributed another $0.11 per share.
I will discuss Enable in further detail in a moment, but we have been pleased with their performance.
As I've stated our previous calls, we continue to push forward with environmental projects and the Mustang modernization plant.
With regards to our environmental compliance projects, all but one lone NOX burner has been installed, and the ACI systems are all in service, and all of these have been on time and under budget.
At Mustang, all of the site preparation work is complete, the substation and transmission tie-in work is in process, and these are all major projects for the Company, and I am pleased with the focus to complete these projects on time, under budget, and in a safe manner.
The utility had a solid quarter with many accomplishments.
Members did a great job of operating the system throughout our peak season.
Our natural gas units once again achieved remarkably high capacity and availability factors during the summer.
The entire team continues to produce higher levels of performance.
And I am happy to report that for the third quarter in a row, we are in the top quartile for our safety performance and are on track to have the best safety record in our Company's history.
This has been a very focused effort based on the notion that every accident is preventable.
Getting things done is one thing.
But getting them accomplished in a safe manner is critical to our Company's success and a key value of our organization.
Briefly looking at our service territory, the latest economic statistics have Oklahoma's and Oklahoma City's unemployment rate at 5% and 4.4% respectively.
We saw a 1.3% customer growth rate, and this is an increase over our historical rate of 1%.
The Oklahoma economy, though impacted by the downturn in energy prices, has proven to be resilient.
However, we remain focused on keeping our rates low, our service high, and actively working to attract new loads to our system.
We have an additional 50 megawatts of loads scheduled for 2017 and are working on several projects in the oil and gas sector as we are beginning to see the energy sector pick up once again.
We believe we are well positioned for growth as the economics for the energy sector continue to improve.
With the approval in Oklahoma of the solar tariff, we began offering community solar to our residential and small commercial customers.
A customer can select up to 50% of their annual usage to be produced by our Mustang solar facility.
Initial demand for our solar energy has been very positive, and we have subscribed over 95% of the annual output of the facility.
This equates to over 5 million kilowatt hours of solar energy.
The Mustang solar facility is another generational choice we can offer customers as part of our diverse generation mix.
Going forward, we are evaluating additional strategically placed solar facilities to enhance our distribution system and provide customer choices.
On the transmission side, we have energized the first 15 miles of the Windspeed II line and are collecting revenues around this portion.
To date, the project is on time and on budget, and the entire line is scheduled for completion in 2018.
Turning to our regulatory event, on past calls we provided our rate case schedule for the next few years, so I won't rehash that here.
In regards to our current rate case in Oklahoma, we expect an ALC report soon, and once that report is in hand, we are hopeful that commissioners will be able to provide a final order as quickly as possible.
In addition to this case and the environmental case, we have also secured orders in our field hearing to offset revenues in solar care so things appear to be moving again in Oklahoma.
In Arkansas, our rate case hearing is scheduled for May 2017, and as you know, we have included an application for formula ready in Arkansas and expect that case to proceed smoothly and efficiently.
We believe the secret to success in the regulatory arena is to build and adjust the fundamentals of our business and we do.
Our rates are low.
In fact, the average bill today, including the interim rates we implemented this summer, is lower than it was five years ago.
Our reliability remains high, and we enjoy high customer satisfaction levels.
And lastly and probably just as significant, we are key supporters of our communities we serve.
These are not boasts.
These are just simply facts, and we work hard to achieve the level of that level of success every day.
As a Company, we are very proud of this accomplishment, and it illustrates our commitment of utility growth by keeping our rates low and our service territory attractive for new customers.
Turning to Enable, they continue to perform well in a slowly improving commodity environment.
OGE has received $105 million in cash distributions year to date.
Yesterday, Enable declared another distribution, and our share will be $35 million to be received later this month, which will bring our total for the year to $140 million.
Producers remain active on Enable's gathering and processing footprint and now with 33 rigs currently active that are contractually dedicated to Enable.
There is a 14% increase from the second quarter.
In a moment, <UNK> will discuss Enable's results in greater detail, but I did want to make a few key points.
Enable's financial metrics are improving.
Distribution coverage ratios are strong.
Distributable cash flow is improving, and as a sponsor, we asked Enable to focus on these metrics by managing O&M expense and allocation of capital, and they have performed very well.
In addition, Enable's financial strength has both served them well in a difficult commodity environment and also allows them to seek opportunities as prices rebound and drilling activity accelerates.
We stated this many times, but I wanted to reiterate our commitment to OGE's ownership interest in Enable.
I am pleased with the direction Enable is heading and very confident in the management team there.
Finally, the OGE board approved a 10% dividend increase in September.
This was the third consecutive year of 10% dividend increases as we remain committed to our goal of 10% annual increases through 2019.
So, on closing, our business had a solid club quarter and accomplished a great deal.
We continue to execute our plan to move the Company forward.
I am proud of our members' commitment and focus on the day to day work of providing reliable and cost effective product to our customers in a safe manner.
Though circumstances change, we are accomplishing what we set out to do.
We are all in plan to achieve our long-term growth rate at the utility and continue to grow our dividend at an industry-leading rate 10% a year through 2019.
We are committed to executing on our strategy, to continue growing our business, growing our communities, and creating long-term shareholder value for all of you.
So, thank you for your time.
Now I will turn the call over to <UNK>.
<UNK>.
Thanks, <UNK>, and good morning, everyone.
For the third quarter, we reported net income of $184 million or $0.92 per share as compared to net income of $111 million or $0.55 per share in 2015.
The contribution by business unit on a comparative basis is listed on the slide.
I would like to point out that last year's results were impacted by a $0.35 write-down of goodwill at Enable.
Excluding the impact of these charges, the third quarter of 2015 consolidated earnings would have been $0.90 per share.
At OG&E, net income for the quarter was $160 million or $0.80 per share as compared to net income of $163 million or $0.82 per share in 2015.
The third-quarter gross margin's utility increased approximately $14 million, which I will discuss on the next slide.
O&M increased approximately $8 million, due in part to acceleration of vegetation management year to date, as well as writers with revenue offset.
I do want to reiterate that O&M is on plan for the year.
Depreciation increased $5 million, primarily due to additional assets being placed into service.
Income tax expense also increased approximately $6 million, primarily due to the higher pretax net income.
Turning to the third-quarter gross margin, utility margins increased approximately $14 million for the third quarter of 2016 compared to 2015.
The primary drivers for gross margin were as follows.
Weather contributed $6 million of margin as cooling degree days increased 6% compared to the third quarter of 2015.
However, compared to normal, weather decreased gross margin approximately $5 million for the quarter.
New customer growth contributed approximately $1 million.
We added 10,600 new customers to the system as compared to the third quarter of 2015, supported by the residential and commercial sectors.
This was growth of 1.3%, slightly ahead of our historic growth rate of 1%.
Finally, writers for customers programs that have a direct expense offset contributed approximately $6 million of gross margin.
Moving on to the environmental and Mustang modernization investment, I have shown you this slide before so I won't go into details of it.
I do want to just point out that our CapEx has shifted to coincide with the major in-service dates in 2017 and 2018 for the projects.
We anticipate that Mustang's [BTs] will be in service by the end of 2017.
We also expect the scrubbers and the Muskogee conversion be in service by the end of 2018.
In addition, we have included a rate case timing schedule in the appendix.
Turning to our investment in Enable, for both the third quarters of 2015 and 2016, Enable Midstream made cash distributions of approximately $35 million to OGE.
Year to date, OGE has received approximately $105 million of distributions.
This slide highlights the importance of Enable as a cash vehicle for OGE.
Put another way, the cash distributions from Enable year to date are more than twice the amount as the earnings contribution.
This is free cash flow for OGE to utilize.
It is important to note that Enable's financial metrics are improving.
Their distribution coverage ratio is strong at 1.4 times for the third quarter as compared to 1.15 times for the third quarter of 2015.
Distributable cash flow is also improving.
DCF for this quarter was $189 million, an increase of $35 million over the same quarter last year.
Enable remains focused on controlling costs and deploying capital efficiently.
We are beginning to see a turnaround in the energy sector, and this can be seen in Enable's 2017 guidance.
And turning to our 2016 outlook, our businesses are on plan, and the outlook remains unchanged.
Yesterday Enable issued 2017 guidance, which reflected improving commodity environment.
Projections include natural gas gathered volume being up 7.6%, natural gas processed volumes up 5%, and distributable cash flow is also increasing 5.5% over their 2016 guidance.
As you know, we will provide OGE's 2017 guidance on our fourth-quarter call in February.
This concludes our prepared remarks.
We will be happy to answer your questions.
Okay.
Well, thank you.
So, in closing, thank you for your time this morning.
I appreciate your interest and support of the Company, and I look forward to seeing you next week at EDI.
Take care and have a great day.
| 2016_OGE |
2017 | ANTM | ANTM
#Thanks, <UNK>
In the Government Business, we added an additional 109,000 members during the quarter, bringing the total 2016 enrollment increase to 614,000 members, representing 6.9% versus year-end 2015. The enrollment growth and pricing increases translate into 2016 Government Business operating revenue of $45.5 billion, a growth of 11.4% versus 2015. Operating margins for the Government Business was 3.9% in 2016, a decline of 90 basis points compared to the prior year, driven by lower gross margins in the Medicaid business
As we communicated previously, we expected Medicaid margins to compress from 2015 levels due to rate actions impacting 2016. In addition, we experienced higher-than-expected claims across Medicaid business in the current year, including materially higher-than-expected cost in the recently implemented Iowa contract
Operating margins in the fourth quarter of 4.5% were higher than expected due to the retroactive change in the minimum MLR calculation under California's Medicaid expansion business we discussed earlier
Importantly, core medical cost trends during the quarter were relatively in line with our most recent expectations
The pipeline of opportunity for our Medicaid business remains substantial, with approximately three-fourths of the pipeline in new and specialized services, and the remainder in traditional Medicaid services
We continue to believe our Medicaid asset and geographic footprint is very well positioned to capitalize on these growth opportunities over the next five years, as we continuously demonstrate that we are part of the solution to addressing the challenges of rising healthcare cost for our state partners' constituents while improving quality
Within Medicare, we are pleased with the progress the team continues to make, as our 2016 margins reflected improvement versus 2015. The improvement is a direct result of investments made in our Medicare business over the past three years
We have now positioned our portfolio to grow MA in 2017, which we will discuss in more detail when we turn to our 2017 outlook
Switching to our Commercial business, our enrollment came in better than expected, growing by over 700,000 members during 2016 to 30.4 million members, representing growth of 2.4%
This growth translated into better-than-expected operating revenue of $38.7 billion during the year, an increase of $1.1 billion, or 3%, compared to 2015. Our 2016 operating margin of 8.3% compared to 7.6% in 2015, an improvement of 70 basis points
Commercial operating margins during the year reflected a lower SG&A ratio due to lower administrative cost resulting from expense efficiency initiatives, as well as fixed cost leveraging on a growing membership base
In addition, operating margins benefited from membership growth and our self-funded product offerings, which carry a higher-than-average operating margin
These increases were offset by operating margin losses in our individual ACA-compliant business, driven by higher-than-expected medical cost experience, as we have discussed previously
Within our ACA-compliant plans, our performance during the fourth quarter was generally in line with previous expectations
We continue to experience higher-than-expected costs from members with chronic conditions
Next, I'd like to discuss the balance sheet
Consistent with our past practice, we have included a roll forward of our medical claims payable balance in this morning's press release
For the full-year 2016, we experienced favorable prior-year reserve development of $850 million, which was moderately better than our expectations
Our reserves continue to include a provision for adverse deviation in the mid to high-single digits, and we believe our reserve balances remain consistent and strong as of December 31, 2016. Our days in claims payable was 41.3 days as of the end of the year, an increase of 0.7 days from the 40.6 days we reported last quarter
Our debt to cap ratio was 38.5% as of December 31, lower by 20 basis points from the 38.7% at the end of the third quarter, which reflects the impact of an increase in shareholders' equity as we did not repurchase any stocks during the quarter
We ended the fourth quarter with approximately $1.4 billion of cash and investments at the parent company, which was impacted by the timing of changes in intercompany funding arrangements, and the settlement of intercompany receivables
Adjusted for the timing impact of these changes, cash and investments at the parent company would have totaled approximately $3.3 billion, as of December 31, 2016. Our investment portfolio was in unrealized gain position of approximately $568 million as of the end of the quarter
For the 3Rs, we continue to book reinsurance as appropriate and we continue to reflect a net receivable position for risk adjustors
As we have consistently done since 2014, we have continued our conservative posture of recording a 100% valuation allowance against any unpaid receivables for the 2014, 2015, and 2016 benefit years for risk corridors
Our reported earnings have never benefited from the amounts we are due under the U.S
corridor program
Now, moving on to cash flow
For the full-year 2016, we reported operating cash flow of approximately $3.2 billion, or 1.3 times net income, which was stronger than expected and reflects the quality of our earnings
Cash flow in the quarter totaled $275 million
As a reminder, our third quarter operating cash flow included the favorable timing of an extra CMS payment, which had an offsetting impact in our fourth quarter operating cash flow
We also used $171 million during the quarter for our cash dividend
With that, I will turn the call back over to <UNK> to discuss our 2017 outlook, and provide some incremental commentary on earnings expectations beyond 2017. <UNK>?
Yeah, thank you, <UNK>
In terms of the high-single digit, low-double digit, that was on an EPS basis, so that would include a little bit of capital deployment associated with that on a long-term basis
Associated with the second part of your question, the Medicare, we've done extremely well over the past few years trying to get that platform fixed and get it corrected
And we're very close to target margins in that block of business right now, albeit at a lower membership level than we would like to have on a long-term basis
We think that there is some significant opportunities for growing the top-line and maintaining those target margins
On the Medicaid, it's a mixed bag
The Medicaid expansion, we've done extraordinarily well, and we've actually been earning above target margins
And that's one of the headwinds we have going into 2017, is the pricing associated with the Medicaid expansion book of business coming back down into target margin levels
And then on the Commercial, we think there's a lot of opportunities associated with wallet share, doing a better job of penetrating our large group ASO block of business, as well as trying to retain and maintain our ACA-compliant and non-ACA compliant Small Group books of business
So it's not a simple question, but we think we're very well positioned for growth, but we're doing pretty well right now
Yeah, sure, thank you, <UNK>
And then, <UNK>, on the other question on the HIF holiday, as we had indicated in our prepared comments, that makes many of our metrics non-comparable on a reported basis year over year
I would look at it this way, in 2016, the amount of health insurer fee that Anthem is going to be required to pay, and is expensed, is approximately $1.2 billion
And we've had a very cognizant approach to try to ensure that our pricing associated with that maintained a constant EPS number
So we're pricing for the fee, the tax gross-up, and the non-deductibility of that again and again, so you can sort of then calculate the impacts
Once you go through that, you'll see that the MLR ratio, year over year, it is going up nominally, really not much at all
The single biggest driver by far is the fee
The G&A ratio is coming down a bit, but the single biggest driver of it coming down – the magnitude's coming down, is the fee
And then you also have to realize that in the competitive environment that we work in, occasionally there can be some fungibility associated with the pricing and how much it's fee versus other things
As well as that in the Medicare Advantage area that we've taken the waiver of the fee and we've baked it into product design and benefits to the customer so that the members actually enjoy that
So a lot of moving parts, but the vast majority of our reported movement is the fee
Yeah, <UNK>, thank you for the inquiry
In terms of – I'll answer the second part first
The renewal was due on July 1, and that's when we would expect to obtain actuarially justified rates associated with Iowa
We are still negotiating with the State of Iowa in terms of the rates
So it's premature to provide a specific point estimate or data element on that, other than to say that we're requesting actuarially justified rates
In terms of 2016, as we had stated, I think in the second quarter call that the expense – the medical loss ratio is a good 20 percentage points higher than we expected
It did come down a bit over the rest of the year, in some of our medical management initiatives and some of our other cost of care initiatives went into place, but it still ended up at a loss in the 10 to 15 percentage points higher than we would have expected, based on that block of business
So <UNK>, let me answer your question on enrollment, and then I know <UNK> has some commentary on the second part of your question
In terms of the enrollment, even though open enrollment ended last night, that only provides us one portion of the equation, and that's the applications, and we monitor that very closely
Applications are a little bit stronger, a little bit better than we expected
Not dramatically, but a little bit stronger
And as we look at the demographics associated with those applications, whether it's age and income distribution, subsidy eligibility, metal levels, various things like that, we're very comfortable with the overall amount of applications as compared to what we planned for
What we do not know and what no one knows at this point is how the renewals work and what percent of renewals that you'll retain versus who jumps to another plan versus who goes somewhere else
And so that's really premature to give an exact membership number because it's really unknown
But I will say the applications were a little bit stronger than we had anticipated
Yeah, sure, thank you, <UNK>
The California Medicaid retroactive adjustment – the medical loss ratio calculation, just for a little bit of clarifications, had to do with how taxes are treated and getting the definition within the California Medicaid arena to more closely align with the definition that already existed as part of the ACA MLR rebate calculation
In terms of – that was the primary driver of us going from $10.80 to $11 for 2016. We were already in an MLR rebate position in California when this occurred
And so what had happened was once we re-performed the calculation under the corrected rules, under the corrected definition, it allowed us to reduce the amount of liability we had on the books associated with the MLR rebate
So there is no offset or – it's just a – we perform the calculation, we'll settle the MLR rebate with the state in 2017, as was previously prescribed and it allowed us to be the primary driver of adding $0.20 per share to the shareholders here at the end of 2016.
Yeah, thank you, <UNK>
And A
, your specific question on trend, so just to clarify, trend for 2016 came in relatively in line with our expectations
Felt very, very good about that, maybe closer to the low-end of the range that we provided at the beginning of 2016. And then, as we look into 2017 in general, trend is relatively stable year over year, except for the one item that you pointed out, and that was the Hepatitis C drug spend
So that has nothing to do with Express Scripts
In 2015, we changed the coverage options and allowed a broader coverage of people that qualified for Hep C treatment
We proactively went out at that point in time and did some rebate contracting and various other things that really mitigated the significant increase that we saw in 2016. The increases would have been even greater without the proactive steps we took
Now, we believe that the cost structure associated with that, the utilization associated with that is going to stay flat from 2016 to 2017. It's just that by staying flat from 2016 to 2017, it means we did not have the increase that we saw from 2015 to 2016, so it's impacting our overall trend calculations
So at the end of the day, trend is really stable year over year
We just have the mathematical dynamic of what's going on with Hepatitis C
Yeah, hey, <UNK>
In terms of the individual ACA compliant, just to give you a frame of reference, it's about 80%
Just a tiny bit over 80% is ACA compliant in our plan, which means that approaching 20% is non-compliant
So yeah
And then in terms of the – in terms of the – what was the question? Could you repeat the question on the PBM?
Yeah, no, thank you
Yeah, so the RFP is not yet out, although it's imminent
And as we have stated previously, we expect to go through and then be very thoughtful in our approach, and by the fourth quarter of 2017, provide more clarity to all of you associated with our future pharmacy strategy
At that point in time, we would expect to provide some quantification and clarification associated with what the economics are, which could be as a 2020 type upside at that point in time
How much of that is passed back through the customer and provides affordability aspects, versus how much is retained by the shareholders
Yeah, sure, <UNK>, thank you
So in terms of the $14, we've talked about some of the headwinds that we're facing on the third quarter call, and those headwinds are still very real, and we continue to work through them
Commercial insured mix was a headwind
The most significant of which was the ACA exchanges, the fact that there was supposed to be 26 million people enrolled in the exchanges by 2018, and we're at far, far short of half of that from a basis within the country, and what the impact is on us
But clearly, we're keeping our foot on the gas
We're trying to do everything possible in order to bridge the gap
But we wanted to ensure that everyone realized, back 90 days ago, that these headwinds were significant and we may not be able to completely overcome them
But we've got a lot of things going on that are going very, very, very well
Medicaid is ahead
We talked about Medicare, given the great growth we have with that
And all of this is without the PBM having any real upside in the $3 billion we talked about
So, we have not declared specifics on 2018 yet
Little premature to do that, but the headwinds are still very real
But we are working very hard to overcome as many of them as we possibly can
And then on your trend question, just say that we really don't go into specific trend information associated with each type of procedure, each type of process
But, as I said, the overall trend is relatively consistent year over year, except for the Hep C movement, in terms of how that's impacting it
So you can – now you can assume that that trend is normally unit price driven, that's the most significant driver of it on a year-over-year basis
Our utilization, we track that very closely, that remains pretty much in line with our expectations
In our medical management, our provider collaboration, those various other things have done a really nice job of keeping the utilization patterns fairly constant and fairly low movement year over year
So it's predominantly price
Well, how about if I say we expect it to be this week?
It's with anything else, yeah, we certainly do expect it to be imminent and if it came out either today or tomorrow, neither of those would be a surprise
But, I mean, as you know with all those things, the devil is always in the details
I mean, we really need to evaluate it, need to understand how it impacts various aspects of our business and various aspects of our membership
We've got a – we're cautiously optimistic
Like I said before, our Medicaid – or, I'm sorry, our Medicare asset is a reconstructed asset, really poised for growth
And we feel very, very good about where we're going to be as a company in the Medicare and Medicare Advantage area specifically, over the next several years
So, tomorrow is just one piece of the puzzle
But until we actually see the details, it's a little premature to declare anything
And <UNK>, just to give you maybe a little more specificity associated with your question, on the back of <UNK>'s response
The fourth quarter SG&A ratio is a little bit higher than what we had initially stated
But when you take a step back and look at the entire year, it's still about half of the savings or half of the decrease from the initial SG&A guidance back at the beginning of 2016 is non-recurring, and maybe half is operational efficiencies along with fixed cost leveraging
So even though we did increase the amount of compensation expense here in the fourth quarter, we're still below target on that
And so it still is a headwind as we get into 2017. Associated with the operational efficiencies, I mean, there has been a lot of very successful projects that have been done here over the past few years
Our higher accuracy of auto adjudication rates of claims continue to go up year over year
Our claims cycle time decreased
Those are things that actually improve the accuracy of our claims payment process, and we do it in a more cost effective and cost efficient manner, just as two examples of things where part of the savings in 2016 are recurring, and will be part of our run rate for 2017. So it's a bit of a mixed bag, but as <UNK> said, we're very proud of how we finished 2016, and think we're heading into 2017 with some nice momentum
We've been in a net receivable position consistently for a while
We were maybe a slight payer back in 2014, but we've been in a net receiver position most of the time since then
So hopefully that clarifies it
It's not one significant obvious item
There is many, many things that are part of the effective tax rate
You really have to look at the states, and where companies make money, and what is the state tax situation – is it a premium tax state? Is it an income tax state? What is the income tax? Is it a franchise tax state? So all those things are clearly part of the variation
The investment portfolio, what percent of an investment portfolio is in tax exempt versus taxable yields? And how does that impact it? I mean, there is any fair share of permanent tax differences that occur
We're pretty comfortable with a lot of the tax planning strategies we've made
We all do start with the 35% rate on a pre-ACA, non-HIF type basis
And I'm not positive I know all of the differences between our rate and everybody else's, other than to say that we see this as a huge focus item, that every time that we can do a tax planning strategy, that just ignores the benefit to the shareholders
And so we put a lot of time and effort and focus on taxes behind the scenes that nobody really sees, and I think our effective tax rate helps confirm that
| 2017_ANTM |
2015 | SCHL | SCHL
#Okay.
So, <UNK>, as far as our ongoing cash flow, the transaction-related fees are $20 million.
That's a one-time item.
And the $10 million of EdTech cash flow contribution, well, that will be out of our numbers.
So I think you can expect going forward that our cash flow would be very similar to our historical levels, but $10 million less for Ed Tech.
Also, I should say that our definition of free cash flow in 2016 does not include the $186 million tax payment related to the EdTech sale.
So that is not included, which would drive down our cash balance at year end.
As far as a normal CapEx, I think the range that we are guiding to today is more normal.
If you look at our historical levels, that would be the range we are normally in.
Last two years we stopped CapEx, particularly in the technology area as we assessed what our corporate-level needs were.
And most of what we spent last year in technology was expense as opposed to capitalized because we were in the design phase.
Now we will start capitalizing as we go live with certain systems.
So, we do expect to grow ex currency about 4% next year.
And this year we grew ex currency about $7.5 million on that $400 million base.
So, in real terms the market currencies are ---+ the local markets are growing.
We're seeing strong growth in Asia, continue to see double-digit growth, and then single growth in Australia and the UK.
Canada had some headwinds this year, so they didn't see the same level of growth.
Well, we had great success this year with our Minecraft books and series.
And so we have to replace that next year.
And so, even though we have a very strong outlook in pipeline of new products coming out in 2016, we need to replace the revenues, similar to what we did this year with Minecraft replacing some of The Hunger Game revenues.
I think right now the way that we are driving our technology spend, we leave it all in overhead and we're not allocating it out to our divisions.
So, in absolute terms, overhead only went up for technology by $3 million.
So, overhead ---+ I'm sorry ---+ the whole Company's technology spend only went up by $3 million.
Within our overhead, it looks like a $27 million increase.
It is offset, primarily in the children's books, with a decrease in spend.
So, next year you'll see flat overhead year over year.
But, remember, that's about $25 million, $27 million that sits in overhead that used to sit in the divisions.
So, the way that the restricted cash works is most of it is tied to our service agreement and meeting certain standards of service.
And the money begins to be released in August.
It's about $2.4 million will be released in August.
And our expectation is that that escrow will be released during the year.
Right now we are meeting all service-level requirements and we feel we're in a good place with our service agreement.
I think <UNK> <UNK> will answer that question, <UNK>.
Thank you.
Well, we've actually started a pretty ambitious program in anticipation of the movie.
As you say, it will come out in the fall.
So we already have a big promotion going on in Barnes & Noble, which is off to a great, great start.
We have a lot of enthusiasm across the board.
In addition to the Backlist, which we've refreshed a lot of the books, we have five tie-in books coming out a few weeks in advance of the movie.
And we're also leveraging that across all of our channels, as well as globally.
So we have a lot of enthusiasm, a lot of momentum in the market leading up to the movie.
Yes, that's some of the excitement we have coming into the fall.
Yes.
Well, I think the Board wanted to respond to the fact that we do have increased cash and we do want to return cash to shareholders.
However, we're going to do this in a measured fashion.
And so we chose to do opportunistic stock buybacks as opposed to a plan.
But we'll keep looking at this, <UNK>, and knowing that our shareholders are certainly interested in the whole question.
Well, having just completed the EdTech transaction, <UNK>, and with the cash, which you say is a drag ---+ we're not necessarily in a hurry to bring any more drags into our picture.
But as we discussed in our last conference call, we've not entered into any agreement on the real estate here in SoHo.
But the commercial real estate market, as you suggest, remains strong for both retail and office space and interest remains high in our real estate, for sure.
The purchase of our headquarters location last year was very timely and well executed we think, and we believe our real estate is going to help the Company and our shareholders substantially over the long term.
But we're measuring carefully what we want to do with it, and we'll obviously continue to keep you informed when and if we have a plan.
Sure.
Well, I should remind you that since 2006 we have returned, like, $560 million to the shareholders through a combination of buybacks and dividends.
So, we haven't been bashful about this over time.
I think the Board really didn't stop to consider our dividend policy at this point, <UNK>, for this Board Meeting.
I think we're looking to talk about this in our September meeting, figure out for our next year of operation what our dividend policy should be, short and longer term.
So the lack of an increase in the dividend is not a statement on our long-term attitude toward dividends.
At the same time, we are ---+ oh, sorry, <UNK>.
This is in response to your question, not to <UNK>.
In response to the buybacks, I think, again, we will come back to you with a program on stock buybacks that will be clearer over time.
Thanks very much.
We've had a complicated fiscal year to explain.
I hope we've done it to your satisfaction.
We're focused on our core business operations going forward.
We're excited about the changes in our marketplace that are giving us great optimism about our near-term and long-term future.
We're focused on our core children's book operation, are expanding education operations, and we are building in our international for the long term.
We thank you for your support and interest and we look forward to talking to you again in September.
| 2015_SCHL |
2016 | NUVA | NUVA
#At the time that we talked about this, the $1 billion and 20% operating margin was there, it's baked at the end of last year.
Our whole goal is to continue to drive that operating margin improvement.
We're committed to getting to 20%.
As a matter of fact, we're committed to getting to 25% over the time.
What we're doing is accelerated growth of that top line at the same time.
So, whether it's $1 billion and 20% at the same time, or if it's a year later, here there's going to be right around the same timeframe, but that we haven't given more specific guidance of exactly when 20% hits versus the last time we gave it, which was at our <UNK> Day.
What I would tell you is, we talked about 100 basis points of core operating margin improvement per year, we've executed well ahead of that for the last two years.
Last year was 400 basis points alone.
Q1, the core business was about 330 basis points and we're committed to continuing to drive that kind of discipline in the business.
So on a go-forward basis, once we get past this year of integrating NSO, we were pretty clear that you would see the improvement, that 100 basis points we've talked about would actually start to accelerate and become much faster.
NSO's going to help contribute to that.
Our in house manufacturing that isn't benefiting us this year will start to do that in 2017.
That's on top of the improvements we're already making.
So, there's quite a few levers out there that will start to accelerate that 100 basis points a year that you have heard us talk about with something much greater.
When you're thinking about the contribution from iGA correctly, the hardware pull through that comes from the planning capability and the intraoperative reconciliation is what's driving the results.
I would also say that as we get into the specific details with our folks who are managing those product lines, Derrick and Ross both articulate very clearly that the complexity of the cases are increasing as well.
What historically might have been an average of two levels per case that we're doing from a posterior perspective, or a fixation perspective, is now moving towards three.
And with that highlights to us is we're getting into more of those complex scoli cases, complex deformity cases, which is what iGA is targeting.
So we're very pleased with the progress we're seeing.
Clearly, the metrics internally that we're following are indicating we're having success in our strategy.
We're not going to get into parsing out the details of the iGA contributions specifically, but clearly you can see that playing through in the lumbar results.
You're thinking about it correctly.
I would correct you.
In Q1, it wasn't necessarily sales force efficiencies.
The headcount efficiencies were really back office driven.
More G&A support functions, which is something that we are focused and trying to become more efficient with our processes.
So that's where we saw some nice improvements.
But not necessarily in the sales force.
We're investing heavily in that area and see some nice benefits from it.
With respect to international, with the lower growth in Q1, we didn't see the benefit on the operating margin that we would expect to see as we get into the back part of the year and that growth starts to accelerate and we start to lever that business to a greater extent.
But to your point, as that happens, you do see opportunities in the operating margin and tax rate to benefit, as well.
Here are the level setting facts about the spine business through the eyes of a hospital.
It's one of the key questions I did a little research on before I decided to step off the Board into this role.
It turns out, the spine business at a typical US hospital represents somewhere between 15% to 25% of their EBITDA.
It is one of the best service lines they have.
The other reality though, is that just because of the complex nature of running a hospital, not all of them can see it.
So when I look at that, I'd say it's also a business that's going in the right direction even from there.
Demographics will lead to ever more spine surgery.
We all want to live a more vibrant vital life.
And to the extent we can make spine surgery more approachable, more minimally invasive, more spine surgery gets done.
The bottom line is the conditions for a great business through the eyes of a hospital are there today and they're even better tomorrow.
So, at NuVasive, we're going to be laserlike focused on helping them make that a great business for themselves and for us.
And I fundamentally believe that focus wins, and will win all day long against other competitors that are trying to do something that is very difficult to do, which is combine economies across service lines and then get something done.
I mean I'll take our chances as being a focused company and winning in what is a very good business called spine.
What you are seeing happened in the international business is procedural selling.
And I think XLIF is an example of procedural selling, but we have a lot of procedures now that we're a full line spine company.
And so what you're seeing different versus in the past, was in the past, we would just be talking about XLIF primarily and then sometimes getting table scraps called pedical screws.
What you are seeing now though through intensive training, investment is we're talking to clients overseas just like we do in the US, that you have to focus on procedures and procedures will deliver better outcomes.
And I think we are just encouraged so far, by what we are seeing in Germany and the UK.
But you're also seeing us not getting ahead of ourselves for the year 2016.
We think it's going to continue on in a very good way, but we've got seven more quarters to prove that out to ourselves and to our investors.
All right.
With that, we will now bring the earnings call to a close.
Operator, you can disconnect us.
Thank you very much everybody.
| 2016_NUVA |
2018 | UTHR | UTHR
#Thank you, operator.
Good morning, everyone.
Welcome to the United Therapeutics\
Sure.
Well, we are ---+ the good news is, when you always keep the FDA busy with submissions, then you're always going to be waiting on the FD<UNK>
And it's not a bad waiting, it's a good waiting.
So we definitely are waiting on the FD<UNK>
And as well when you work with great partners as we do with Medtronic and DEKA and other companies, then there's always a research and development involves a certain amount of waiting.
But again, it's a good waiting.
It's a kind of waiting like when you're baking a pie and you're waiting for the pie to be ready.
So let me go through some of those waitings, it's an excellent question.
So start with the Implantable System for Remodulin, the acronym, ISR, just like the Israeli acronym for the Olympics, ISR.
The ISR system is now before the FD<UNK>
We submitted the drug portion of the ISR at the end of January.
And we expect to learn by the end of February whether or not it will be a 1 or 2 submission.
And depending on that is whether it's a shorter or a little bit of a longer review.
But in either event, the review period would be consistent with our being able to get approval and launch the product in the next calendar year.
So everything is on schedule.
Everything is consistent with what we previously advised, that 2017 ---+ 2018 is the year that we expect the ISR to be approved, and we continue to be very optimistic and bullish about that.
I'd have to leave it to our legal experts as to exactly when to provide advice as to the type of approval process ---+ review process, excuse me, that the FDA will go through 1 or 2 for ISR.
But certainly, I know that's something that's obviously important to you and to other people, and I'm sure that at minimum, there would be an update of our SEC filings.
I'm sure to say what type of review process the FDA decided to put that through.
So that's definitely on the checklist for a new product launch.
And within the next 12 months, we will be there.
We'll be there ---+ not (inaudible) everything's going okay with the FDA, we should be there with the launch of ISR.
If they ---+ it is a revolutionary product.
It is ---+ you've never heard me ---+ anybody who says to me ---+ and I've been on this phone for like more than 15 years, I think.
You've never heard me say this before with any other products, I have not seen more physician excitement and anticipation over any product than the ISR system, which is a little bit surprising to me because when you get into the nitty-gritty details of it, which I am that type of a manager, it's pretty high-tech and amazing.
You're talking about over a foot of a medical-based capillary inside of a patient's body connected to a machine, it's a pump, but it's a machine, that has to work automatically for years upon years, 4 years without any failure or anything, and then have it rate of flow beat controls through the electromagnetic spectrum, okay, through wireless connections.
This is pretty Star Trek, futuristic, sci-fi technology.
And yet, there are dozens of patients who feel that this is the therapy that gave them their lives back, life back.
It was not getting put on IV or subcu of Remodulin after they were panting for breath and couldn't make it up the stairs that got them their life back.
It was getting rid of the [pus], having everything internal.
So there was nothing they had to do every day.
That's what's got them their life back and that's what we hear from every one of the physicians involved in the ISR program.
And I've heard from multiple patients sending me YouTubes of gratitude and that sort of thing.
So 12 months to launch there.
The next one that you talked about was the RemUnity.
And on the RemUnity, we expect to file the 510(k) for its approval this month.
So again, we'll knock on wood because that's a big filing, a lot of parts and pieces going together.
So RemUnity should do for subcu what the ISR does for IP.
That's the easy way to think of it.
And hopefully, that too will be a rapid review at the FD<UNK>
510(k)s are usually pretty rapid reviews just because it's a rapid reviews, no guarantees that there's not going to be any need for back-and-forth.
And everything the FDA is looking out for our safety and our efficacy and we are thankful for that.
But that is on track for filing this month, the first time you've heard me say that.
And also, I would say that means that it is in our planning and on track for a commercial launch this calendar year.
So that's 2 additional commercial launches that I'm able to talk about on this call.
So those are the main things that we're waiting for, either the FDA or for other partners.
Thank you for your question.
Operator, could you queue up the next question, please.
Yes, no.
This is not going to be patient-filled.
These are all prefilled.
Next question, please.
Well, thank you for the question.
I'm fortunate to have our Chief Financial Officer sitting right next to me here in Silver Spring.
And <UNK>, could you kindly field that question.
Sure.
<UNK>, thanks for the question.
So there was 2.
There was 1 about COGS and there was a step-up in COGS this quarter reflective of the increased royalty that we paid to [Lilly] associated with the new contract.
So the ---+ there was probably about a $20 million increase in COGS there.
With respect to the general spend levels, specifically to R&D, as you asked, there was about a $100 million increase year-over-year.
And if you recall back to the start of this year, our expectation that we communicated was that there will be an increase of R&D to advance our expanding product pipeline that we talked about in our opening remarks.
The increase that we anticipate going forward will be at these levels.
But again, we don't want to get into a quarterly discussion because of the starting and stopping of studies, the starting and stopping of research projects just within a calendar year.
So it's best to look at it overall.
And we don't want to get into a quarterly discussion as you brought up.
But I would expect going forward, the R&D expenses to continue at an elevated level just with the large amount of pipeline products that <UNK> talked about and that are reflected in the pipeline chart on our website.
Thanks, <UNK>, for your question.
I think the bar for the competition is actually pretty low.
As according to the label on Uptravi, which would be the closest comparable drug to Orenitram, about half of the patients fail the Uptravi therapy within 3 years.
So that's a lot of patients.
I mean, with ---+ we're looking at here, 30,000, 40,000 patients with pulmonary arterial hypertension.
If only the half that failed within 3 years ended up on Orenitram, which would be the logical thing to do once you failed 1 oral therapy, you'd go to another oral therapy before you take on more invasive therapies, it would be well north of about 10,000 patients coming on to Orenitram.
So that part of therapy ---+ for competition right there is pretty low.
It's actually lower than that because in the real world, one never sees results as good as the ---+ I won't say never, but I rarely see results as good as in a (inaudible) controlled clinical trial where you have a lot of forces kind of making people stick to the therapy that they're on instead of switching to another therapy as soon as the patient is not doing as well.
And in fact, as highlighted in my introductory remarks, we see Orenitram growing quarter-after-quarter, third consecutive growth ---+ quarter growth of greater than 20%.
And this is reflective of the fact that ever more patients are failing AMBITION therapy, are failing Uptravi therapy and are coming on to Orenitram therapy.
Now Orenitram has a beautiful characteristic that neither AMBITION nor Uptravi can match.
And that is, it's titratable.
It's titratable as titratable really as is a (inaudible) therapy, such as Remodulin.
So this is a fantastic skill set that is resident within Orenitram that allows it to hold on to its patient for a much longer period of time because you can continue to titrate the therapy.
I think it's on top of all of that, which has led us to have approximately a 1/3 versus 2/3 market share of Uptravi as of right now without the readout of the EV therapy, without any data in combination therapy, without a label showing the equivalent morbidity/mortality.
We've got like 1/3 market share right now without any of that stuff.
I think that once we report our data showing a improvement in morbidity/mortality from Orenitram that there will be no competitive difference in terms of anything that advantages Uptravi.
And in fact, there'll be a significant competitive advantage towards Orenitram, which is its titratability and which is the ---+ also the efficacy inherent in being the only true prostacyclin oral analogue.
Operator, can you queue up the next ---+ this I guess would be the last question.
Yes.
Thank you very much for the question.
Again, on a day of the ---+ accompanied by our great CFO, <UNK> <UNK>.
So <UNK>, if you could perhaps talk a little bit about what tax reform has done for United Therapeutics' effective tax rates.
I think that's something that people are very, very interested in.
Sure.
Thank you for the question.
U.S. tax reform offers many benefits to UT.
But by far, the biggest benefit from tax reform in 2018 will be the lowering ---+ we will recognize the benefit of the lowering of the Federal rates to 21% from 35%, which will result in improved after-tax cash flows going forward.
Keep in mind, we as well as others in the biotech and pharma industry will lose some benefits with respect to the domestic manufacturing deduction as well as some other research credits.
But like many other companies, one thing you will note in our financial statements for 2017 is that we [didn't] need to recognize the benefit of this lower rates and revalue our existing deferred tax assets and liabilities, which represented to us a noncash charge of about $71 million.
But these benefits that we will recognize going forward, as I just talked about, will be at these lower rates.
With respect to capital allocation priorities, which was the second part of your question, our priorities really remain unchanged.
We will continue to invest in R&D products and research activities that Dr.
<UNK> talked about at the opening part of the call.
And then the next, we will evaluate and continue to look at value-creating M&A opportunities.
Our third priority would be share repurchases from time to time, if appropriate, but if only mission-critical R&D and M&A opportunities do not avail themselves to us.
So thank you for the question.
Thank you very much.
Operator, you can now wrap up the call.
| 2018_UTHR |
2017 | MCY | MCY
#Thank you very much.
I would like to welcome everyone to Mercury's second quarter conference call.
I'm Gabe <UNK>, President and CEO.
In the room with me is Mr.
<UNK> <UNK>, Chairman; Ted <UNK>, Senior Vice President, CFO; <UNK> <UNK>, Vice President and Chief Product Officer; and Chris Graves, Vice President and Chief Investment Officer.
Before we take questions, we will make a few comments regarding the quarter.
I am pleased to report, our second quarter operating earnings of $0.68 per share improved significantly as compared to our second quarter 2016 operating earnings of $0.35 per share.
The improvement in operating earnings was primarily due to an improvement in the combined ratio from 101.7% in the second quarter of 2016 to 97.8% in the second quarter of 2017.
Our results in the quarter were negatively impacted by $10 million of catastrophe losses, primarily caused by severe Midwestern weather, including tornadoes in Oklahoma.
In addition, we recorded $10 million of unfavorable reserve development, which came primarily from our commercial lines of business.
This compares to second quarter of 2016, which had $11 million of catastrophe losses and $22 million of unfavorable reserve development.
Excluding the impact of catastrophe losses and the unfavorable reserve development, the combined ratio was 95.3% in the quarter.
The improvement in the combined ratio was primarily due to an improvement in our personal and commercial auto combined ratio.
Our second quarter auto combined ratio was 97.2% compared to 104.6% in the second quarter of 2016.
Partially offsetting the improvement in our auto combined ratio was a deterioration in our homeowners and California commercial property combined ratio.
Our homeowners combined ratio was 98.9% in the second quarter of 2017 compared to 91.4% in the second quarter of 2016.
In our California commercial property line of business, several large losses negatively impacted the results in that line.
We posted a combined ratio of 129.9% in the quarter compared to 84.9% in the second quarter of 2016.
Historically, our California commercial property line has produced favorable underwriting results.
The expense ratio was 24% in the second quarter compared to 25.4% in the second quarter of 2016.
The lower expense ratio was primarily due to a decrease in acquisition costs, a lower advertising spend and cost efficiency savings.
To help offset increasing loss trends, we have been increasing rates in most states.
In California, we implemented a 6.9% personal auto rate increase in California Automobile Insurance Company effective in May, and a 6.9% rate increase in our homeowners line is going into effect in August.
In addition, a 5% rate increase is pending approval with the Department of Insurance for Mercury Insurance Company.
Personal auto premiums in Mercury Insurance Company represents about half of our company-wide premiums earned and California Automobile Insurance Company represents about 14% of our company-wide premiums earned.
California homeowners premiums represent about 11% of our company-wide premiums earned.
Premiums written grew 2% in the quarter, primarily due to higher average premiums per policy.
Company-wide, private passenger auto new business applications submitted to the company decreased approximately 9% in the quarter as we continue to focus on improving profitability in our private passenger auto line.
The 9% decline in new business application is an improvement over the 16% decline we experienced in the first quarter of 2017.
Company-wide, homeowners applications were relatively flat in the quarter.
With that brief background, we will now take questions.
Well, it's primarily a result of lower application.
It has an impact on our new business applications and it also has an impact on retention as well.
I will say that most of that is coming from outside of California.
I think, in the quarter, our California new business applications for private passenger auto were relatively flat but they were down quite a bit, over 30%, I believe, outside of California.
So when you combine it, the apps were down about 9% or so, but it's really just a function of less new business applications and renewal applications being written in total.
I think that the new business apps are going to continue to have an impact on the renewal business, for instance, in the next few quarters.
So I think, we mentioned at the end of last year that we were expecting relatively minor growth in 2017.
As far as 2018, we don't have any guidance for you on that yet.
Greg, it's Teddy here.
So the expense ratio was less favorable impact that Gabe mentioned earlier.
Q1 and Q3 are typically our higher advertising spend, and Q2 and Q4 are lower quarters for advertising spend.
So that lower advertising spend in Q2 definitely helped the expense ratio.
And then, we had slightly lower acquisition costs and some operating efficiencies that are also reflected in the 24%.
We do expect that third quarter expense ratio will take back up to be closer to the 25% range that it's been earlier.
It's down maybe a few million dollars year-over-year.
Well, the auto reserve liability has stabilized.
There's minimal development.
And if you remember, the numbers last year were quite large, I think, $80 million or something like that for the whole year.
There's quite of a bit of that, that happened in the first half of the year.
This year, it's pretty much isolated to some very large losses in our commercial property lines.
The development factors are much more stable when we take a look at historical factors.
Last year, they have jumped up quite a bit.
But now over the last several quarter, we've seen those development factors in our triangles to be much more stable.
Our target historically has been a 95% combined ratio.
That's everything.
Well, the commissions are adjusted periodically, and <UNK>, we've had a gradual downward trend in our average commission rates probably for the last several years.
And so that continues to get reflected in the results.
The second part of your question was around the ad spend.
Could you clarify the second part of your question.
Yes, let me see it.
While he's looking for that information, <UNK>, I will note that our commissions have been coming down over the last several years.
But in California, our average commission rate, ballpark, is around 16%, which is still above probably several points above industry average.
Outside of California, I would say it's closer to 13%, which is still a very competitive commission rate.
So although the commission rate has been helping us, it's been trending downward.
And California has been trending downward as a result of the fact that the profitability hasn't been there as well.
So our base rate commission has been trending downward.
It's still several points, as I mentioned earlier, above the competition.
And again, outside of California, we're at about 13%, and that's pretty close to where the competition is at.
And on the ad expense, the second quarter is more than a full point lower than the first quarter was on the expense ratio.
It is something that we have looked at and, in fact, have tested.
I've actually tested myself, I put the app on my phone and they say I'm not as good as a driver as I think I am.
But anyway, <UNK>, do you want to mention some of the stuff we're doing there.
Yes, we've certainly been monitoring the space.
We're looking at doing a test in commercial auto using a smartphone app for used space insurance.
On personal line side, it's an intriguing development, it helps lower the cost of UBI program relative to the older approach using a dongle and the on-board diagnostic port.
We still have some concerns in the independent agent channel, how this can be sold without just sort of cannibalizing business we would have otherwise sold at a higher rate.
And that's like we're intrigued by the technology and we're doing some testing in commercial auto.
But on personal lines, we're just continuing to monitor at this point.
And I will say, Greg, in our biggest market in California, you're not allowed to use these devices for how you drive.
The only way you can use these devices is for your annual miles, then you drive, and there are another means to get the annual mileage.
So in California, which is our biggest market.
.
We do have a program to verify mileage in California.
Yes, we have a verified mileage program in California.
So this would be really, right now, I think, something that we would do outside of California.
Thank you, Greg.
<UNK>, we don't forecast or we don't give any guidance, but that is definitely our goal.
Our goal is to hit a 95% combined ratio, although we don't provide guidance as to when we're going to think ---+ when we think we're going to hit that, but that is our goal.
Yes, that's ---+ we ---+ a lot of it depends on loss trends and what happens with loss trends, and we're trying to stay above ---+ on track with the loss trends, Wes.
But ---+ which is why we keep making lines for trend, right, to keep it with trend.
And if we're successful there and we keep ---+ there's a lot of things going on in the company right now, I will say this, Wes, to try and improve every aspect of the business, whether it's on the expense side or on the indemnity side, on the claims, underwriting, market segmentation, agent relationships.
Every facet of the business right now is focused on trying to improve the profitability of this company.
That is correct.
That's our objective.
Yes.
Okay.
Thank you for joining us this quarter.
We look forward to talking again next quarter.
Thank you very much, everyone.
| 2017_MCY |
2016 | AEO | AEO
#So the easy part's the comp.
The comp for the merchandise sold at an American Eagle store is in the American Eagle comp.
We're definitely growing the side-by-sides.
We'll have 90 by the end of 2017 which is a nice growth.
We love that operating model; it's great for the Aerie business.
And I always say it opens up new doors and new customers for us.
The AE girl naturally moves over to Aerie and learns about our business and loves what she's seeing.
So side-by-side is definitely part of our strategy.
Thinking about the standalone business, we're going to be highly strategic on where we open up new stores.
We have a game plan in place.
We have density models that we're looking at to make sure that we don't overdo it.
But we have very pointed strategies on the stores that we're going to open.
What we see is there's a nice leverage on the direct business where we have locations.
So as a reminder, we're only in 11 states right now.
We're only in 11 states, so we have lots of expansion opportunity.
But the growth in direct, which has been dynamic, we've had a huge direct growth, and it's been explosive, as I mentioned.
We see 60% of the growth in direct coming from those 11 states.
So that's what I really think the opportunity is for Aerie.
Hi.
In terms of promotions, we continue to be strategic in trying to contain the promotions.
The landscape, however, continues to be incredibly promotional.
And so we feel like we need to compete on the lease line with something to engage the customer.
We are finding that the promotions we're running ---+ clearly as you see in the results ---+ the promotions we're running are contained, but have also been effective at helping to drive the metrics that we need to drive.
In terms of the financial aspect of the inventory composition, we are cleaner than last year.
And, again, the markdowns were in line with last year from a profit standpoint.
Let me spend a few minutes on that.
In terms of gross margin in comparison to historical, we're getting right up there with historical levels, historical highs.
And in terms of is it applicable, I think what's happening is we've got a refined DNA and going back to and executing better to our traditional roots.
So we certainly have more opportunity in gross margin.
And for Aerie, Aerie is about on par with American Eagle.
As their productivity continues to increase and with their growth and our ability to deploy some more effective sourcing opportunities within their product line, we should see continued expansion in their gross margin.
And over the long term, we'd hope them to be accretive to the total.
Good morning.
I would say first, I'll just start with the second question in terms of denim.
It's really definitely talking a lot about denim.
I think it's important to recognize that it's our entire bottoms business that is really strong.
So we've leveraged our strength and our customer's loyalty in jeans and taking that across shorts and pants and see really strong business across that whole section of the business.
In terms of new fashion trends, the business is constantly evolving.
I think we find the most important thing for us is to provide the best outfitting and trend-right product for the customer.
We're seeing strength both in more oversized stops, as well as more shrunken tops.
I think we're seeing potentially some shift there, not as dramatic I think, as some other people have talked to.
But with the way we run the business and the way we're constantly testing for what's the future as well as our Don't Ask Why capsule which gives us a glimpse into where our customer's headed, I think we'll be prepared as we start to see changes there.
Whether it means meaningful impact to the business, I think that's ---+ it's always great when things start to shift.
Whenever she feels like she needs to update her closet, it's always an opportunity.
It just means that we need to be positioned ---+ we need to time it right with the customer and have the right inventory behind it and that's what we work on season after season.
I'll let <UNK> talk to some of the technologies around it, but I think for us, I think it's not just a matter of does it continue for a few quarters or a year or whatever it is.
This is the way the customer behaves; this is the way the customer is shopping going forward.
And as a customer-focused Company we want to make sure we're always leading there and making it as easy as possible for her to participate in the brand.
We've talked about our profitable store fleet, as well as the flexibility we have in that store fleet.
But the stores, as <UNK> mentioned, and for the AE brand as well, the stores are a terrific opportunity for us to take advantage of omni-channel technologies and omni-channel experience.
The customer can participate with the brand in a physical way that is not possible with single-channel brands.
So we really believe that the future is mobile.
The future is digital; the future is stores.
And we're going to be prepared and do everything we can to be at the forefront of that to make the customer's experience as easy as possible.
In terms of Aerie productivity, side-by-side stores are our most productive in terms of operating profit.
There's not a significant difference in terms of operating profit across the stores in terms of how we run them.
It really comes down to square footage and how we staff those stores and the rent tied to them.
I'll let <UNK> talk about the merchandising differences.
Yes, the side-by-sides are smaller.
So what we do when we position the merchandise strategy by format, is we make sure that the customer has the same experience in all formats.
So we go after the key items of the season and we make sure those are represented in every format.
Albeit it's a smaller format, she still gets the same experience.
And just to circle off on your question around advertising.
We do expect advertising to be up.
However, a reminder, we do expect to be able to leverage our expense base.
And advertising investments have really been two-fold here for the back half.
Continued investment in our digital marketing, which has driven large traffic increases to our websites.
By the way, about 100% of our customers shop on their mobile devices before they shop the store.
Unquantifiable, but we do believe that we're driving customers into the store with that marketing as well.
And then the marketing campaign that we've talked about.
But again, expense leverage expected.
Michelle, we have time for one more question.
Okay, sure.
Happy to.
Not going to get into the specifics of revenue by channel but in terms of profitability, Mexico, nicely profitable.
Asia, improved profitability over last year, in line with our expectations and targets for their growth.
And UK, small business, three stores, not yet profitable, wait and see approach there.
Franchise is wonderfully profitable and will continue to grow.
Okay, that concludes our call today ---+ are you done, <UNK>nifer.
Is that it.
All right.
Okay.
That concludes our call.
Thanks for joining us, everybody.
Have a great day.
And appreciate your interest in American Eagle Outfitters.
Thank you.
Bye-bye.
| 2016_AEO |
2017 | RTN | RTN
#I have a few opening remarks, starting with the first quarter highlights
And then we'll move on to questions
During my remarks, I'll be referring to the web slides that we issued earlier this morning
If everyone would turn to page 3. We are pleased with the solid performance the team delivered in the first quarter with bookings, sales and EPS better than our expectations
After this good start, we're raising our full year outlook for all three of these measures, which I'll discuss further in just a few minutes
We had solid bookings in the first quarter of $5.7 billion and sales in the quarter were $6 billion, up 3.4%, led by our IDS and SAS businesses
Our EPS from continuing operations was $1.73 which I'll give a little more color on in just a moment
During the quarter, the company repurchased 2.7 million shares of common stock for $400 million
And as a reminder, effective January 1, 2017, we adopted the new revenue recognition standard
The 2016 results have been recast to reflect this change
Turning now to page 4. Let me start by providing some detail on our first quarter results
Company bookings for the first quarter were $5.7 billion, which were ahead of our expectations and down slightly from the same period last year
And on a trailing four quarter basis, our total book-to-bill ratio is 1.12. International awards represented 33% of the total bookings, an increase of approximately 14% over last year's first quarter
A couple of key bookings in the first quarter included the $1 billion award for the upgraded early warning radar for Qatar at IDS, $256 million for active electronically scanned array radars at SAS, and at missiles over $200 million on AIM-9X Sidewinder short-range air-to-air missiles
Backlog at the end of the first quarter was $36.1 billion, an increase of approximately $1.9 billion or 5.5% compared to the first quarter 2016. It's worth noting that approximately 41% of our backlog is comprised of international programs
We now move to page 5. As I just mentioned, for the first quarter 2017, sales were higher than the guidance we set in January
Sales were particularly strong at both IDS and at SAS
We expect sales for the company to increase throughout the year with a strong second half driven by our bookings over the past several quarters
Looking now at sales by business
IDS had first quarter net sales of $1.4 billion
The increase from Q1 2016 was primarily driven by higher sales on an international early warning radar program
We expect IDS sales to increase through the year as some of our larger international programs continue to ramp up
In the first quarter, IIS had net sales of $1.5 billion
Compared with the same quarter last year the change, as expected, was primarily due to lower net sales on an international classified program which substantially completed in 2016. Missile Systems had net sales of $1.8 billion, up slightly compared with the same period last year
SAS had net sales of $1.6 billion
Higher sales on electronic warfare systems program contributed to the 8% increase versus last year
And for Forcepoint, sales were up about 4% in the quarter
Moving ahead to page 6, let me spend a few minutes talking about our margins
We delivered strong margin performance in the quarter
Our operating margin was 12.4% for the total company, up 180 basis points, and 11.8% on a business segment basis, an increase of 160 basis points
Margin improvement in the first quarter of 2017 was driven by favorable program mix with some of our largest international awards progressing through their lifecycle
And, as a reminder, in the first quarter of 2016, at IDS, we had a $36 million unfavorable program adjustment that impacted their margins
At Forcepoint, as expected, the first quarter 2017 operating margin was down for the quarter
This is due to the internal investment to support Forcepoint's long-term growth that we discussed on the earnings call in January
We remain focused on margin improvement going forward and see our business segment margins in the 12.4% to 12.6% range for the full year, consistent with the guidance we laid out in January
We also see our margin improving as we move throughout the year
Turning now to page 7. First quarter 2017 EPS of $1.73 was up 21% from last year's first quarter and was better than expected
This year-over-year increase was largely driven by higher volume and margin expansion
On page 8, as I mentioned earlier, we are updating the company's financial outlook for 2017 to reflect our improved performance to-date
We're increasing our full year 2017 net sales range by $100 million, which favorably impact EPS by about $0.04. This increase is driven by higher expected sales at our Missile Systems business
We now expect net sales to be in the range of between $24.9 billion and $25.4 billion
For the year, we expect sales to be up 3% to 5% from 2016. Earlier this month, we gave notice to redeem $591 million in notes that were due in March and December of 2018. As a result, in the second quarter of 2017, we expect to record a non-operating charge associated with the make-whole provision related to the early retirement of debt
This charge of approximately $40 million pre-tax or $26 million after-tax based upon current market conditions impacts EPS by $0.09 and has been included in our updated EPS guidance
We're also reducing the range of our interest expense to be between $196 million and $201 million to reflect this early retirement of debt
This is expected to reduce our interest expense primarily in both the third and fourth quarters worth about $0.04 to EPS compared to our prior guidance
We have slightly lowered our effective tax rate to reflect the improved benefit associated with stock-based compensation and various other items, which in total is worth about $0.06 for the full year
We now expect our full year effective tax rate to be approximately 31%
Looking at our EPS guidance, we exceeded the high-end of our guidance in the first quarter by $0.18. For the year, due to the strong first quarter operating performance, we are raising guidance by $0.05 after absorbing a net $0.05 financing charge that was not in our prior guidance
The remaining $0.08 is due to timing within the year
And as a result, we now expect our full year EPS to be in a range of between $7.25 and $7.40. As I discussed earlier, we repurchased 2.7 million shares of common stock for $400 million in the quarter and continue to see our diluted share count in the range of between 291 million and 293 million shares for 2017, a 2% reduction at the midpoint of the range
Operating cash flow in the first quarter was essentially in line with our prior expectations and was slightly impacted by the higher sales we saw in the first quarter
We continue to see our full year 2017 operating cash flow outlook between $2.8 billion and $3.1 billion
And, as you can see on page 9, we've included guidance by business, which reflects the higher net sales at Missile Systems that I mentioned earlier
Before moving on to page 10, as <UNK> mentioned earlier, we're now raising our full year 2017 bookings outlook to be between $25.5 billion and $26.5 billion
This $500 million increase is driven by demand from a broad base of domestic and international customers
On page 10, we provided you with our outlook for the second quarter of 2017. As we mentioned on our last call, we still expect the cadence for the balance of 2017 to play out similar to 2016 with sales, EPS and operating cash flow ramping up in the second half of the year
I want to point out that we expect second quarter sales to be in a range of $6.05 billion to $6.2 billion and EPS from continuing operations is expected to be in a range of $1.67 to $1.71. It's important to note that we expect the tax rate to be approximately 29.5% in the quarter, lower than the full year, primarily due to the timing of the benefit associated with stock-based compensation
Again, I want to reiterate that our second quarter EPS outlook includes an estimated unfavorable $40 million pre-tax or $0.09 EPS impact to non-operating income associated with the early retirement of debt
This charge will be recorded in other income and expense
Before concluding, I'd like to spend a minute on our balanced capital deployment strategy
As we said on the call in January, we expect the full year 2017 share buyback to approximate 2016's levels
And as mentioned earlier, we recently raised the dividend by 8.9%
We continue to expect to generate strong free cash flow for the year and target returning approximately 80% of free cash flow to shareholders, while maintaining a strong balance sheet
In summary, we saw a good performance in the first quarter
Our bookings were strong, sales and EPS from continuing operations were higher than the guidance we set in January and our operating cash flow remains on track for the year
With that, <UNK> and I will now open the call up for questions
Question-and-Answer Session
And <UNK> or <UNK>, I'd just add the following from a big Patriot point of view with IDS
A lot of talk about their margins over the last couple years
I think as we closed out the back half of 2016, we saw the margins improving there as we had indicated they would
They are off to a solid start this year with regard to their Q1 margin
The rate they achieved in the quarter is just below the guidance for the year and they had strong sales
The margin – they did exceed in Q1, exceeded our expectations, primarily due to the earlier timing on some program improvements partly related to the mix
And when we look at the full year, at IDS, we expect to see margins improve a bit more because of the mix that you referred to and increased productivity
Recall as well that, in 2016, IDS did have the exit from the business venture
So when you look at IDS, excluding the impact, we would expect to see about 100 basis points of margin expansion that's reflected in our guidance for the year compared to last year normalized for the business exit
And we're pleased with the track that the business is on
Hi, Rob
And I think, Rob, just to kind of maybe complete and pile on a little bit what <UNK> said
From a margin perspective, the quarter was a little ahead of our expectations
It was at the high-end of our guidance for the year
One thing I would say the Q2 margin we do expect it to be down slightly from Q1, probably in the mid-single-digits, driven by a combination of some seasonality as well as, as I referred to in my opening comments, the timing of the investment that we see at the business there
So, I think that kind of sums up Forcepoint
Last year, <UNK>, our Navy business in total was about 18% of our total revenue
Yeah
So, I mean, it just effectively mapped, right, the relationship of their bookings in the quarter to the sales that they generated, nothing out of line there
At a total company level, as we indicated, the bookings in the quarter exceeded our expectations
But if you peel that back, Missiles' bookings were roughly that order of magnitude below their sales in the quarter
But for the total year, we expect them to be on track and have a slight increase on a year-over-year basis with their backlog
And just as a remainder, they've had some strong bookings over the last couple of years
Their book-to-bill, I think, last year was about 1.13, so nothing out of the norm there
Just the burn-off of revenue and lower than what they had been experienced – level of bookings, but nothing to be concerned about
Yeah
So, let me hit that a couple ways
I think given everything that you just laid out, what I think is important we're going forward with the early retirement of debt under our balanced capital deployment
And that still assumes, which has been our stated objective now for a couple of years of returning about 80% of free cash flow to shareholders
And I think in my opening comments I reaffirmed that
We did buy back the $400 million of stock in the first quarter
We're on track to reduce the shares outstanding by about 2% at the midpoint of our range
And as <UNK> mentioned in his comments, for the 13th year in a row, we raised our dividend this year by 8.9%
As it relates to the retirement of debt, the debt that we're retiring is out there at about 6.5%
We're going to finance that, if you will, with a combination of cash on hand and commercial paper and rates on CP around 1%
And we're doing this because this approach allows us to do a couple things, lower interest expense, clearly maintain our financial flexibility, especially ahead of potential tax reform and what that could mean for us
I think, overall, more importantly, it doesn't change our philosophy around our balanced capital deployment, including the 80% of free cash going back to shareholders
And it also does not reflect the change in the view of how we view our balance sheet, which, as I mentioned earlier, remains very strong and gives us flexibility
Good morning
Yeah
I can give you that, <UNK>
Funded backlog at the end of Q1 was $24.6 billion
That's about 68% of our total backlog
And that's in the range that we typically see it out
It typically runs 60% to 70% of total
The reason we didn't put it in, as I mentioned earlier, we did adopt a new revenue recognition standard in Q1. And we've adjusted our reporting, including around backlog, to align with the new standard
But we're still tracking it and we'll provide it, if folks are interested
Yeah
Let me kind of hit that from two or three different angles here to make sure I give it the right context
So, obviously with the guidance we'd given in January of zero to $100 million, we were expecting our overall operating cash flow to be relatively low – lower than last year
And that was all driven by the cadence around the working capital
For one thing, recall, we really exceeded our cash flow expectations for 2016 by about $300 million, which otherwise, from a timing point of view, all tied to collections, would have been beneficial to Q1. And we'll always take the cash earlier, right? So we saw what was lining up here for the quarter
It really is all due to the timing of collections that are tied to the timing of pre-determined or negotiated contract milestones with each of our particular contracts
And also, we're continuing to grow and we're ramping up to support some of that growth
If you want to think of it from a total year point of view, I'd expect that to continue to build over the next couple quarters into Q2 and Q3 and then we would come back down in the fourth quarter
And, again, to try to help you size that a little bit, we will come back down, it will below the levels we're at for – somewhere between the levels we're at at Q1 and where we were at the end of 2016. And, again, really tied primarily to the timing of payments related to executing contract milestones
From a – translate that to cash flow, I'll just throw in there, for Q2, we expect cash flow – strong cash flow, operating cash flow above $700 million
And as we said earlier, we feel confident in the total year outlook of the $2.8 billion to $3.1 billion
No
We've seen pretty consistent terms here for the last year or two and from a terms' point of view not seen anything different
Rob, obviously, I'll take the first one
As I just said, we're confident in our outlook for the cash flow for the year
We do expect to see about $700 million in Q2 with the rest of the year playing out or following a cadence that is roughly in line with prior years but with the majority of the cash flow weighted in the second half and even then more into Q4 driven by the program milestones and deliveries that I just referred to
Good morning
Good morning, <UNK>
So again the profile – as I just described a little bit a while ago, not anything really new than what we were counting on
By year-end, as I said, the absolute balances from where they are here in Q1, they will be lower, okay
But part of it is – a little bit of it is the growth aspect of it and the growth profile
And we're going to continue to work to drive down working capital
There is always kind of the things that fall December versus January
So there are some opportunities that we're working on that we're looking at that could potentially get accelerated into 2017 and provide a better outlook, similar to what happened at the end of 2016.
I think when you go – if you go back to the outlook for January – and I know we gave a range right for just using cash as a surrogate for the working capital to $2.8 billion to $3.1 billion
What we were saying is that when you normalize for the discretionary contribution that we made last year, free cash last year would have been – I'm sorry, operating cash last year would have been $3.4 billion
The decrease this year was driven by the net pension effect of higher required contributions
And we said that we thought working capital could be flattish to maybe nominally favorable
And we still could end up in that range there, but because of the growth that is maybe a little bit more pressure
But you're thinking of it relatively correctly
| 2017_RTN |
2016 | BJRI | BJRI
#I will start.
I'd just start off by saying our trends were consistent with what you've seen in terms of timing from an industry perspective from NavTrak or Black Box from that perspective.
And I'd say because of our focus on lunch and value, lunch was a bit stronger from a year-over-year perspective as we weren't promoting broader or much on the dinner front.
But in terms of weekends or weekdays or other than things that are explained promotionally or from a menu perspective, there weren't big shifts.
The only other thing that we don't have an exact explanation for, but it just did seem like spring break timing was not as beneficial in those traditional high-value ---+ spring break is helpful for everyone, but we tend to see nice bumps during those weeks.
And when the laps we're going against us, this seemed to hurt a little bit more than when they were back and helping us.
Overall, it's just our perspective that we just didn't see the benefit from the Easter and spring break season that we have had before.
Some of that's probably weather.
But in general, just the calendar just didn't seem to benefit as much seasonally as it has in the past is the only other color I could give.
I would say and jumping on to Greg's comments there, our weekdays are starting to weaken, but that's as expected because we were promoting lunch.
Most of our lunch offers were through the weekdays, so we saw that stronger.
I still believe, <UNK>, what you tend to see in casual dining is when there is a reason to celebrate, events, casual dining tends to be stronger.
I think and that's because the way the competition might be with fast casual as well.
So you start off January pretty strong because people are still in celebratory modes, some of the people still have vacations those first couple weeks, and then as you start to get back into the rest of the normalcy of your patterns it seems to have gotten softer.
I think we tend to see that through our business.
When there's reasons to celebrate, whether it's Valentine's Day even days off of school whether it might be a Memorial Day, a Veterans Day, et cetera, those tend to be very big days for us.
That's what we've seen frankly over the last two years or so.
We're looking forward to Mother's Day and Father's Day and graduation season just around the corner.
<UNK>, we're not going to make any longer-term forecasts, it's obviously somewhat dependent ---+ that's why we're working as hard as we are on the cost structure side.
It is our point of view is the more progress we can make on that front, then we can take less price and even widen our value benefit and gap here.
So that is our strategy around it.
How that works out is going to be somewhat dependent on how successful we are on that front, and whether what's happening competitively et cetera.
But all the data that we are looking at is ---+ if you balance it regionally like when it's a little deceiving, not deceiving or you just have to keep in mind that when we say mid-2%s, we have a disproportionate amount of California pricing in that number.
More so than other concepts that aren't as California focused.
So when we look at it regionally, we think we're doing a good job of sticking to that strategy where both our nominal pricing is in line but are effective pricing after our promotional spend is, if anything, widening the gap from a value perspective competitively.
I don't think it's that impactful.
We pick up the Sunday, but as a result of the rest of the week's a little bit softer because that would have been a spring break week in that first quarter.
So you get a Sunday, but then you lose it during the middle of the week on the Monday, Tuesday, Wednesdays when everybody would've on a spring percent.
So I think net-net, it's actually immaterial to where we are right now.
Well, I'll try and take most of that question, I don't know if somebody wants add on at the end here.
But we internally still believe that Texas is going to continue to be softer.
If you've got a new restaurant still coming online from a competitive intrusion standpoint, as well as frankly construction in a lot of our or a few of our big restaurant areas is really impeding a acceleration of comp sales there.
So when I think about building models for BJ's and where comps are going to be this year, I take that into consideration even though we're seeing a little bit more pricing outside of California.
And we're seeing stronger sales maybe in other markets, with Texas taking us down from that standpoint.
I do think, as Greg <UNK> mentioned, part of our plan will be that the a little bit more incentive based some of those Texas markets.
Because we do know, as Kevin also mentioned, that our guests, certain guests in those markets they are looking for deals.
That's a market with a lot of restaurants out there, and sometimes they're making a decision based on what they would be the best value of that day and that best value tends to be a deal in front of them versus maybe everyday low pricing.
It's really a combination of those two things,
There's no question that the energy may not directly impact family income, but it's a darker cloud in Texas than it's going to be elsewhere.
So I do think for that reason people are a little more or less confident about their future than elsewhere, and that's clearly impacting it.
But look, the other thing I would add is, we're looking at this as an opportunity to make our concept even better.
There's nothing we can do about oil prices, and frankly the number restaurants that are being built out there.
And our attitude about it is, we run great restaurants, we run still, if not among the busiest restaurants in the state of Texas and we love Texas and we make a lot of money in Texas.
So it's how do we leverage that position and the volume we're already doing to offset these negative trends maybe a little differently.
And it's a challenge that maybe we get better as a concept that we can take to other geographies as part of figuring out this challenge of how we get better as a concept in doing this.
We all wish it were all smooth sailing and that's why we build restaurants all over the country is you are going have these ups and downs and counterbalances.
We look at it as a challenge to get better, but at the end of the day, to Greg's point, the reality of the math is Texas is going to in all likelihood continue to be growing at a lower rate and being a drag on comps for this year.
But it's our goal to make that as little a drag as possible.
Thank you.
Thank you.
Thanks, everyone.
Thanks.
| 2016_BJRI |
2015 | IDXX | IDXX
#Yes, thank you.
It's actually, first of all, we do have several new product launches that we've talked about in the last few weeks, all which will benefit the second half.
As we've mentioned, the T4 slide to our Dx install base, the SNAP Lepto, and the full launch of SDMA in our reference labs.
In addition, we have some favorable compares in the second half with regard to some Q4 marketing programs that we had in the US in 2014 that's associated with our go-direct and a little bit more favorable compare in our livestock and poultry business.
Yes.
So our rapid assay modality overall tracked our expectations, obviously, of 4Dx, which is by far the largest product in that category.
It has to be a contributing factor there.
Our volume, actually, in the first half of the year on 4Dx has grown.
Sometimes customers use the 4Dx in the lab, and sometimes they use it in clinics.
Sometimes they switch.
And so when we look at the volumes across the two modalities, we've seen growth.
And I think we've made a lot of progress in understanding the relative performance of our assays in the critical dimension of sensitivity which, of course, is the dimension.
That's the reason why customers purchase these rapid-assay tests is to determine whether a patient has contracted the infectious disease.
We've seen some customers in some regions, such as those that are more Ehrlichia endemic, temporarily switch to a competitive offering for Ehrlichia.
But when they are informed of the difference, of the pretty dramatic difference in sensitivity, we get them back.
And so that's a constant process.
There are a lot of customers out there that we've got to talk to, and we've got new assets that are available to us as a result of the work we've done over the last quarter that is now in the hands of our sales organization.
It's always been a competitive market, and we sell on, really, what is a lower-cost system solution when you take all factors into consideration.
Our sales force, which was greatly expanded before the beginning of the year, is getting better and better at not only the customer relationships but being able to have that conversation.
We are pleased with the premium instrument placement growth we saw in the US in the second quarter over the first quarter.
Of course, that doesn't even speak to the extraordinary performance we had on a global basis on instrument placements.
And there's really, there's no difference in the economics of our programs, as was asked in a previous question.
And we've got the most complete product line when you look at our full instrument product line and, of course, our reference labs, and when we can do multi-modal profiles we talked about on an in-house chemistry with a send-out SDMA result.
And the T4 is a wonderful addition, not only to, of course, we've had it on this Catalyst One for the Dx, which builds for the differentiated value.
We believe we continue to be unique in the ability to do two-way integration with the vast majority of practice management software that is in practice because it was built into that practice management software over many years.
And the performance of our analyzers is uniquely designed for real-time care, with quick turnaround time and minimum tech involvement.
And so that, with continued advancements in VetConnect Plus, for example, where we had, I think, 100% growth in utilization, VetConnect Plus, year over year, in the US market.
Really, that combined and a maturing commercial capability with an unprecedented product line, really, we feel quite comfortable in this competitive environment.
I'd also just build on <UNK>'s comments just to highlight that, of course, we noted that we had a very strong premium instrument placement quarter in the US with the high-water mark for the percentage going into competitive and greenfield accounts.
And of note, we are expanding, and noted in our comments that we're expanding our instrument base in chemistry and hematology in the US.
Each quarter.
So it is expanding.
And that's net of customers who stopped using us.
So it's a net expansion.
It's just the methodology we use for where we record it in segment reporting.
For simplicity for internal management, we use a standard cost for the business areas in terms of how they record their profit performance.
And if there's variances to performance and they get capitalized into inventory before they get recognized through the P&L, we capture that in the unallocated portion, just as a way to limit some of the noise on the internal management of the business.
Yes, our internal management responsibility accounting is based on standard costs, as you would expect.
And then our global worldwide operations folks are the ones who are doing quite a good job beating those standard costs.
And so the numbers were beneficial, and that's what you see flowing through.
And they're somewhat larger than they had been in the past, but it's reflective of good underlying business performance and strong volumes.
And so that it's a real benefit, and that is supporting improved CAG recurring diagnostic gross margins.
Yes.
We're obviously trying to give you an overall calibration, so the net benefit is about 3% on growth versus the original 3.5% overall.
When you get down to the modality level, we really have this fully integrated in our business now.
So trying to parse the discrete impacts of adjustments we might be making across modalities related to the change ---+ it's not how we're measuring the business.
We're obviously measuring ourselves on our current revenues.
And it is becoming just harder to estimate that with precision.
So we've given directional indications in the past on the benefit by modality, and it was directionally consistent.
And obviously, we've updated the overall number.
But we're trying to move to a zone where we're talking about the revenues that we're measuring ourselves on and the revenues that drive our profitability performance.
And that's why we're moving away from this with-and-without calculation.
Yes, that is correct.
It's predominantly volume led.
Yes, I think that's directionally direct and also consistent with our calibration of the business last quarter and the expectations that we've set.
So I think it's entirely in line with expectations.
What we are pleased about is the new assets and appreciation we have for the differences in our products in the critical area of test sensitivity.
And we now have those recently ---+ obviously, this is all very recent ---+ we have those resources in the field to be able to have those conversations.
So that's, I think, a positive development from a marketing perspective.
But with regard to volumes, the volumes were consistent with the expectations that we had set in our April call.
It is 1% to 2% improvement in the normalized organic growth rate.
Keep in mind we'll have a favorable normalization benefit related to prior-year distributor inventory changes that factors into that.
But it is an improvement, and we do expect improvement in the fourth quarter as well, building momentum as we're rolling out the new product introductions.
And that's built into the full-year growth outlook.
You did.
<UNK>, thank you for the question.
Really, as a result of years of work, including with the key opinion leaders and six months of preparing the market since we announced SDMA would be part of the core chemistry panel, we concluded a flawless launch earlier this month.
And, of course, it's all in Q3; it's not reflected in our Q2 numbers.
And really, the excitement and the adoption rate is just quite gratifying.
SDMA will drive our growth on a number of dimensions ---+ higher loyalty with our current reference lab customers; greater utilization in preventive care; the ability to have greater price realization when we're faced with a loyal customer who's faced with a competitive offer that does not include SDMA; of course, winning new accounts who want to, instead of just sending us their ---+ splitting their samples and sending their core to someone else and their SDMA to us and increasing their costs significantly as a result, just sending the entire chemistry panel to us.
We have customers who routinely split their business between us and someone else who will, as they understand ---+ quickly ---+ and adopt SDMA, will be predisposed to sending their chemistry panels to us if they haven't before.
And then finally, incremental revenue from the $19.95 SDMA-only results.
To your question about dimensionalizing that, we look forward to doing that next week at our analyst meeting.
That is our intent, and I think we'll be able to fully satisfy your question in that regard at that time.
Thank you, Allison.
I want to thank everybody who's been on the call.
I know we also have a number IDEXXers who are on the call or who will subsequently listen, and I just want to congratulate our organization here for some extraordinary accomplishments in Q2.
It really was an extraordinary quarter for the instrument business on a global basis.
Sometimes we have to remind ourselves and everybody else that we are a global organization, and Catalyst One is really just a blockbuster instrument.
The flawless SDMA launch, which we had in Q3, a wave of innovations that we're bringing to the market beyond those two products in terms of T4 on a slide, SDMA.
We just introduced images for histo and cyto pathologies that are available on VetConnect Plus, which is a wonderful advancement in the VetConnect Plus form of receiving results and unique to IDEXX.
And I think we've seen great success in getting a better appreciation for the differentiation of our infectious disease assays, and an organization globally that is really quite engaged.
So my gratitude to everyone at IDEXX who helps deliver these results, and we look forward to the Analyst Day next week.
We will be broadcasting that in our Reg FB form for all investors to hear and look forward to detailing the long-term organic growth, double digit, that we think will come out of our innovations and our comments on margin expansion over the long term, and then going into some detail in some of our strategies.
So with that, we will conclude the call.
| 2015_IDXX |
2017 | STC | STC
#Good day, and welcome to the Stewart Information Services Second Quarter 2017 Earnings Conference Call and Webcast.
Today's call is being recorded.
(Operator Instructions) I would like now to turn the call over to <UNK> <UNK>, Director of Investor Relations.
Please go ahead.
Good morning.
Thanks, Erika.
Thank you for joining us for our second quarter 2017 earnings conference call.
We will be discussing results that were released earlier this morning.
Joining me today are CEO, Matt <UNK>; and CFO, <UNK> <UNK>.
To listen online, please go to the stewart.com website to access the link for this conference call.
I will remind participants that this conference call will contain forward-looking statements and involve a number of risks and uncertainties.
Because such statements are based on an expectation of future financial operating results and are not statements of fact, actual results may differ materially from those projected.
The risks and uncertainties with forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release published this morning and in the statement regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC.
Let me now turn the call over to Matt.
Thank you, <UNK>, and again, we appreciate everyone joining us today.
This morning, as you saw in the press release, we reported pretax income of $33 million for the second quarter 2017 compared to $42 million from the second quarter of 2016.
Stewart generated net income of $19 million compared to net income of $24 million for the prior year quarter.
As mentioned in the earnings release, we are very pleased to announce that on June 2, Stewart acquired the retail branch division of Title365, which operates primarily in Southern California.
We are excited to have these associates join the Stewart family as this acquisition affirms our commitment to targeted growth and scale efficiencies in our direct operations, particularly, in the Western U.S. Our retail team gains experienced leadership and market penetration in several high-growth target markets, while the Title365 associates benefit from our global reach, financial strength and extensive resources.
Second quarter 2017 operating revenues decreased 1% to $481 million from $484 million in the second quarter of 2016, while gross title revenues increased 1% from last year.
We are pleased to see our commercial and international operations posting revenue growth of 14% and 7%, respectively.
These increases were contracted by expected declines in refinancing transactions and ancillary services revenues as well as certain employee losses in our direct business, which I'll discuss further in a moment.
Total employee and other operating cost decreased by $11 million or 5%, validating the continued diligence to manage our cost as well as the benefit from our actions in 2016 to focus on core title operations.
On our first quarter earnings call on April 20, we noted that we have seen some management and staff departures in our retail operations.
We did see those departures continuing during May and June.
As you know, we have focused relentlessly on margin improvement and financial discipline for many quarters now.
The pace and scope of these initiatives intensified in early 2017, which, coupled with assertive timelines, culminated in these departures, most of whom chose to work for smaller underwriters and independent agencies.
The markets most impacted were Texas, Arizona and the Pacific Northwest.
We have, and do expect, our requisite recruiting and hiring of strong industry players to rebuild these markets will not only recapture lost revenue but lay a very strong foundation for our long-term growth objectives.
In addition to rebuilding, we are refining the deployment of the new Title and Escrow production technology in process we described on our last earnings call to ensure that our customer-facing staff can continue delivering exceptional customer service.
This revision does place some risk around our previous expectation of $10 million of annualized savings by the end of 2017, with another $10 million realized by the end of 2018, assuming orders stay comparable year-over-year.
We will provide further updates in future earnings calls, but do remain committed to the initiative and its ability to drive efficiency into our production while providing an enhanced platform for our valued associates to improve service to their customers.
Again, we believe the new additions to our team, along with the changes to our deployment, have brought a renewed stability to our offices, improving our opportunities going forward.
With respect to our revenue for the second half of year, we estimate the gross impact of revenue of tax to the departures to be approximately $40 million to $45 million.
Open orders on a per work-day basis declined relative to the prior year during the second quarter, with the decline becoming more pronounced in May and June.
The new hires previously mentioned will yield new orders, however, there is an obvious lag time before those orders' resulting revenue being recognized.
While Title365 will help offset the lower order count and revenue decline, we anticipate that the biggest impact from the departures will be in Q3 as a result of timing.
I'll now turn it over to <UNK> for more detail on our financial results.
Thank you, Matt, and good morning, everyone.
The Title segment generated pretax income of $40 million or an 8% margin compared to pretax income of $51 million or an 11% margin in the second quarter of 2016.
Our Title segment revenues were $470 million for the second quarter of 2017, an increase of 1% from the last year's second quarter.
With respect to our direct title operations, the overall revenues decreased 2% from the prior year quarter, with revenue increases in our commercial and international operations offset by decline in centralized title revenues, which was in line with industry trends.
Revenues from purchase transactions also declined primarily due to the staff departures noted by Matt a moment ago.
Total commercial revenues for the quarter were up 14% over the prior year quarter, as domestic commercial revenues increased to $47 million from $40 million in the second quarter of 2016, despite a 5% decrease in commercial orders closed.
Total title orders closed decreased 13% from second quarter 2016, primarily driven by a 36% decrease in refinancing transactions closed.
Domestic commercial fee per file was $6,300 and domestic residential fee per file was approximately $2,100.
Revenues from independent agency operations increased 4% or $9 million in the second quarter of 2017.
Net of retention agency revenues were similar to that of the prior year quarter.
The independent agent remittance rate was 17.9% in the second quarter of 2017 as compared to 18.6% in the prior year quarter due to increases in revenues from lower remitting states.
We experienced relatively more of our agency revenues coming from states with more agent-friendly splits like Texas, New York, Michigan and California.
Consistent with our previous expectations, we anticipate our ongoing average annual remittance ratio to be in the low to mid-18% range.
Title losses as a percentage of title revenues were 5.2% in the second quarter of 2017 as compared to 3.7% in the prior year quarter, or 4.9% when adjusted for the policy loss reserve reduction we mentioned earlier.
We anticipate maintaining a loss accrual rate of approximately 5% during 2017.
Our total balance sheet policy loss reserves were $465 million at quarter end and remained above the actuarial midpoint of total estimated policy losses.
Looking at our Ancillary Services and Corporate segment, which now consist almost exclusively of search and valuation services, total revenues for the segment decreased 32% to $15 million compared to the year ago quarter, primarily due to our divestitures of several lines of businesses at the end of 2016.
This resulted in a pretax operating loss of $6 million in the second quarter of 2017 compared to the pretax loss of $9 million in the prior year quarter.
After factoring in $6 million of parent company and corporate operations expenses, the segment was close to breakeven in the quarter.
Of note, total employee and other operating cost for the segment in the second quarter declined by $9 million or 32%, more than offsetting the revenue decline from last year's quarter.
With respect to operating expenses, on a consolidated basis, employee cost for the second quarter of 2017 decreased 9% from the second quarter of 2016, and average employee counts also decreased approximately 9%.
The decline is attributable to reductions in employee counts tied to volume declines, primarily in ancillary services, the previously described staff departures in direct operations and ongoing operational efficiency gains in corporate operations.
We also incurred lower contract labor cost compared to second quarter 2016.
As a percentage of total operating revenues, employees cost for the second quarter of 2017 were 29%, an improvement of 250 basis points compared to 31.5% in the prior year quarter.
Other operating expenses for the second quarter of 2017 increased 3% from second quarter of 2016, primarily because of increased outside search fees.
Our commercial and international operations are the principal users of outside search services and so the increased revenues noted earlier resulted in higher cost for these services.
As a percentage of total operating revenues, other operating expenses were 18.5% versus 17.9% in the second quarter of 2016.
On an ongoing basis, we expect that other operating cost will average approximately 18% to 20% of total operating revenues in any given quarter, recognizing the seasonality of revenues and the fixed cost component of these expenses.
Depreciation and amortization expenses decreased 12% from the second quarter of 2016, primarily because of the disposal of certain intangible assets in connection with ancillary services divestitures I mentioned earlier.
Lastly, a couple of comments on other matters.
The effective tax rate for the second quarter of 2017 was comparable to the prior year quarter.
Cash flows from operations decreased to $36 million compared to $50 million in the second quarter of 2016.
The decline was primarily due to the lower net income generated during the second quarter 2017 and the lower collections on accounts receivable.
As of quarter end, approximately $4 million of cash was held at the parent holding company.
And with that, I will turn the call back over to the operator to take questions.
(Operator Instructions) We'll take our first question from <UNK> <UNK> with Stephens.
So on the other expense line, it did sound like that grew a little bit faster than revenue growth, that's ---+ it looks like the first time over the last few quarters, but <UNK>, I think you mentioned that's higher cost from the search services, is that right.
That's correct.
So if you think about the components of variable or the pieces of that other operating expense line item that are variable, they don't all vary in direct proportion to revenues.
There are certain types of revenues that move or cause the variable cost component of that line to move differently.
So in particular, commercial and international tend to use outside search services much more extensively than the other operations that we have.
And so you have a higher variable cost when you have that type of revenue increased.
So it really was that sort of outside search services that drove the increase from last year because you saw those very nice increases in revenues from commercial and international.
Okay.
That makes sense.
So I guess, the trending of that cost [versus] revenues should be based on commercial trends from here out.
Okay.
And then on the commercial business, anything you can provide as far as geographic trends or maybe how that looked on the national versus local level.
It was a pretty balanced quarter.
We did have one larger transaction that closed.
Energy and multifamily continued to be areas of strength.
Geographically, we're seeing little more input from our Western markets.
So again, a pretty well balanced quarter.
Going forward, we obviously remain cautiously optimistic in our ability to continue to outperform the market, so although we're ---+ where ---+ uncertainty remains on the macro environment.
Okay.
And then does Title365 have any type of footprint in commercial.
No.
Nothing meaningful on a national basis.
All those are really retail operations, local operations.
Okay.
Then last one for me.
On the attrition that you guys called out, it sounds like that's obviously mostly in the direct business.
How does that balance between residential and commercial direct.
That would be largely residential.
And we'll go next to the line of <UNK> <UNK> with KB<UNK>
Just first on the $40 million to $45 million of annual revenues lost that you referred to, is some of that already reflected in the 2Q '17 numbers.
Or is that all kind of incremental going forward.
That's really the expectation for the back half of the year, <UNK>.
So that's really where ---+ and as we said a minute ago, we think that's skewing more towards the third quarter.
Okay.
And just when I think about how that comes in, is that $40 million to $45 million sort of a reduction off the baseline off the back half of 2016.
Or is that in annualized, so basically will be half that number in the back half of '17.
No, it's not an annualized number.
I mean that is a fixed number specific to 2017.
Okay.
And then you noted ---+ sorry with the hires and Title365, et cetera, by year-end, you feel like a lot of that will be recovered.
I mean, it certainly ---+ the emphasis that we placed on building our underwriters' balance sheet, both from a surplus perspective and from a liquidity perspective, have helped in regard to us being able to handle higher liability transactions.
I don't want to make a prediction as to what the future may bring, but the trends have been positive.
As Matt mentioned a moment ago, we are aware of some of the macroeconomic trends ---+ or expectations going into 2018 particularly.
Well, we won't give guidance on that revenue number, <UNK>.
I mean, it's ---+ as we said, it's an important acquisition for us from a ---+ particularly, a little larger than your normal kind of tuck-in acquisition, it certainly does help us out in California, which is an important market, not only for us, but just a big market for the industry.
So it's very positive for us from that perspective.
But as we said earlier, we really look to that to help backfill some of the revenue loss from the attrition that we've had in the second half.
No, we are precluded from disclosing purchase price.
Yes, I don't think we said which markets are on the new system and which ones are migrating.
I think in the comments, what we alluded to was that we have ---+ definitely took a step.
I mentioned some of the speed and scope that we were deploying and we have ---+ we were concerned that we were inhibiting some of our customer experiences and so we have definitely ---+ looking at that deployment and making sure that we are taking care of our customers and providing a system that encourages our associates to take care of our customers.
So we'll keep you apprised of that.
This was the quarter where we really had to dig in and look at a lot of that.
And again, we're absolutely committed to the process and direction of where we are headed, but we did change some of our deployment just to make sure we're taking care of our customers and that our associates can do so going forward.
So we'll provide continued information as that deploys.
Pleased, overall, with the quality of the folks that we brought on board, as we rebuild.
I mean, we're always keeping our eyes open.
Like I said earlier, the tuck-in acquisitions are important to us.
Title365 might have been a little larger than the normal, but it wasn't the only one in the quarter and it was just the one that rose to the level of discussing, just given its importance to us on the California market.
I mean, there is integration there.
But again, it's core business and so we think that, that integration will go well so ---+ toward that end.
I don't think we're precluded from looking at other opportunities while we integrate those assets.
Right.
I think that's a long discussion, obviously.
I mean, we have lots of discussions on our game plan.
We talk about what winning looks like overall.
We talk about the importance of margins.
We talk about being most admired by our associates, by our customers and by our shareholders.
And I think, obviously, there is transition and we have had some cultural transition and we're deliberate in keeping the aspects of our culture of trust and integrity and customer service and understanding our industry ---+ at the same time, continue to drive and understand accountability and what teamwork looks like in terms of the game plan.
So like I said, in these changes ---+ and we probably have been more deliberate in seeing some of these departures ---+ that we do have people out and effectively communicating what that game plan is and what's in it for our associates.
At the end of the day, they succeed and win in their markets.
No, we have done both of those.
Again, this goes further back but as you mentioned, we've been talking about this for a while now, moving everyone, consolidating legal entities, moving everyone to an ERP system, standardizing your allocations.
I mean, these are all significant changes for our direct operations.
And so keeping that communication flow strong is important, aligning that compensation pay per performance has been something that we have definitely driven, understanding again how it fits into the overall whole and what profitability looks like, what those expectations are, are all part of the transition that we drive forward.
Yes.
So now that concludes our quarter's conference call.
Thank you for joining us today and your interest in Stewart, and we look forward to hearing from you again next quarter.
Thank you.
| 2017_STC |
2016 | EBS | EBS
#Good day, ladies and gentlemen, and welcome to the fourth-quarter 2015 Emergent BioSolutions Inc.
earnings conference call.
(Operator Instructions).
As a reminder, today's program is being recorded.
I would now like to introduce your host for today's program, Mr.
<UNK> <UNK>.
Please go ahead.
Thank you, Jonathan, and good afternoon, everyone.
Again, my name is <UNK> <UNK>, Vice President of Investor Relations for Emergent.
Thank you for joining us today as we discuss our financial and operational results for the fourth quarter and 12 months of 2015, as well as our 2016 forecast.
As is customary, our call today is open to all participants.
In addition, the call is being recorded and is copyrighted by Emergent BioSolutions.
Participating on the call with prepared comments will be <UNK> <UNK>, President and Chief Executive Officer; and <UNK> <UNK>, Executive Vice President and Chief Financial Officer.
There will be a Q&A session at the conclusion of our prepared comments.
Other members of senior management will be available to participate.
Before we begin, I will remind everyone that during today's call, either on our prepared comments or the Q&A session, management may make projections and other forward-looking statements related to our business, future events, our prospects, or future performance.
These forward-looking statements reflect Emergent's current perspective on existing trends and information.
Any such forward-looking statements are not guarantees of future performance and involve substantial risks and uncertainties.
Actual results may differ materially from those projected any forward-looking statements.
Please review our filings with the SEC on Forms 10-K, 10-Q, and 8-K for more information on the risks and uncertainties that could cause actual results to differ.
During our prepared comments, as well as during the Q&A session, we may also refer to certain non-GAAP financial measures that involve adjustments to GAAP figures in order to provide greater transparency regarding Emergent's operating performance.
Please refer to the tables found in today's press release regarding our use of adjusted net income, EBITDA, and adjusted EBITDA, and the reconciliations between our GAAP financial measures and these non-GAAP financial measures.
For the benefit of those who may be listening to the replay of the webcast, this call was held and recorded on February 25, 2016.
Since then, Emergent may have made announcements related to topics discussed during today's call.
So again, please reference our most recent press releases and SEC filings.
Emergent BioSolutions assumes no obligation to update the information in today's press release, or as presented on this call, except as may be required by applicable laws or regulations.
Today's press release may be found on the investor's home page of our website.
And with that introduction, I would now like to turn the call over to <UNK> <UNK>, Emergent BioSolutions' President and CEO.
<UNK>.
Thank you, <UNK>, and good afternoon, everyone, and thank you for joining us.
During the call today I will provide a brief business update, and <UNK> <UNK> will discuss our recent financial performance in greater detail.
Let me start with a summary of our 2015 financial performance.
Overall, 2015 was a very successful year, and we ended the year with a strong fourth quarter.
During the quarter, total revenue was $168 million, up 14% from 2014.
Our GAAP net income increased by 11%, and our adjusted net income increased by 8% compared to the same quarter in 2014.
For the full year, total revenues exceeded $520 million, a 16% increase over 2014.
Our 2015 GAAP net income increased 71%, and our adjusted net income increased 39% over the prior year.
Finally, our EBITDA in 2015 was $130 million, growing 41% compared to the prior year.
In 2016 we are forecasting continued growth in revenues, net income, and EBITDA.
The financial forecast that we announced today reaffirms the guidance that we provided at the JPMorgan Health Care Conference in January.
We plan to achieve our 2016 revenue target based on a number of factors.
First, continued BioThrax sales under our existing procurement contract, as well as under the anticipated follow-on contract with the CDC.
Second, through anticipated sales of our other portfolio products to the US government under existing procurement contracts.
Third, through an expansion of our contract manufacturing services in both our Maryland and Winnipeg operations.
Fourth, by securing additional funding for contracts and grants, both existing and new.
And, finally, through increasing international sales.
With an expanding product portfolio, we see real potential to meaningfully grow our international sales over time.
As a reminder, in our recently announced five-year growth plan, we are targeting to achieve at least 10% of our revenues from ex-US sources by 2020.
Turning now to Building 55, as we previously announced, the FDA requested that we perform a re-analysis on one of the more than 30 assays used for comparability before filing our sBLA.
We are on track to complete their request during the first half of the year, after which we expect to submit the sBLA.
As a reminder, we anticipate a PDUFA date of four months following acceptance by the FDA of the sBLA filing.
Moving on to our follow-on BioThrax procurement contract with the CDC, we have had a preliminary meeting and exchanges of communication with the CDC on this topic.
The CDC recognizes the importance of the anthrax preparedness.
And with FY16 funding levels, we anticipate that a follow-on, multi-year contract will be put in place to ensure an uninterrupted supply of BioThrax to the SNS.
As a reminder, we do not intend to disclose any specifics or details of our contract negotiations with the CDC until such time as the contract has been completed.
Turning now to an update on Emergard, our military-grade auto-injector platform.
Last week we announced that the US Department of Defense and Battelle has selected Emergard over several other commercially available auto-injector devices to be tested against, and developed to, US military specification for nerve agent antidote delivery.
Emergard is designed to be transported, stored, and operated in a forward-deployed environment, and built to ensure successful injection through chemical protective equipment.
The development and testing under this award is expected to be completed in 2016; and, if successful, could lead to the procurement of specific products within the Emergard platform to meet US military and first responder needs.
Finally, I'd like to provide an update on our planned spinoff of Aptevo Therapeutics, our biosciences business.
The spinoff is on track, with our receipt of a favorable private letter ruling from the IRS and our announcement of the anticipated Board of Directors and senior management team.
The remaining steps include the filing of a Form 10 with the Securities and Exchange Commission, securing SEC clearance of that filing, and then final approval by our Board of Directors.
We continue to expect a mid-2016 completion of this transaction.
That concludes my prepared comments.
And I will now turn the call over to <UNK> <UNK> for details on our financial performance.
<UNK>.
Thank you, <UNK>.
Good afternoon, everyone, and thank you for joining our call.
I'd first like to make some general comments about our financial results for the fourth quarter of 2015 compared to last year.
I will then comment on our performance for the year compared to prior year, followed by comments on our balance sheet, focusing on our cash position, and then finishing up with some comments about our 2016 forecast.
From an operational perspective, we had another exceptional quarter.
Total revenues were the strongest in the Company's history, coming in at $168.1 million, or $20 million above Q4 of last year, a 14% improvement.
The increase in revenue is primarily due to increased BioThrax sales during the period.
Gross margin, on a consolidated product and CMO revenue basis for the quarter, was a 72%, which is above our normal range of 60% to 70% due to increased BioThrax revenues during the period.
Gross research and development spend for the quarter was $32.5 million, a $6.5 million decline versus prior year.
Taking into account the offsetting effect of our contracts, grants, and collaborations revenues, our net R&D spend for the quarter was $7.6 million, a significant reduction over 2014.
SG&A for the quarter was higher year-over-year by $14 million.
The two largest components of the increase were a one-time $3.5 million reserve for a potential accounts receivable write-off within the biosciences segment, and ongoing costs to support the spinoff of Aptevo Therapeutics.
For the quarter, our GAAP net income was $33.3 million, or $0.71 per diluted share versus $30.1 million, or $0.66 per diluted share, in the same period for 2014.
On an adjusted basis, we earned $37.5 million, or $0.78 per diluted share versus $34.6 million, or $0.75 per diluted share in 2014.
EBITDA for the fourth quarter was $58.5 million, or $1.22 per diluted share.
And adjusted EBITDA for the period was $61.7 million, or $1.28 per diluted share.
Turning to the full-year period, and our financials for calendar year 2015 reflect the continued fundamental strength of the core business, augmented by our ongoing efforts to manage costs and drive extended profitability and cash flow generation.
For the year, we achieved the following.
Total revenues were $523 million, up 16% versus last year.
Gross margin was 69%, in line with our expected range of between 60% and 70%.
Net R&D was $31 million, which is 8% of our adjusted revenues, reflecting the subtraction of grants, contracts from total revenues.
SG&A was $148 million, an increase of 21%, and represents 28% of our total revenues in 2015.
GAAP net income was $63 million or $1.41 per diluted share.
Adjusted net income was $76 million or $1.60 per diluted share.
And finally, EBITDA was $130 million, or $2.75 per diluted share, while adjusted EBITDA was $137.4 million, or $2.91 per diluted share.
Turning to our balance sheet, our year-end capital position remained very strong, highlighted by our cash balance of $313 million, along with an accounts receivable balance of $121 million.
As we have communicated in the past, our capital deployment priorities remain focused on acquisitions that are synergistic to the core business, CapEx in support of that core business, along with targeted R&D projects, plus consideration of stock buybacks and dividends.
Across the board, 2015 performance was substantially improved over the prior year, positioning us to achieve our 2016 financial goals, which include total revenues of between $600 million and $630 million; GAAP net income of between $75 million and $85 million; adjusted net income of between $90 million and $100 million; and, finally, EBITDA of between $150 million and $160 million.
This forecast includes the impact of a successful spinoff of Aptevo Therapeutics in mid-2016, and continuous delivery of BioThrax to the CDC under an anticipated follow-on, multi-year procurement contract; but, importantly, does not include any estimates for BioThrax deliveries from Building 55, or any estimates for potential new corporate development or other M&A transactions.
Finally, first-quarter 2016 revenues are projected to be between $105 million and $120 million, consistent with what we announced earlier in January.
This concludes my prepared remarks, and I will now turn the call over to the operator to begin the question-and-answer session of the call.
Operator.
(Operator Instructions).
<UNK> <UNK>, JPMorgan.
The first one is just on Building 55, and where we stand with getting that online.
I know you left it out of guidance, sounds like out of conservatism.
But can you just help us get comfortable with that building coming online this year.
And what are the remaining steps.
Thanks.
Yes, thank you, <UNK>.
Thanks for joining the call today.
So, the process really hasn't changed at all since the last time we presented publicly.
I think that was at the JPMorgan Health Care Conference.
And the FDA had requested, as I indicated, that we do re-analysis of one of the more than 30 comparability assays that are out there.
So we're in the process of getting that done; a high degree of confidence that we will get it done in the first half of the year.
And then, subsequently, we will file the sBLA.
It is a four-month PDUFA clock.
So in the course of that time period, whatever steps that need to be taken, we expect will be taken.
So we see a high degree of confidence in getting that building online and approved this year.
The process has been transparent.
We have given you as much information as we got.
There will be a pre-approval or prior approval inspection in that process, as is typical, and back and forth with the Agency in connection with our application, which is fairly typical.
But there should be no surprises.
The Agency is pretty well versed and up-to-date on where things stand in the facility.
And it's a matter of [running the drops] and moving it forward.
Okay, got it.
And two follow-ups on that.
I think you had described, in a short way and a long way of addressing this last assay question that the FDA had; and I think, as of JPMorgan, you hadn't finalized which route you were going to take.
Have that conversation happened, and have you confirmed which approach you are going to go forward with.
And then also can you just describe how, as you negotiate the next contract with the CDC, how do you contemplate ---+ assuming Building 55 comes online ---+ but what if it doesn't.
Do you have to outline two scenarios when you negotiate that contract.
How does that work.
Yes, two excellent questions.
So let me take your first one first, which is the short path versus the long path.
You are absolutely right; we have prepared and submitted all the information that we believe the FDA needs in order to make a decision on the short path.
We have not heard back from them as to their conclusion.
So for the moment, we are continuing the work necessary in order to submit the data that supports the long path forward.
If they come back to us and say, you know what.
We're satisfied with what you have provided; it's good enough; let's stop here ---+ then the process gets accelerated.
So that's where we are.
We just have not heard back from the Agency on their assessment of the data that has been submitted.
We've done everything that we can at this juncture, so we're in a waiting mode with respect to Agency evaluation.
On the second question with respect to the contract negotiations, you put your finger on an interesting and dynamic point, which is: what do you do with respect to Building 12 versus Building 55.
And we have some pretty concrete thoughts there in terms of how we will handle that.
I prefer not to share that with you, because it does get into some of the details of the contract negotiation thinking that we have internally.
And as you can appreciate, it's important that we keep that confidential as part of this entire process.
But we have thought that through.
And we have some ---+ I think some creative solutions to how that could work, going forward.
Got it, thank you.
If you don't mind, I'd love to ask just one more.
I think there's a biosimilar company working on a Phase I anthrax vaccine.
Can you talk about how you think about the longer-term competitive landscapes for anthrax vaccines, whether you see that as competition at all.
Love to hear some comments there.
Thanks.
Yes, sure.
Well, the exciting news with respect to the competitive landscape around anthrax vaccine is the closest competitor is NuThrax.
And NuThrax, as you know, is BioThrax which is formulated with an adjuvant CPG.
It is completing the work necessary in order to move to the next stage of clinical testing, which is Phase III.
That's our product, and that product has been under development for quite a number of years.
And we see that as the most exciting opportunity.
And I think the government sees it in that vein, as well.
Because it answers the mail on so many of the different touch points that the government is looking for: further reduction in the number of doses, down to two doses; very rapid immunogenicity, so it's got a nice potency profile, which is a very important for a PEP indication; a good stability profile.
So, we see that as really the product that's going to raise the bar significantly with respect to follow-on products.
We, too, as you know, have an rPA candidate that's in development.
The rPAs have been around now since the early 2000s.
So we are now approaching 15 years of development of rPAs, and they really are struggling to get beyond a Phase I.
There are a lot of challenges associated with rPAs.
We know them as well as anybody.
Is that to say that ultimately, longer-term, something could be developed.
Possibly, but we don't see that happening in the next five, maybe even five to 10 years ---+ certainly within the lifetime of the upcoming contract that we anticipate with the CDC.
So, a long-winded way of saying, very excited about our competitive positioning in the anthrax vaccine space.
We think we see NuThrax as really answering the mail there.
And once the government has NuThrax where it needs to be, we think that they are going to be checking the box on anthrax vaccines, and moving on to some of the other threats, including emerging infectious diseases that need to be addressed.
Got it.
Thank you.
<UNK> <UNK>, Cowen and Company.
Congratulations on the quarter.
So, with your performance this year in BioThrax sales and next year, there's been quite a step-up in revenue coming from Building 12.
Is this you're just expecting two very good production years in a row.
Or has something really changed at Building 12 in terms of the efficiency of the process.
And then if it's the latter, is any of that going to translate to what you see as the capacity for Building 55.
Okay, thanks.
And then following up on Building 55, I think you have covered the bases on the US approval.
But part of the opportunity is the ability to maybe sell outside the US.
Where do things stand with approval in Europe.
Yes, thanks for asking that question.
I did not cover that in my prepared remarks.
As we have previously indicated, we are expecting approval in Germany of Building 55 in the middle of this year, and that remains on track, so no change there.
And with that, we can begin small sales.
We expect small-scale sales to begin in Europe.
But, importantly, that approval will allow us to then move into the mutual recognition process, and file for regulatory approval in other EU countries on the basis of that German approval, which then further opens the doors for some sales internationally of BioThrax out of 55.
So, thanks for raising that question.
Okay.
And then one last one: with Emergard, I know you guys have mentioned that this year's supply is already sold out.
So what's the capacity there from your suppliers to maybe increase supply in future years.
And you, I think at one point, have mentioned the market for that type of product is maybe $100 million, $200 million worldwide.
What is the path to get there.
Yes, I am so excited about the Emergard opportunity, I can't tell you.
It's really proving to be in excess of what we originally thought when we undertook this effort.
So, the team has been aggressively looking at the supply chain because we have sold out the capacity for this year.
And we're already making significant improvements in capacity, both capacity of manufacturing in the European site that currently produces it, and looking at bringing it into the US, with significantly increased capacity beginning next year.
So, we're all over that because the demand is so significant across the globe.
And you can see it right now with the announcement that we had last week with the US Department of Defense selecting Emergard as the platform of choice for further evaluation against their criteria and their specifications.
And that could lead, I believe, to rather significant market opportunities here in the US, for the US military, as well as first responders.
So, our efforts right now are expanding manufacturing capacity, identifying what are the required APIs, addressing the specification requirements for the US military, and trying to increase output towards the latter part of this year, into 2017 and beyond.
And right now, I'm feeling very good about where we stand there.
I don't want to get into specifics about the actual number of units that we can produce.
I consider that to be competitive intelligence that I prefer to keep confidential for our Company and our shareholders.
But we're doing everything that we can to address that market, and we see it as a real significant market; certainly the $100 million to $200 million, but it potentially could go beyond that.
Okay.
Thank you.
<UNK> <UNK>, Laidlaw.
I wanted to follow up on the ex-US sales part.
That seems to be one of the bigger black boxes as we look at it.
Can you talk a little bit about how you may characterize pricing, ex-US.
In the past, you've said it should be substantially higher.
Any kind of bracket around that.
And then any thoughts on what realistically we could expect ---+ selling ton in the US.
Could you double it in ex-US.
Would it be half of that.
Any sort of bracketing around that you could give us.
Yes, sure.
Thanks, <UNK>.
Nice to hear your voice.
Thanks for joining the call today.
Yes, so I think, high-level, what I'd like you to think about ex-US is growing that business to about 10% of our revenues by 2020.
That's really the size of the opportunity that we're targeting right now.
And it is across the platform; it's not just BioThrax.
We see some real opportunity, Emergard.
Every conversation we have with foreign government agencies, they are very interested in the Emergard platform, and the various products that could be provided under that platform.
So remember, this is a platform, and it sets the stage for unique product offerings under that platform.
The BAT product, the botulism antitoxin, also is very high on the radar; RSDL, AIG.
So it's across the board, which gives me a lot of confidence that we can successfully achieve that greater than 10% target.
So that's how I'd like you to think about it.
Certainly for BioThrax and for really all the products, they are not at the US market level.
Otherwise, we would have targeted international sales at a higher percentage than where we ended up.
So hopefully that gives you some guidance as you think about your model.
It does.
Thank you very much.
And another question that often comes up, with Ebola, you got Zika ---+ often the calls come in from the clients, can EBS handle that.
And I'm calling you guys.
When sort of the next ---+ whatever the name of the next thing that comes up will be ---+ and rather than have us call in, when these sort of things come up, what sort of responsiveness does EBS have to turn on a dime, or to get active with the government to handle an Ebola, to handle the Zika virus, handle the next one comes down.
Yes.
Great question.
And as you think about the focus area of Emergent with the spinoff of the biosciences business coming up, we're really going to be focusing in on the CBRN, but also the emerging infectious diseases space.
So I'm glad you put a spotlight on that.
So, you think back over the years, we had the pandemic flu.
And as you know now, with our ADM facility, we have a product that's in the works that could produce ---+ and we're expected to produce about 50 million doses of a pan-flu product within four months of identification of the strain.
Then we saw Ebola hit, and we were tapped by the US government at the ADM site to make the Ebola monoclonal being used in ---+ as a therapeutic.
And interestingly, don't forget, we also had an Ebola vaccine that we produced in very short order based on our MVA technology.
And that went into a clinic lightning-fast as a combination vaccination with the GSK product.
So it was a boost to the GSK prime that was in development.
And that went into two Phase I clinical trials very shortly after we completed production.
So as you think about the next threats coming in the emerging infectious disease, whether it's Zika, or chikungunya, or dengue, or whatever it might be, we see Emergent very well positioned.
We have platform technologies, including our hyperimmune.
And you think about the hyperimmune platform, it's very exciting in that we have six approved products on that platform.
So the [CMC] section is fully baked and fully developed.
And it's simply a matter of identifying and collecting quality plasma with the right antibodies that we can run through that process.
That process is fairly quick in terms of getting to the stage where we can have a product candidate available for clinical testing.
So the hyperimmune is a very appropriate technology to be used in the emerging infectious disease arena.
We also have broad-spectrum antimicrobial, the antiviral, and the antibacterial technologies that we have, both of which are supported by US government funding right now.
So these are broad-spectrum.
They can handle new bacterial infections or new viral infections, potentially, with some of the candidates that are in those platforms.
And lastly, the ADM site, where we have very flexible manufacturing and an ability to bring a technology in and manufacture that product for clinical testing ---+ whatever the US government might decide is appropriate.
So, very flexible, broad-based, and an area where we think we have tremendous strength and an ability to respond quickly and effectively as these emerging infectious disease appear on the landscape.
Thank you.
One last question, I guess two last questions.
I know that for competitive reasons, you really can't say what you're looking at.
You've been very vocal that you're looking for acquisitions in the CBRN space.
But is it possible to narrow down what areas look most interesting among that broad swath of potential opportunities.
And maybe a question for <UNK>, as well: if nothing can be met at your price, does a share buyback make sense.
Great.
Thank you very much for taking the questions.
<UNK> <UNK>, Wells Fargo.
Great quarter.
So, first on the receivables: that seemed to take a pretty big uptick, and so just wanted to see what the timing is there.
I think the people that owe the cash are probably good for it.
But just want to hear what's going on behind the scenes.
And then I have a follow-up.
<UNK>, there's nothing unusual about the nature of the $120 million-plus receivable balance at year end.
The majority of that is US government, so there has never been a problem collecting that.
The timing is usually very quick, as well.
So, nothing unusual other than the dollar value is a bit large, but nothing to be concerned about.
(technical difficulty) <UNK>.
We did cover that during the prepared remarks, and there were some questions about what the contours of that might look like.
But we've had a preliminary meeting and a number of exchanges of communication with the CDC.
And I think it's safe to say the CDC does continue to recognize the importance of being prepared for the anthrax threat.
And with the fiscal-year 2016 funding levels, we do anticipate the follow-on, multi-year contract will be in place to ensure that there is no interruption in the supply of BioThrax to the SNS.
We haven't given any specifics on timing.
And we are not going to really be commenting on the specific details of any of the negotiations that we have ongoing with the CDC until such time as the contract is completed, at which point obviously we'll make an announcement.
Thank you, Jonathan.
And with that, ladies and gentlemen, we now conclude the call.
Thank you for your participation.
Please note an archived version of the webcast of today's call will be available later today and accessible through the Company website.
Thank you again, and we look forward to speaking to all of you in the future.
Goodbye.
| 2016_EBS |
2016 | DAKT | DAKT
#Thank you, operator.
Good morning, everyone.
Thank you for participating in our fourth-quarter and year-end earnings conference call.
I would like to review our disclosure, cautioning investors and participants that, in addition to statements of historical fact, we will be discussing forward-looking statements reflecting our expectations and plans about our future financial performance and future business opportunities.
All forward-looking statements involve risks and uncertainties which may be out of our control and may cause actual results to differ materially.
Such risks included changes in economic conditions, changes in the competitive and market landscape, management of growth, timing and magnitude of future contracts, fluctuations of margins, the introduction of new products and technology, and other important factors as noted and detailed in our 10-K and 10-Q SEC filings.
FY16 is a 52-week year and FY15 was a 53-week year.
The extra week of FY15 fell within the first quarter.
At this time, I would like to introduce <UNK> <UNK>, our Chairman, President and CEO, for a few comments.
Thanks, <UNK>.
Good morning, everyone.
FY16 has proven to be a challenging year financially for Daktronics.
Global macroeconomics factors, including low oil prices, growing US dollar, flowing GDP, political instability and other uncertainties affected order volume.
Orders specifically slowed for the year in the commercial segments of billboard and spectacular and also in our international business.
In our billboard segment, orders declined due to the decreased demand from our large national billboard customers, although we continue to maintain good relationships with these customers, and estimate our market share will remain strong.
Spectacular marketing commercial is generally comprised of large projects.
Those with prices ranging from $0.5 million to a few million dollars.
From time to time, mega projects could exceed $10 million in this area.
Many of the large projects we expected would converted to orders in FY16 were delayed and caused a decline in orders year-over-year.
However, this variability is not uncommon occurrence in what we describe as a large project business.
In addition to economic conditions affecting orders, we continue to see aggressive pricing in many foreign markets from competitors, especially those from Asia.
Industry mergers and consolidations occurred and we continued to learn how the new joint forces will compete.
These combination of factors most affected orders through the international business.
During the last 15 months, we discovered and allocated resources to a display performance issue.
The issue consumed and continues to consume resources that would otherwise have been focused on value-added activities, such as developing new product releases and providing services to our customers.
We have qualified our new designs to higher levels of long-term reliability (inaudible).
However, the change in priorities delayed certain product releases and caused us to delay production on some orders, decreasing sales for the quarter.
We incurred or reserved approximately $9 million to correct the issue, and we expect the remaining reserve will see us through the foreseeable future.
However, this is an estimation based on the best information and analysis that we have today and will be monitored closely.
Both the decline in order or sales volume and this warrantee issue reduced our gross profits for the year.
Order bookings were down for the fourth quarter, with the biggest decrease in our international and live events business units.
Both units had unique multi-million dollar project quarters last year during the same period and, as stated above, order bookings in our large project account base businesses are inherently volatile.
This creates unevenness in order flow, creating difficulty to make meaningful comparisons over short-term periods.
Orders rose for the year in the high school park and recreation market, due to demand for large display systems, and in transportation, partially due to increased funding availability because of the Federal Highway Funding Bill Act.
While this past year was not stellar, Daktronics continues to be the world leader in the marketplace and we strive to maintain this leadership through ongoing investments in our future performance in products, in services, in processes and in systems.
Even with our challenges, we had a number of significant accomplishments.
One of these was the development of a family of outdoor products that provides more competitive pricing along with performance levels targeted for specific applications.
One such application is for out-of-home advertisers that have short-term operating deferments of three to five years, which drive similar expectations of product lifetime.
We also released new outdoor designs which will improve lifetime reliability and visual quality as we continue to lower the overall cost.
We completed an exciting acquisition with Adflow in March.
Adflow is an industry leader in delivering digital signage, interactive kiosks, and marketing solutions for some of the most recognized retailers and brands in North America.
Their interior and interactive offerings complement our current commercial business unit on premise solution and they bring to us an impressive list of existing customers.
The acquisition of Adflow provides Daktronics an opportunity to grow and strengthen our solution offering in digital media networks.
AIM [seral] Daktronics also contributed to continuous improvements and built various capabilities throughout the organization this past year to reduce waste and improve profitability.
For more detail on the financial results, I will turn it back to <UNK>.
Thank you, <UNK>.
Sales for the year declined approximately 7.4% from $616 million to $570 million.
Approximately 2% of this decline is due to the decrease of one week in FY16 and the remaining decline was primarily due to decreases in sales and live events, commercial and international business units.
Live events declined due to the timing of orders converting to sales based on customer delivery expectation and needs and due to the slight order decline in the year.
Backlog for live events increased $14 million going into the new year and we expect to realized those into sales for FY17.
The commercial billboard niche sales decline was driven by decreased demand from our customers during the year for the factors <UNK> noted.
Spectacular was down slightly due to order timing.
Out on-premise business had a successful year for sales and experienced increases with national [law] account activity.
International orders declined nearly $44 million for the year, and in turn, impacted sales.
Overall, global market conditions, strong US dollar, competition, and the timing of large project orders caused the decline.
Sales for the fourth quarter of FY16 declined 12.4% to $138 million as compared to $158 million last year.
Sales declined in the international, commercial billboard and spectacular niches, and live events business unit.
The decline is due to the factors already noted due to timing of orders, production scheduled to align with customers needs by date, and lower order volumes.
Gross profit for the year declined to 21.2% as compared to 23.5% in FY15.
The decline is attributable to the impact of warrantee expenses, which impacted gross profit by 1.6%.
Gross margin levels were unfavorably impacted by volume levels, changes in the mix of business and increased competitive bids.
For the fourth-quarter, gross profit was 20.2% compared to 22.3% last year.
The warranty charge in the quarter affected gross margins negatively by 2.2%.
Total warranty as a percent of sales was 3% for the quarter and 4.1% for FY16 as compared to the FY15 rates of 1.6% for the fourth quarter and 2.2% for the year.
The increase in rates is primarily due to the warranty issue noted.
We have accrued our best estimate of the most probable ultimate cause for this issue based on the estimated failure rates, prevention measure, the performance of the signs and site ages.
Our balance sheet includes reserves for approximately $5 million to cover costs for future warranty activity.
We will continue to monitor and adjust this reserve as necessary.
Commercial market was primarily impacted by this warranty charge.
In addition, commercial gross profit was impacted by the decrease in sales volumes in the billboard niche.
For the year, gross profit improved in transportation by 1.4%, primarily due to increased volume.
Live events gross margin remained relatively flat and was impacted by decreased volumes through the mostly fixed class infrastructure and offset by improved sales mix, with less subcontracted installation activity this year as compared to last.
High school park and recreation business unit gross profit decreased approximately 0.5% as compared to last year, after removing the impact of the FY15 nonrecurring theater rating division sale.
This late decline is attributable to the sales in exchange.
And international gross profits were impacted because of lower volumes and the impact of competitive bidding.
Operating expenses increased 4.6% to $118 million for the year or approximately 6.6% when adjusting for the extra week of FY15.
Product design and development increased approximately $2.3 million for work performed on new or enhanced video display model and in control systems.
General and administrative expenses increased by $2.1 million, primarily due to increases in information technology maintenance, personnel related costs and in professional fees.
During the quarter, we consolidated Adflow for a portion of the quarter, which included sales of less than $1 million with a slight loss of approximately $0.2 million.
Our overall affective tax rate was 34% for the year due to our lower income and the continued research and development credit offset by a $0.9 million international deferred tax asset valuation.
We forecast the forward-looking effective annual tax rate to be approximately 34% with the research and development restatement.
Our tax rate can fluctuate depending on changes in tax legislation and geographic mix of taxable income.
We reported negative free cash flow of $3.6 million for FY16 compared to a positive free cash flow of $35.4 million for the same period in FY15.
The cash usage was primarily due to lower cash provided for operating activities due to the lower net income level, timing increases in working capital due to projects, cash receipts and payments for inventory, and we incurred $17 million capital expenses for the year.
Looking into FY17, we began the year with $181 million of backlog, which is down approximately 4.9% or $9 million as compared to the beginning of FY16.
Because not all backlog is expected to convert to sales in the first quarter due to customer delivery expectations, primarily in live events and transportation units, as well as uncertainty to order timing, we believe Q1 sales volumes will be similar to slightly down from FY16's first quarter.
Gross profit predictions also remain dynamic pending the conversion of sales, but we expect gross profits to be similar to last fiscal year's first quarter.
We anticipate operating expenses in dollars to be slightly up as compared to the first quarter of FY16 due to general increases in personnel costs, information technology expenditures, and increased design and development activity.
For the year, we are expecting modest sales growth.
We expect live events, high school park and recreation to continue to grow slightly.
We believe transportation has room to grow nicely with the demand picture in stability and funding.
While it is more difficult to predict the commercial spectacular segments, there many opportunities in our pipeline that position us for an increase year-over-year.
For commercial billboard niches, we expect similar volume.
In our commercial on-premise activity, we will be actively promoting our outdoor network solution and new product lines.
Internationally, we see opportunities to grow, but find it difficult to know how the year will shape up due to macro economic factors <UNK> mentioned.
Because of the uncertainty, as <UNK> will further discuss, we will work to constrain cost growth in fixed cost and manufacturing, selling, services, and general and administrative areas in the coming year as to manage our expenses through expected sales volumes.
We also planned allocate additional resources for our design and development areas to complete developments and enhance our designs in our display and control systems.
Our cash and marketable securities positions remain positive at $53 million at the end of the quarter.
We expect our capital usage to be approximately $19 million for FY17.
Uses of capital expenses is for manufacturing equipment, or newer enhanced product production, expanded capacity, demonstration equipment for new products, and continued information infrastructure investments.
With that, I will turn it back to <UNK> for additional comments on our outlook.
Thanks, <UNK>.
As <UNK> mentioned, we plan to accelerate activities in our design groups to complete development for a number of solution areas.
A few examples would be the continued improvement of our control platforms to allow customers a better experience as they operate our best-in-class systems as well as lower our overall cost of maintenance and upgrades.
We also continue to focus development efforts on the video hardware capabilities for higher and higher resolution displays.
Finally, we're focusing efforts on achieving lower cost target systems for certain applications to meet varied expectations around the globe.
While this will increase development expenses, we believe this will drive our ability to capture continued global market share and meet requests of our customers.
While we continue to see digital as a growing global segment, our outlook for orders and sales in the coming year is for modest growth.
We have maintained our US market share over the years and our customers remain pleased with our solutions.
Our pipeline of boarding activity is strong in the live events, commercial spectacular, transportation and high school park and recreation units.
In live events, our customers continue to focus on providing a unique experience to those attending sporting events and our products are a key element to create this atmosphere.
There are a number of projects expected for the upgrade or replacement of existing equipment.
A number of uniquely designed mega projects are in the marketplace in the commercial spectacular business with the desire to attract customers through advertising or creation of a destination.
Our on-premise and out-of-home customers continue to turn to digital messaging solutions that advertise or communicate information to their audiences.
In transportation, ordering in North America remains strong, heavily influenced by the passing of the US transportation bill this past year.
This allows for longer-term planning at the state DOT levels and more availability of projects for the foreseeable future.
The number of larger sports complexes at high schools has been on the rise as this market continues to adopt video technology for sporting events.
Also, high schools continue to use lesson centers to communicate with parents, teachers and students throughout the year.
This demand continues to grow as well.
We continued to consolidate Adflow into our revenues and have gained some reoccurring revenue models with this platform.
Our strategy is to continue to serve Adflow's existing customer base well and expand Adflow's reached throughout our on-premise business in commercial.
While the business has historically been under $10 million in sales, we expect to grow over the long term as we integrate both interior and exterior signage solutions for this market.
The commercial billboard market is expected to be at similar levels as last year.
In all business units, we continue to have returning customers.
Our solutions in these markets have natural replacement cycles as the products have a known end of life.
This provides us the outlook to continue to invest in customer centric solutions to meet demands in the market.
Our marketplace is competitive, however.
We continue to experience price pressures from Asian competitors entering the US market.
We also continue to see these low-cost competitors target international markets, which we believe has had some impact in our international order volume.
This pressure and a dynamic world economy seems to have impacted decision timelines and depressed orders in some areas, which may continue in the near-term.
Other economic headwinds, such as the US election, the proposed Brexit, oil prices, uncertainty in interest rates, currency fluctuations, and regional political unrest has created volatility and some uncertainty for order, timing and forecasting in the marketplace.
While these challenges may have some short-term impacts on orders, our strategy is to continue to focus on the things we can control, serving our customers and the growing market with high-quality, reliable solutions which meet their business needs.
We believe this is the path to long-term profitable growth.
As the order picture for short-term becomes clearer, we continue to monitor and limit the amount of cost added for personnel, our largest non-inventory cost.
We are also carefully evaluating capital expenditures and working to carefully manage our other expenses for this year.
We have challenged our managers to be frugal throughout the Company as we position our organization for success in this fiscal year and beyond.
To this end, we are supporting our development teams to bring solutions to the market with higher velocity.
We continue to see many opportunities to grow and to be successful in this business and overall are optimistic for our future.
With that, I would ask the operator to please open it up for questions.
It appears, <UNK>, that in the key markets that we participated in, we still have a significant market share and are able to maintain that.
There has been some growth at our Asian competitors in [regilent] staging, in the ultra high def, and some of these other areas where our market segments that are made interesting to us but we're not players in those today.
Is that helpful.
Yes, <UNK>, we are, as <UNK> mentioned and I mentioned, we are working with the managers to be frugal and to really be sensitive to those costs and to control costs.
Many areas are meeting regularly to ensure that we are watching as our orders come in to reduce costs or maintaining cost levels.
I don't have anything specific that I would like to describe today.
I think and maybe to provide greater color to <UNK>'s statement, we don't see it as one specific thing or a few things.
We see this as a tightening really across the globe to carefully manage our expenses.
Good morning, <UNK>.
So for my last call, that would have been just getting into our fourth quarter.
A lot of times timing changes on the customer demand side.
So the backlog is still there, as I highlighted.
It's just the timing of the delivery and production of that revenue.
Yesco was, of course, was acquired by Samsung and their recently came out with a new naming strategy.
They're calling their company Prismview.
We've seen some activity by Samsung Prismview of worldwide, not anything that I would describe as a strategy yet that I could articulate.
We're still seeing how these mergers will impact the marketplace.
There's also the Leyard Planar acquisition that happened in the last fiscal year as well.
Adflow is a Canadian company and they have been very active in what we would call the commercial on-premise base, but really inside the stores, inside their brick and mortar.
And we have been active in that same space, but mainly outside on the curb or on the roadside of similar businesses, so we believe together, we have a stronger value statement and we'll be able to grow the orders on both sides without significantly adding to the underlying resources ever.
Certainly the types of systems that they've put in place have application in other areas, maybe in sporting venues and in shopping malls and concourses, and we would continue to explore those types of applications into the future.
Sure, and maybe another factor to that was some of the orders that we've talked about that have slipped into the future quarters, we had thought maybe they would land into the quarter and be able to be some of that revenue recognized.
So it would be a combination of both of those things.
We had a softer second half of the year for international, so there was some at the international, a little bit of the spectacular maybe as well in our commercial segments, and a little bit of live events that, again, that timing of when that revenue is recognized changed that up a bit.
Some of the orders, as we've outlined, we think are keyed up and ready to go, but it has been slow this past year and maybe will continue to be slow with the macro economic factors we've talked about.
We do have the $180 million in backlog and we will continue to work on that.
As we go through Q1, we will have customers that will come to us with opportunities, often at a shorter-than-normal lead time and if we have room in timing with other projects, we would tend to take those opportunities.
So the schedule can be a little fluid in our summer if that's helpful.
Yes, especially if we would have an opportunity, if it would arise, for Q1, and have something in our schedule that it doesn't need delivery until Q2.
In our live events pipeline, a fair amount is truant.
We've been seeing a lot of activity over the past few years and that continues into this year.
As <UNK> mentioned, we had a softening in our international as well as our commercial spectacular in really the second half of last fiscal year.
I would say right now, we're seeing more activity in both of those areas as we have entered Q1 and are proceeding through this quarter.
But as we described, there are, especially in our international business, we benefit a little from diversity, but in every area of the globe right now, they have their own things that are our top of mind and that's impacted the decision timeline on many of these larger orders.
That is our current expectation.
Yes.
Correct.
It would be true that we expect warranties not to be up high in the first quarter.
That would be a factor as well as then, as you mentioned, the mix of what we see available to be built and scheduled out for this quarter.
I would say that is true.
We had, as I mentioned, the backlog to produce and it's hard for us to change mid-quarter those kind of fixed costs, so that more of a longer-term play that we need to make.
Yes, we expect that, for product development, we expect to invest a bit more this next year than we did last year to add velocity to the design and development work that we're planning, to bring out new product lines to the marketplace.
For G&A, I would expect a slight increase, but we are, as <UNK> mentioned, working with the groups to be frugal and to manage their costs and to hold or decline expenses where they can.
Yes, thank you.
Thanks to everyone for your participation on today's call.
As we complete our fiscal year, I'd like to have a special thanks for some of our key stakeholders.
I'd like to thank our customers, your years of support and trust in Daktronics to deliver results for businesses.
I'd like to thank our employees.
They all had a tremendous effort over the past year to provide our customers a high-quality experience, even as we ask them to solve many of the problems that we faced as well as capitalizing on the opportunities we encountered.
Our suppliers have been very valuable.
I'd like to thank them for their continued partnership in making our operations run smoothly and their advice and guidance in our future developments.
And also to you, the investors on the call for continuing to take your time to learn more about Daktronics and realize we're in a lumpy business and to understand the ups and downs that we face on a year in and year out basis.
We're looking forward to future success in 2017 and we hope to see any of you that are interested to attend our annual meeting here at late summer.
Thank you.
Have a great summer, everyone.
| 2016_DAKT |
2016 | SSTK | SSTK
#There's going to be amazing stuff we'll be able to do internally, where we can track customers across all of our products with a single user ID, for one.
Externally, we will be able to ---+ customer-facing features will be a lot easier.
So imagine, as our Editor product grows, we'll be able to deploy that in multiple different environments, on our site, off our site, in WebDAM, across all of our different types of products, Offset, Premier, our enterprise platform, et cetera.
The reason for the migration is that we have a single view of our customer across all of our products.
And when we develop a technology, we can develop it once and use it across all of our products within Shutterstock.
Yes, appreciate the question.
What we are seeing is really nothing that is specific to any one area.
The marketing spend is the outcome of the activity.
We've had some related to timing.
There are things that occur ---+ both product launches, releases and activity that we have.
Our cost per acquisition is growing more predictably year over year.
We've gotten more efficient and better in our SEO and SEM work that we are doing.
There's some events that are pushed to later in the year ---+ the actual event themselves that we had expended some money in the first quarter and prior years.
There's nothing that ---+ it wasn't like, oh, we were trying ---+ we weren't saying, oh, we want to spend less marketing dollars.
I think it's the summation of a number of activities that happened to occur in the quarter.
Of course, we're looking at, obviously, having the highest return on investment we've had over a multiple period.
We are focused on continuing to be able to manage our spend across all of our categories.
But we will also lean in and spend on marketing, as and when appropriate, to drive profitable growth that has high cash return on investment.
Like I say, there is nothing unique that you are missing or that we are not telling you.
I think it is just the activity within the quarter.
But once again, we expect that will pick up in the second quarter.
We have a number of both events, and we also have a product activity in the second quarter which we will be supporting aggressively.
One thing I just want to add is that, over the past 13 years, we have clearly been, in our space, the most aggressive marketers.
We've learned a ton.
There is no one in the space that's spent more money marketing than we have, especially on the performance side.
We have all this data, and we know exactly how to reach our customers.
Some quarters will get more efficient than others.
We won't spend that money, if it doesn't make sense.
During that pullback, you can see some of the stuff that you see this quarter with those numbers.
What we said in the past was it was in the low- to mid-20%s.
It's accelerated from there to be between ---+ slightly over 25%.
We certainly expect it to continue to grow, given the opportunities we see, both with existing and new customers.
I don't have any specifics on the countries you mentioned.
But we continue to grow around the world, across all of our regions and across the many different countries that we do business in.
We continue to get more local.
We continue to learn more about our customers around the world, and that causes us to sell more images and products and video to all of our customers.
So as it relates to some of the markets in which we are expanding, Korea and India and other ---+ not necessarily emerging markets, but developing markets are ones where there is great amounts of advertising and communication, especially when you think about markets like India.
We have not historically had a large business there, and so our growth rates have been significant.
We are just hitting a great user base in terms of both larger size enterprises, as well as small- and medium-sized businesses in those markets.
We have been relatively strong in Germany, and we continue to see strength.
We have an office in Berlin, aggressively pursue the European market with our team there, and continue to see opportunities across both western and eastern Europe to further expand.
Asia Pacific remains a significant opportunity.
And we are focused on continuing to expand not just in India but in other markets in the AsiaPAC region, especially given, as <UNK> said, our ability to be more local, to provide both content as well to the customers, and the customers in those markets.
So we feel real strong about it.
Enterprise is now growing fast internationally.
As we talked about in past quarters, we are seeing greater consistency in Europe as well, versus some of the fluctuations during the economic crisis that they were going through.
Overall, we are seeing good stabilization.
But I think being local in markets and having that network effect is really important for us.
We will continue to do everything we can to continue to grow those opportunities.
Thank you, everybody, for joining us today.
If you have any follow-up questions, please let me know here in New York.
We're happy to help.
Thanks.
| 2016_SSTK |
2016 | AXL | AXL
#Thanks, <UNK>.
Let me start first by saying we're highly confident that we can do it.
At the same time, as I covered with you, we're still quoting on activity that will support the backlog in 2018.
Historically we've run around $300 million a year on our backlog.
So 2016, 2017 are covered that way.
2018 is a little bit light.
But like I said, there's $500 million of opportunity that we're quoting on that could favorably impact the 2018 period of time.
We've got another $1 billion of opportunity impacting us in the 2019, 2020 period of time.
That business is right in our wheelhouse, as we just talked with <UNK> about trucks and crossover vehicles.
This has got geographic diversification associated with it and obviously, a significant customer diversification.
So again, we feel highly confident that we can offset it and again, that's just from an organic standpoint.
At the same time, we're producing things from a strategic standpoint, we're even more confident.
Thank you.
<UNK>, that would pretty much go across our entire product portfolio.
From an FX standpoint, the impact was primarily out of our products we ship in Brazil, which is GM and Volkswagen.
As it relates to metal, that impacts pretty much all customers.
<UNK>, those are gross backlog numbers.
Correct.
I'd say it's about the same.
As I said, we're starting to see some increase in our customer opportunities or our business opportunities but that's more on the 2019 to 2020 commensurate with where we're seeing greater penetration or greater needs for trucks and SUVs and crossovers in the future.
Thanks, <UNK>.
Have a good day.
Thank you, <UNK>.
We thank all of you who participated on this call and appreciate your interest in AAM.
We certainly look forward to talking with you in the future.
| 2016_AXL |
2017 | TXN | TXN
#Thanks, <UNK>, and good afternoon everyone
Gross profit in the quarter was $2.14 billion or 63% of revenue
From a year ago, gross profit increased primarily due to higher revenue
Gross profit margin increased 220 basis points
Operating expenses in the quarter were $808 million or 23.8% of revenue, and on a trailing 12-month basis, they were 22.8% of revenue, in the lower half of our model
Over the last 12 months, we have invested $1.4 billion in R&D, an important element of our capital allocation
Acquisition charges were $80 million, all of which was the ongoing amortization of intangibles, which is a non-cash expense
Operating profit was $1.25 billion, or 36.8% of revenue
Operating profit was up 27% from the year-ago quarter
Operating margin for Analog was 41.4%, up from 36.6% a year ago
Embedded Processing was 29.9%, up from 25.7% a year ago
Our focused investments on the best sustainable growth opportunities with differentiated positions enable both businesses to continue to contribute nicely to free cash flow growth
Net income in the first quarter was $997 million or $0.97 per share, which included an additional $0.08 discrete tax benefit that was not in our original guidance
Let me now comment on our capital management results, starting with our cash generation
Cash flow from operations was $795 million in the quarter
Inventory days were 132, consistent with our long-term model of 105 to 135 days
Capital expenditures were $127 million in the quarter
On a trailing 12-month basis, cash flow from operations was $4.76 billion, up 9% from the same period a year ago
Trailing 12-month capital expenditures were $534 million or 4% of revenue
As a reminder, our long-term expectation for capital expenditures is about 4% of revenue
Free cash flow for the past 12 months was $4.22 billion or 30.7% of revenue
Free cash flow was 11% higher than a year ago
Our cash flow reflects the strength of our business model
As we have said, we believe free cash flow growth, especially on a per-share basis, is most important to maximizing shareholder value in the long term and will be valued only if it is productively invested in the business or returned to owners
In the first quarter, we paid $500 million in dividends and repurchased $550 million of our own stock for a total return of $1.05 billion
Total cash returned to owners in the past 12 months was $3.82 billion
These combined returns demonstrate our confidence in our business model and our commitment to return excess cash to our owners
Over the last 12 months, we paid $1.76 billion in dividends or 42% of trailing 12-month free cash flow, which demonstrates the affordability and sustainability of our dividend growth
Outstanding share count was reduced by 1% over the past 12 months and has been reduced by 42% since the end of 2004, when we initiated a program designed to reduce our share count
In fact, we have reduced shares every quarter year on year for 52 consecutive quarters
In March, we retired $250 million of debt
This leaves total debt of $3.375 billion with a weighted average coupon rate of 2.32%
Our cash management and tax practices are fundamental to our commitment to return cash
We ended the first quarter with $3.05 billion of cash and short-term investments, with our U.S
entities owning about 80% of our cash
This onshore cash is readily available for multiple uses
Turning to our outlook for second quarter, we expect revenue in the range of $3.4 billion to $3.7 billion and earnings per share in the range of $0.89 to $1.01, which includes an estimated $30 million discrete tax benefit
Before moving to Q&A, there are three changes that I want to explain to help you better understand our first quarter results and our second quarter outlook
The first is to remind you that in the fourth quarter of 2016, we adopted a new GAAP standard that impacts the accounting of taxes for stock-based compensation
While this adoption has no impact on our cash balance, it does result in a discrete tax item that impacts our effective tax rate and earnings per share
To help you model the tax rate and discrete tax items, I am sharing the quarterly assumptions and their impact
We will continue to report how our results differ from our guidance just as we did this quarter
To start with, our operating tax rate for 2017 is estimated to be about 30%, unchanged from previous guidance
This operating tax rate assumes no discrete items and it's what you will need to use as a starting point for your longer term models
Next, we are assuming discrete tax items of about $30 million, $20 million and $10 million in the second, third, and fourth quarters of 2017 respectively
Therefore, the effective tax rates which include discrete tax items translate to about 28%, 29% and 30% in the second, third and fourth quarters respectively
These are the quarterly effective tax rates you should use for your 2017 models
If you do the math using these numbers, you will get an effective tax rate of 27% for the year
I advise you not to use 27% in any quarter as the size of discrete tax items vary quarter to quarter, particularly in first quarter
We will post a chart summarizing our assumptions for these discrete tax items as well as the retrospective impact of this new standard on our website at ti
com/ir
Hopefully providing these discrete tax item assumptions will be a good start in dealing with this new accounting standard
The second item is a GAAP standard that we adopted in the first quarter of 2017 that requires us to report certain pension costs in other income and expense, or OI&E, that were previously reported in OpEx and cost of revenue
This change is small, typically about $15 million of costs in a quarter, with about 70% coming out of OpEx and the balance out of cost of revenue
A chart summarizing these changes and their retrospective impact will be available on our website The last change is also effective first quarter of 2017 and impacts how we handle royalties
We will no longer recognize royalties in revenue
Instead, they will be recorded as income in other income and expense
As Analog and Embedded have become a much larger part of the company, royalties now represent a little less than 1% of our overall revenue
They were about $30 million in the first quarter of 2017, about what they were a year ago
We expect royalties to continue to run generally at about this level for many years into the future
However, given their decreasing significance to our core operations, they are now recorded as other income and expense rather than in revenue as of our first quarter 2017 results
I'm hopeful that spending some extra time talking through these accounting details will help you in understanding our results Now to wrap up, we remain focused on growing free cash flow per share over the long term and investing to strengthen our competitive advantages
We believe our first quarter results continue to demonstrate our progress
With that, let me turn it back to <UNK>
Thanks, <UNK>
Yes
Thanks for the call
I'll handle that one
On OpEx, everything came in about as expected
What I would tell you, the way you want to think about OpEx, high level, we've talked about our model where we want to run OpEx between 20% and 30% of revenue and in stable markets at the lower end of that, the lower half
And that's exactly what we've been doing for the last couple of years
And in fact, on a trailing 12-month basis, we're just below that
So as you think forward, you should model us along those lines
If you're thinking kind of on a tactical level first to second, I would remind you that second quarter does have three months of higher pay and benefit raises versus only two months in first quarter
So you may have some of that played in kind of similar to what happened last year, maybe a little less than that
Yes, we are – well, I'll answer our inventory days and then I'll let <UNK> comment on the disti channel
But we're comfortable with our inventory days
It's well within our range
Always remember inventory days is a backwards looking metric, so what we have it there for is to support growth
And the other key point to remember is as we have focused our strategy more on industrial, automotive and on catalog type of parts, the risk of obsolescence on this part is really minimal
So it makes sense from a longer-term standpoint to have that inventory available to support revenue growth
Yes, I'd be happy to comment
The update is no change
It's the same strategy for M&A
We looked at – we're always considering options and looking at things, but it has to be an opportunity that is focused on industrial, it's focused on automotive, catalog type of parts, Analog catalog
So it has to be a good strategic fit from that standpoint
But then the other component that has to be there is that the numbers have to make sense
So when we have both of those combinations, then we are willing to move forward on considering that further
So the change in royalties was included in our guidance, meaning that the royalties were in other income and expense, just like how they came in in results
And on a go-forward basis, they will stay in other income and expense
So for modeling purposes, you can look at how that other income and expense line came in and then model it similar to that on a go-forward basis
Yes, sure
As you think of the company on a go forward basis, the biggest driver of our gross margin is revenue, revenue growth
And that's what we're focused on industrial and automotive
Those are the best opportunities that we have ahead of us because of the constant growth of semiconductors in those spaces
Now, beyond revenue growth, then we have 300-millimeter manufacturing, the efficiency of our manufacturing, particularly with 300 millimeter
As you probably recall from the capital management strategy, I walked through why 300-millimeter is such a competitive advantage, and that's because the cost of the chip is significantly less
In fact, it's 40% less at the chip level than on 200-millimeter
So what that translates to is not just higher gross margin but more importantly, higher free cash flow, And then free cash flow per share that we can return to the owners of the company
Well, I'll give you some color and then I'll let <UNK> chime in
But, we think of our strategy, as stated in the capital management strategy for many years, is that we want to add capacity well ahead of demand
And that's because this is an asymmetrical bet
This capacity we can buy
When we buy that way, we can buy used equipment and we can buy it at pennies on the dollar where the carrying cost is minimal but the upside potential is tremendous for the reasons that I talked about earlier and the great fall through that we get to free cash flow
So we're thinking longer term, 10, 15 years out when we're making capacity decisions
The way I would comment on that is, we have said before that our revenues fall through between 70% and 75%
So if you do that math on a sequential basis, you'll get somewhere close to where you need to be
Let me address the second part of that question first
That's clear, we've been focusing on industrial and on automotive
That's where we have been biasing our investments for a number of years, and that's why we're getting strong results in both of those end markets
Now over half of our revenue is coming from industrial and automotive, so those investments are paying off
On your first part of your question, I would take you back to my earlier comments
We like, our stated goal or model is 20% to 30% OpEx
I know you're asking about R&D, but we like to look at it as OpEx because there are a lot of pieces there that we think of as investments, investments in sales, in the sales force, in ti
com, and a few other things that help us build those competitive advantages
So OpEx 20% to 30% in stable times, in the bottom half of that, so 20% to 25%, and we have been running like that for now 27 months
So you should think about that way when you're modeling our OpEx
| 2017_TXN |
2016 | FBHS | FBHS
#So the turnover rate has been running low- to mid-single in existing housing.
We're encouraged by the credit availability, especially at the entry level.
I think that the bigger constraint has been the inventory of existing housing that's been on the market than there is demand.
And I think if you look at Case Schiller and other pricing surveys, the pressure that you see on existing housing prices rising is because inventory's not quite where demand is.
So I'm encouraged by demand, I'm encouraged by credit availability.
I also look at, from a macro standpoint, level of spending per household on home improvements.
We're not even back to a 50-year average yet.
We've been running below that since 2008.
So we look at that and how far up are we on that curve.
It's a large number universe, so you're talking about the average is $725 to $750.
But if you actually look at those who are really remodeling, it's in the $1,500, north of that type number.
Then you look at what the home centers activity has been.
And that's running in single digits.
And I think their outlooks are more for mid-single digits for the year.
So there's a number of factors that get us pretty comfortable around a 5% rate, which is really the historic average.
I think there's potential for upside over that over the next couple of years, just based on the fact that we've underinvested in the repair/remodel side of the market.
Houses are getting older.
We've under built relative to the housing stock over eight years.
And so you're going to continue to lean on the existing housing stock.
So the turnover is one factor that used to be highly correlated, so back, I'm talking pre-2006, that was highly correlated to R&R spending.
That completely disconnected in the downturn.
It's gotten tighter, but it isn't back to that same high level of correlation.
So it's important, but it's not the only driver in R&R that we look at.
It skews by household type.
So older households are drawing from savings, and they have been for a while.
They're not really relying on credit as much.
And for a long time, we saw that in the mix coming through dealers as being a richer mix, and when they were spending, they were actually spending not constrained by credit.
Over the last 18, 24 months, we've seen much more activity at the entry level, semi-custom level, both in home centers, as well as in the dealer channel.
We think there probably is some credit support to that.
And that's, you could say it's HELOCs, you could say it's refinancing, it's general savings.
And the price points are, frankly, lower, so they can afford, they're more affordable projects at that entry-level semi-custom, so you're not needing to really finance that much of a purchase.
So I think it's a combination of those two, depending on the level of activity we're seeing.
Anecdotally, across the dealer channel, pretty consistent growth throughout the year.
So about 10% in the quarter, 10% for the whole year.
And we saw actually a mix shift a little bit more to some of that semi-custom out of the custom.
So there is more of that support in the general broader market, but pretty consistent growth rates.
Our planning assumption is pretty modest, in general, across Canada, China a couple percent growth, so low single digit type growth.
Where we're seeing success in China is really retail and e-commerce.
So the Moen brand, we've been there 20 years.
We are very well recognized.
And so just as e-commerce continues to expand across categories in China, we're benefiting from that.
So that's driving some pretty good growth from us at good margins.
And our traditional retail, where we've got 1,000 outlets in China, is supporting R&R activity that's coming through that market.
There is some softness in direct to builder, but frankly, it's just down low single digits.
So it's less than you might expect.
It might be that faucets and sinks, fairly small ticket purchase, remodeling-type ticket purchase, is holding up reasonably well.
But we obviously pressure tested it as we come to the year, and so we're looking closely at it, but so far we're seeing reasonable rates for our category, not relying upon new construction, but really more the retail side of that market.
Canada, relatively flat.
I think it depends on part of the country.
Obviously, out West, Calgary impacted by oil, but the cities are holding up okay.
And I'd just say low single digits is what we're planning on for the year.
Where we are in the mix cycle.
From a mix standpoint, we've seen continuing improvement in mix.
And I'd step back, we tested that over the summer, we did some proprietary research, some real consumer research.
And this all comes back to the consumer desire to personalize their space.
They want something rather complex, unique.
And so that's translating into consumers buying up in our mix change, so from entry-level up to first, second upgrades, more semi-custom, more unique finishes, painted versus stained looks.
Things that we can price for, not just raising prices but rather the mix is driving that.
Same on entry doors, with Thermo-Tru.
They're buying more unique glass styles, different finishes in that entry.
So I'd say we're not at peak.
I'd say it continues to improve and is driving some of that margin improvement that we see.
So the margin improvement's coming from efficiencies in our plants, but it's also coming from some of that mix improvement, as they're buying the new products that we're bringing in and mixing and matching for their own unique styles.
And that was something that we were sitting there saying, how long is this going to run for.
And actually, based on research, it's going to continue to run.
This is pretty fundamental around consumer behavior in the US, people like to customize more and more.
And so we're working hard with our designers and our channel partners to provide that mix and provide more unique looks that the consumers are going to get excited about.
Sure.
I'll start with Security.
So full-year 2015, operating margin of 12.5%.
We are, as <UNK> mentioned in his comments, we started the integration in the end of June of 2015, of Sentry Safe manufacturing into Master Lock.
That will take a year or so.
So sometime this summer we should finish that.
So at that point, at a minimum by the fourth quarter of 2016, we should be at a much higher run rate.
I'd say you could see Sentry Safe going, pre integration of the manufacturing, from 7% operating margin to 13% 14% operating margin for at least the last quarter of 2016.
And then by the time we hit 2017, if they're at a 13%, 14%, Master Lock is a 14% to 15%.
So you've taken that whole business up nicely from 12.5% this year to 14% to 15% by 2017.
But 2016 is a transition year.
We won't get a lot of the benefit until probably the fourth quarter, maybe a little bit into the third quarter.
So great profit growth potential there with that integration.
In terms of Doors, so Doors, nice growth in 2015, operating margin full-year, 10%.
Doors are much like Cabinets.
We expect them to get back to that 14%, 15% operating margin at steady state.
They're making great progress there.
I think if you looked at the guidance, midpoint of our guidance, you could see them approaching or exceeding 11% in 2016.
So again, just like Cabinets, well on track to get back to that 14% plus at steady state.
So this all goes back to the things <UNK> talked about and that really disciplined approach to sales growth that really drives profit.
So these margin improvements are across all of our segments, because it's a philosophy.
Sure.
We remain, as we have, focused on total shareholder value.
So we're very active right now on the M&A side.
We've got a lot of discussions going on, are in the midst of a number of things, and I can never predict if any of these will result.
But I'm encouraged by our level of activity.
If anything, we're busier now than we were a year ago.
And so I'd say that still is a real focus for us.
On the other side, we bought back $100 million worth of our shares, 2.1 million, in the month of January.
I'd say at the value that we're seeing in the market right now versus our plans, we'll remain looking hard at share repurchase this year.
We've still got about $148 million left under our authorization.
So we're going to look at both of those, and we've got plenty of capacity to both buy back shares and complete acquisitions.
We ended the year at only 1.4 times debt.
So we've got capacity to do things, we've got debt capacity, we've got strong free cash flow.
So we'll be very efficient with our cash.
We have been coming up on five years here, and we're going to continue to do that and there may be some really nice opportunities looking at us over the next few months.
So that's about all I can say on all that.
But I'd say we'll be balanced in our approach across those two.
The $163 million that we ended the year is what we modeled in guidance.
The guidance, that includes the need to buy back about 1 million shares just to avoid dilution.
So we bought back 2.1 in January.
1 million of that's built into the guidance; 1 million of it isn't.
In terms of corporate ---+ and we break corporate out into the G& A and then our net pension income ---+ that will go up from $63 million in 2015 to, we think, maybe $69 million in 2016, kind of guidance.
And $3 million of it is just less pension income, $2 million of it is spending on cyber security, and the other $1 million is miscellaneous.
So I'd plan on a net of $69 million.
Thank you.
We'd like to thank everyone for attending our call today and look forward to speaking with many of you again very soon.
| 2016_FBHS |
2016 | ABG | ABG
#<UNK>, this is <UNK>.
Naturally we would like to keep the customer on the shortest cycle we can to see them back again purchasing other cars.
WIth the low interest rates and the simple interest loans, most people are okay.
And even though the loans are longer in length you still have a trade cycle where people are not far off what it has been in the past.
I think you are talking about the number we call total deal.
Essentially which is, for everybody who is not familiar with it, it's the gross that we make on new, used and F&I.
That number ---+ we had some pressure this quarter, that number was down.
But it has been, I would say, relatively stable, if not improving, like you said, over the last 10 years.
What we've done ---+ as an industry, not just us ---+ we've been able to generate incremental F&I PVR to offset some of the long-term pressure that we've seen on both new and used margins.
And it is roughly $3,000 a car.
That seems like a number that the industry depends on in order to generate the returns it needs on the capital that's tied up in these car stores.
And I would expect, as an industry, that's the kind of a number that we will continue to see as we go forward.
Fundamentally, that's what justifies the investment in the dirt and the stores that make this whole thing work.
<UNK>, I will start and then I think <UNK> <UNK> might have more to add.
I think there's a broader issue that's happening here.
If we were to got back 12 to 24 months a lot of these premium luxury vehicles were difficult for us to get.
A lot of production was down to China and some of the other developing countries.
You don't have go back very far.
We were being scrutinized as an industry to make sure that inventory from the United States wasn't leaking out and ending up in China.
The world has changed.
There are very few inventory shortages now in the premium luxury side.
Vehicles that we had a difficult time getting supply for are now readily available, not only in our store but in the stores of our competitors, and that has pressured margins.
I think that may have more to do with the margin pressure than anything else.
<UNK> might have different view.
<UNK>.
The only thing I would add is, the only thing that's changed over the years is the luxury brands have brought a lot more entry vehicles into the market, which skews their overall margin because these are lower-end margin vehicles and they're more in volume.
Those will certainly play a role in it.
And, naturally, there's the repressing.
The E-Class is coming out.
We are in a society where we are refreshing cars faster than we ever have.
The consumers demand it.
I just think it is the balance of the new models and the timing.
I think we need to see where we are with Q auto.
I can tell you that one of the things we have learned at Q auto is we do a fair amount ---+ the majority of the vehicles that we are selling in Q auto are subprime.
If that came under tremendous pressure we would have to see exactly what it did to those stores.
Like I said earlier, it is very intriguing.
What we're doing with some of our digital advertising at Q is really having some interesting impacts.
We don't have a lot of capital tied up, so especially in the two, if you would, smaller format stores, it makes it easier for us to get to the point where we can get a decent ROI.
I would put it this way, we are not going to walk way from it if we think we are close to hitting that magic breakeven point.
And I think it is going to boil down to our ability to get an incremental or 25 or 50 cars sold in a given store.
And that's what we are very much focused on.
We have not seen any issues whatsoever.
Texas represents about 10% to 15% of our business, and we are starting to see some headwinds in Texas.
It is minimal at this point.
<UNK>, I would just add that we only have one store in Houston so this impact that <UNK> is talking about is an impact that we are seeing in Dallas.
But, like <UNK> said, there's some impact.
It is undeniable.
We will just have to see where it goes
You're most welcome.
That concludes today's discussions.
We appreciate all the questions.
We think these are great questions.
We're glad we had an opportunity to talk to you about the business, where we've been, where we are going.
And we look forward to talking to you again at the end of the quarter.
Take care.
| 2016_ABG |
2015 | AAPL | AAPL
#<UNK>, it's <UNK>.
We look at it a bit differently than you do.
We look at it as our job is to grow our products, regardless of the price, which means that we need to convince, in some cases, people to move from one price band to the other.
And, that we think that if we do a great job with the product that people will be willing to spend more because they get so much more out of it.
I think you can look at the results on the iPhone and see that in action.
We grew 87% in China.
We grew 90%-plus in India.
Emerging markets are growing 65%.
These numbers are unbelievable, and they are done in an environment where it's not the best of conditions.
That's how we look at it.
We don't do the [MBA] analysis of there's only X people buying in a price band, and therefore, we can only get X minus Y percent.
That's not the way we have ever looked at it.
If we did, we wouldn't be shipping any products.
I think there's no doubt; if you look at it, we are expanding the market size in those areas.
It's also true that there's some people that are switching from comparable price points to the iPhone, and that's great, too.
But, I think the answer is that both of those things are happening and it is key that we do both, not just one.
86% also seems low to me, but I was quoting a third-party source and not our own data.
Our own data would look better than that, but the numbers are only comparable if I quote the third-party source for both, and so that's what I'm doing.
On the upgrade cycle, what we are seeing; it's not remarkably different.
However, there's a number of plans that people begin signing up for in the last year that could change it.
These are upgrade-any-time kind of plans.
They may be one-year leases that could actually help the upgrade rate.
I think it will be interesting to see how that plays out over the next horizon.
But, generally speaking, I see positive vectors there, not negative.
In the aggregate.
Well, we think the ---+ <UNK>, it's <UNK>.
We think the phone has a lot of legs to it; many, many, many years.
There's tons of innovation left at the phone.
I think we are in the early innings of it, not in the late innings.
And I think the market rate of growth over the long haul will also be impressive, and so I think there will be multiple winners here.
So that's how I see it.
In terms of the other things that we're doing, we have some great capability and great teams in Apple, and so we can do more than one thing.
And so, we have other things that we're working on as well.
But at the aggregate level we still remain very focused, because if you look at our size versus the number of projects we have going, it's much smaller compared to most.
But, that's how we do things, and that's how we get the level of quality that we want out of each one of those.
And so, the other things that you named, whether it be Apple Music or Apple Pay, both of these are very important to us.
And things that you didn't mention: the Mac continues to perform very well.
I'm still bullish on iPad.
We've gotten ---+ with iOS 9, there is some incredible productivity enhancements coming in with split view and slide over and picture-in-picture.
These things are incredible features.
The enterprise business is clearly picking up, and more and more companies are either contracting for or writing apps themselves.
And, I believe that the iPad consumer upgrade cycle will eventually occur, because as we look at the usage statistics on iPad, it remains unbelievably great.
The next closest usage of the next competitor, we are 6 times greater.
And so, these are extraordinary numbers.
It's not like people have forgotten iPad or anything.
It's a fantastic product.
So I see a lot of runway.
And as I look geographically, where we have been doing really good in the emerging markets, our share is still not high in any of them and so there is a lot of headroom there as well, as there is in most developed markets as well.
And so, I look around and I see opportunity left and right.
That's what we're focused on.
It's a very good question.
We remain extremely bullish on China and we're continuing to invest.
Nothing that's happened has changed our fundamental view that China will be Apple's largest market at some point in the future.
It's true, as you point out, that the equity markets have been ---+ have recently been volatile.
This could create some speed bumps in the near term.
But to put it in context, which I think is important, despite that volatility in the Chinese market, they're still up 90% over the last year and they're up 20% year to date.
And so these kind of numbers are numbers I think all of us would love.
Also, the stock market participation among Chinese household is fairly narrow and the stock ownership is very concentrated in a few people who put what appears to be a smaller portion of their wealth in the market than we buy.
And so I think, generally, this has been ---+ or at least as we see it, maybe it's not true for other businesses ---+ that this worry is probably overstated.
So we're not changing anything.
We have our pedal to the metal on getting to 40 stores mid next year.
As we had talked about before, we are continuing to expand the indirect channel as well.
As you point out, and I think this is a major point that many people miss, the LTE penetration in China is only at 12%.
China doesn't possess the level of fiber that some other countries do, and so in order to get great video performance, et cetera, raising that penetration is really great.
I think that really plays to an incredible smart phone future there.
Also, and I can't underestimate ---+ I can't overstate this: the rise of the middle-class there is continuing and it is transforming China.
I saw a recent study from McKinsey that's projecting the upper middle class to grow from 14% to 54% of households over the 10-year period from 2012 to 2022, so we are within that period at this moment.
And you can see ---+ for all of us that travel there so much ---+ with every trip you can see this occurring.
And so I think we would be foolish to change our plans.
I think China is a fantastic geography with an incredible, unprecedented level of opportunity there and we're going to be there.
I'm very familiar with the ads.
In certain geographies, the way that we win is to get switchers.
In other geographies, the way that we win is to get people to buy their first smart phone.
In other geographies, the way that we win is to get people to upgrade from their current iPhone.
All of those are very important for us.
In many geographies, it's two of those, or in some geographies, it's all three of those.
And so all of those are important.
We are very focused on growing iPhone around the world, not just in one geography, and getting our message out there through ads is one way to do that.
Yes, <UNK>.
Obviously, FX has been a significant hit in many ways, of course.
It reduces our growth rates.
We would be 800 basis points higher this quarter from the 33% that we've reported if it wasn't for the movement in currencies around the world.
Really, when you look around the world, if you exclude China, essentially every single currency has weakened against the dollar.
We are pretty careful and thoughtful about where we increase prices and when and by how much [during] mid cycle, because it's not something that we particularly like to do.
We've had circumstances around the world this year where, frankly, we didn't have many options because the currency movement was so large, and so we've had to reprice.
I have to say that it's been remarkable.
Look, in the long run, a strong US dollar is not a positive for our international business.
It's normal to see a drop in demand when prices go up.
That goes without saying.
It has been remarkable so far to see that.
We did take prices in a few markets, but remarkable to see how resilient iPhone sales have been because we have increased ---+ in spite of these price increases, we have increased sales and we have increased market share in all our geographies around the world without exception.
<UNK>, it's <UNK>.
Maybe the best way to talk about this is at the product level.
On the Watch, our June sales were higher than April or May.
I realize that's very different than what some of the ---+ is being written, but June sales were the highest.
And so, the Watch had a more of a back-ended kind of skewing.
The phone itself followed what I would call a normal seasonal kind of pattern.
If you look at the ---+ it sounds like you're honing in on the greater China results themselves.
There's no obvious impact for last quarter in the greater China numbers.
Obviously, with the aggregate or the consolidated number being 112%, it's hard to find a lot of bad things in the numbers.
| 2015_AAPL |
2017 | EGN | EGN
#Well, we're hopeful we are going to see that kind of uplift.
We tried ---+ we tried gen 2 down in Glasscock, and we got a very good uplift from gen 2 to gen 1.
So our hope is that this particular frac job across the footprint is going to result in a pretty good uplift.
I don't know of any reason right now that that would not be the case.
Yes, it's a great question.
It's one of those highly subjective things.
We will have a few more wells on gen 3 that we get productive history on at the end of the first quarter.
But it's not going to be a whole lot, so my suspicion is we wouldn't ---+ we could change our minds.
But the earliest that we would think about doing that would be the second quarter, and I'm not sure we'd do it then.
It's just going to depend on how long we've seen these results and how many we've seen, how consistent they are.
How's that for a non-answer, <UNK>.
Well, we just don't know.
Well, I'm not sure we have enough data to know, and particularly since these wells were sort of stand-alone wells.
We did see oil cut very quickly, and we are very pleased.
But I'm not sure that we've got enough data in hand to know a definitive answer on that.
<UNK>, I've ---+ and I think <UNK> said it.
The one thing we've been pleased with is these wells have cut oil quicker than the previous generation fracs.
Now, we don't have a lot of them and it's early time, but it's always good when you see that happening quicker.
It's pretty even at the end of the year.
And I think it's going to be pretty fairly balanced as we move forward.
Obviously, if we've got an odd number, there will be one more in one basin versus another.
But it's a pretty even split, <UNK>, as we have thought about it.
Give me that second question again, <UNK>.
I'm going to address that one first.
Well, I can tell you this.
We are going to have a lower inventory of uncompleted wells, as we said, coming out of 2017.
But we've got an awful lot of development work that we're doing in the Midland that's coming online that will push into that next quarter.
So I don't think ---+ unfortunately, <UNK>, we haven't really provided any quarterly guidance for 2018 and 2019 yet, but we do feel very confident on our annual 20% growth rates.
And that's probably the best I can do for right now.
We really haven't looked forward to 2019 in terms of a quarterly guidance yet.
Well, the realizations have been higher, and that market has turned around.
And I'm forgetting what percentage we budgeted going forward there for that, <UNK>.
This is <UNK>.
One of the issues is that natural gas liquids prices have increased, and therefore some of your fixed costs that you've got related to transportation and fractionation are less as it relates to the gross NGL price.
And I think we laid out in the press release our expectations on realizations.
Well, <UNK>, I think as we look later in the year, we look at a lot of different things ---+ what kind of performance have we got; what kind of pricing do we have; what bolt-on acquisitions have we been able to do.
Anything we've got out there right now is subject to change.
And I think those are all things that we will look at.
Now, as it relates to gen 3 frac performance, as you know, we have a lot of wells that are already producing.
And I think we put in the press release that we had about 8.9 million barrels of production related to wells coming online.
So that's the number that I think you need to think about when you are thinking about the performance.
Obviously, it won't be on the entire production number that we forecasted.
Well, go ahead.
And maybe ---+ I don't know if I got directly to your question or not, if you need a follow up.
There's a good bit of drilling on the Tiger wells.
One of the reasons that on the slide our working interest drops a little bit on the drilling program is because we partnered on that particular acreage that the Tiger wells are on.
We only have 70% working interest; another has a 30%.
And there are some reasons that we want to go ahead and drill that acreage up this year.
So we do have a good bit more going in that Tiger unit.
And I think it's pretty consistent with what everybody else is talking about in that particular area.
A lot of people are talking about overall well costs up 10%.
If you look at 15% on pressure pumping, it's less than 10% on the total well costs at this point.
We do.
We have ---+ the tank battery is what it takes to get it off the lease, which is what ---+ the most any of our competitors will allocate.
So these costs are DC&E.
So they have the tank battery equipment, which is roughly about $200,000.
Now, they don't have saltwater disposals and all that kind of stuff, which nobody else allocates as well.
So this is drilling, completion, and equip the wellhead.
Well, the cadence of rig adds we had ---+ you know, if you look at the capital that we disclosed for 2018 and 2019, and you guys know about what it costs to rent a rig, it's predicated on a fairly ---+ you know, it's like a one-rig add sort of deal per year.
Now, it could be off a little bit, but it's not a stretch.
And the thing is we can do that with organization that we've got.
So you're not going to see a big jump in costs in order to basically double the production of the Company.
Yes.
<UNK>, actually ---+ that is a good oil cut.
It's not particularly unique to Wolfcamp A/Bs.
We've got 25 wells in our database.
They average, at this point, 85% oil cut.
So they are not abnormally high.
What we are interested in is to see how long a gen 3 well can maintain that high oil cut.
So as we go forward, but given what we are trying to achieve in the reservoir, we would like to see the GOR remain lower longer.
But as an original well production at this point, they are not abnormal.
They may be a few percent higher than our average.
Our average is about 85%.
But they are not abnormally high.
No, it just takes a little longer.
A lot of the wells we are bringing on are Midland Basin wells, and it just takes a little bit longer.
A lot of those are drilled in pattern development.
And we've always said that the first quarter was going to be flat to slightly down off of the fourth quarter.
We have been telegraphing that for months.
And that's ---+ hopefully, it does turn out to be conservative.
But I think that's what we planned it to be, based on the fact that a lot of our production starts to come on in that second, third, fourth quarter.
Yes, a variety of tests.
We've got one, as you pointed out, that will be on 60% of a section that's 30 wells.
We've got a lot of quarter-section tests.
We will do a little bit of stuff in the Delaware.
But most of that, again, we are probably not going to be talking about.
We.
d consider those results to be proprietary to us.
And so while we will be doing a lot of that testing, I.
m trying to think .
- trying to push things a little bit tighter, maybe in some cases looking at what it does if you do it a little bit wider.
We are continuing to work on spacing.
And frankly, in that regard we are probably a lot further ahead of other people in terms of how many wells we put in a section.
Well, <UNK>, we started out with a high number of crews first of this year, because we do have a pretty good DUC inventory that we are working through.
And we are also ---+ as we drill ---+ our drilling cadence will allow certain number of wells during this time to be drilled and completed toward the end of the year.
Then as we get to the end of the year, we are not DUC-ing wells per se, but we will go back to a more normal cadence.
And so at some points in time, we will have a number of wells available to complete; given our drilling halos and our fracking halos, we will have a space for two crews.
And at some points in time we will have space for five.
And that kind of tempo will basically go forward.
That's a more normal tempo, and it just depends on how many wells we have available to complete at one time in the queue.
I would just dovetail: it's not a concern about availability at all.
You shouldn't be reading availability ---+.
Crews are available.
It's just that's the number we are going to need to do what we need to do in 2017, okay.
Is it the $1 billion for ---+.
If we are high ---+ if we were near the high end in 2017, does that imply we will automatically be at the high end on 2019 guidance.
Well, it's going to probably depend on the lot of things.
I think you can ---+ the assumption, probably, is yes, because one of the reasons we had a range is we were trying to build in some service costs increase.
Now, if they jump way up, obviously that number may move some more.
But if they stay consistent with where we are, yes, I think it's probably not a bad idea to think we are going to be at the higher end of the range.
Well, it's basically that we are drilling more to the formations where we apply ESPs.
That would be the Lower Spraberry, the Jo Mill, and the Middle Spraberry.
We will also do some testing in certain areas in the Wolfcamp.
So we are looking to expand that program in the Wolfcamp some, if those tests work out.
It's all a matter of cost.
Is it going to be worth the extra cost to install the ESPs.
But the short answer to the question is: we are just going to do more of the formations this year and probably going forward than we have in the past.
Last year was our first real endeavor into the Lower, the Middle, and the Jo Mill on any kind of scale.
That's a great question.
The Delaware costs have been mitigated a good bit.
Most of that is going to be water sourcing and water disposal, where we've got deals in place that are saving us a good bit on water handling on both ends.
It's not really drilling.
Thank you very much.
Appreciate everybody's attention, and have a great day.
| 2017_EGN |
2017 | KMB | KMB
#Good morning, everyone
Let me start with the headlines for the quarter
Sales and earnings were down slightly, reflecting a challenging environment, as Tom just described, and comparison to strong results last year
We delivered significant cost savings in the quarter, and we've increased our full year cost savings outlook
And finally, we're on track with our overall capital plan
Now let's take a look at the details, starting with sales
Our second quarter net sales were $4.6 billion, that's down 1% year-on-year due to lower organic sales
Tom is going to provide some more color on our top line in just a few minutes
On profitability, second quarter gross margin was 36.1%, that's down 20 basis points year-on-year
Operating margin was 17.5%, down 50 basis points
While margins were down slightly overall, I'm encouraged with the improvements that we achieved in our Personal Care and K-C Professional business segments, and also in the developing and emerging markets overall
Commodities were a $75 million drag in the second quarter, and for the full year, we're now expecting inflation of $200 million to $300 million, that's $50 million higher than our previous estimate driven by higher pulp costs
Our teams continued to deliver significant FORCE cost savings
Second quarter savings were $120 million and we've increased our full year savings target to $425 million to $450 million
Our original target was for savings of at least $400 million
Given the current environment, we are also tightly managing our overhead spending
On the bottom line, second quarter earnings per share were $1.49, down 3% year-on-year
Lower equity income reduced earnings by $0.03 per share, offset by a lower share count and a slightly better effective tax rate
Now let's take a look at cash flow
Cash provided by operations in the second quarter was $825 million, in line with our expectations
Cash flow was down compared to $860 million in the year-ago quarter, including the impact of higher tax payments this year
Second quarter working capital cash conversion cycle was down six days compared to full year 2016, bringing the year-to-date decline to five days
We're making very good progress in this area, and we expect to nicely exceed our original one-day improvement target for the full year
We also continue to manage capital spending in this environment, and we now expect that full year spending will be in the lower half of our $850 million to $950 million target range
On capital allocation, second quarter dividend payments and share repurchases totaled more than $600 million
We continue to expect that full year dividends and share repurchases will total between $2.2 billion and $2.4 billion
Looking at our segments, in Personal Care, organic sales fell 1% due to lower net selling prices
Organic sales were up 2% in developing and emerging markets but were down elsewhere
Personal Care operating margins were 20.6%, up 60 basis points
The improvement was driven by cost savings, partially offset by lower selling prices and higher input costs
In Consumer Tissue, organic sales were down 2%, driven by North America
Overall, Consumer Tissue operating margins were 16.5%, down 190 basis points
The results were impacted by lower sales and higher pulp costs
In K-C Professional, organic sales in the quarter were up 1%, with gains in all major geographies
K-C Professional operating margins were 20.1%, up 150 basis points
The comparison included benefits from cost savings
So in summary, our second quarter results were impacted by difficult environment with weaker economies, category softness and increased competitive activity
Nonetheless, we are achieving strong cost savings, we're generating healthy cash flow, and we're allocating capital in shareholder-friendly ways
I'll now turn the call back over to Tom
Yeah, we do continue to deliver significant cost savings through the FORCE program, and we were able to take up the full year target
And what I'd say is that as the program name implies, our teams really are Focused On Reducing Costs Everywhere
When you look at our supply chain savings that includes improving productivity and waste across our manufacturing operations, driving down the cost of our facilities, optimizing the cost of our product specifications and continually negotiating lower input costs or material costs of our products
And year-to-date, we are at 4% of cost of goods, which is really a strong performance, not only internally but benchmarks very well
I continue to see opportunities for us to continue to deliver the FORCE cost savings as we move forward
So good performance there, and I think more opportunity there
Sure
On the buyback, the $800 million to $1 billion is still the right number for the year
We're on track with that
And in terms of the interest expense, we did some pre-funding on the $950 million that comes due in August, which is why you see a higher debt number at the end of the quarter, but that should normalize
And the debt that we'll take out in August is a pretty high coupon, it's 6.125%, and so that will be replaced with lower interest rate debt and that should bring the interest expense down for the year
| 2017_KMB |
2016 | FHN | FHN
#<UNK>, it is <UNK>.
I think the last couple quarters, we have talked about being a little bit more focused on positive operating leverage.
And so, I think you are correct, that our expense base is higher than what I would have said a year ago, I think.
And that's true, but if you look at the revenue assumptions, that certainly we had and maybe the Street had, I would guess that they were higher as well, ex rates.
And so, as we have looked at where we wanted to invest in the business, we've allowed that investment to continue, which has driven most of our expenses.
And we've gotten the revenue that we needed to get, and so that's manifested itself in double-digit loan growth, deposit growth, PP&R is well into the double digits, net interest income is very strong, even without a lot of rate help.
So I think that's why we are a little bit more focused on the operating leverage side, as opposed to an absolute number, on the expense base.
If you actually look at where expenses are growing, it is in the personnel line.
A lot of the year-over-year growth is from much better fixed income than what we would have thought last year.
So that's driving a lot of it.
The strategic investments in our expansion markets, in our specialty lending businesses is driving it.
Increased incentives, because of the strong balance sheet growth that we have seen is driving a lot of it.
FDIC expense from a bigger balance sheet is driving it, and some marketing expense, as it relates to supporting growth, particularly in expansion markets, is supporting it.
So we think that as <UNK> talked about, we still are very focused on expenses, on expense management.
We feel good about how the organization is managing expenses, and we are strategically allowing expense to grow, commensurate with outsized revenue opportunity.
<UNK>, this is <UNK>, if I could, I want to pick up on that.
As I think about how we have, one, focused on expenses, and how we've executed on expenses, really for seven, eight, nine years now.
We have worked very, very hard at driving efficiency, while continuing to invest in the franchise.
And I have used the term, and <UNK> has used the term, both this morning on operating leverage.
In some ways, I think if I could backup and do it again, we would probably be less focused on a range 680, 670, 660, whatever the numbers were, because we have so many variable components like our fixed income business, that make it hard to ever reconcile back to that.
But that doesn't diminish the key point that <UNK> just made, and what has been our trends and pattern over the last several years is, we are focused on making the investments we need to make to grow the business and drive inefficiency and controlling costs in ways that we create positive operating leverage, quarter in, quarter out.
And so, we are not focused on a number as much as we are focused on making smart investments in the business, that drive the future growth opportunities, the future revenue opportunities.
And at the same time, driving the efficiencies that allow us to capitalize on process improvement, a cross functional, cross organizational, or horizontal processes, where we can be more efficient.
So in some ways, we have oversimplified the way we have talked about it, and I would say on my part, maybe it was a mistake that we got pinned down to a range of numbers, but I feel very, very good about what I see going on in the organization, in terms of expense discipline, focus on controlling and managing expenses, and I feel pretty good about our ability to control, and to manage expenses in the fourth quarter, and 2017 and beyond.
So thanks for letting me get that in.
It is a slight negative on the margin.
We've got some sensitivity data in there, and I think one 25 basis point move parallel is $10 million, and two is roughly $20 million.
For sure, it has impact there.
I guess, you could say we and the rest of the industry have gotten pretty comfortable working in an industry where rates don't do very much.
I think it's probably a bad thing for the industry.
I don't think it changes much in the things that we do day-in, day-out, but I do think it continues to put pressure on the industry, in the sense that there is very little revenue growth opportunities, there's still a tremendous amount of competition for what appears to be a flattening trend line in terms of loan demand, particularly with an environment where there's less emphasis industry-wide on products like commercial real estate, et cetera.
So I think is going to make our business more competitive.
I think that can have some marginal impact on pricing, but I think day-in, day-out we're pretty comfortable we get the 25 basis points, we can deal with that, if we don't get the 25 basis points, we will also continue to deal with that, but I don't think it will have a significant day-to-day operating impact on us.
We're going to stay focused on expenses, and trying to drive the profitability and the returns in the business.
<UNK>, it's <UNK>.
So the investments that we continue to make probably won't be all too recognizable from a regulatory perspective.
They are part and parcel of what we've been doing over the last couple of years.
There's nothing that's particularly outsized, in terms of that arena.
Where we are making significant investments that are showing up in our incremental expenses are in our digital banking platform, our online banking platform, that's obviously our most recognizable customer-facing system.
And so, we are doing that, at the same time we are rationalizing our branch network, to help offset some of the costs of that as customers are changing their behavior.
So those are the biggest things that I think we see from an investment perspective.
In terms of the franchise finance business, I think we have hired something like 10 or so people to support that business.
We are very pleased with the caliber and the experience of that team, Todd <UNK>es, who leads it, came from GE Capital, and several other people in that, that we hired, did as well.
So there's a lot of continuity there.
They are on the ground talking to customers, looking for new opportunities, integrating very, very well into our culture and our organization, and are very happy to be here.
And we are happy to have them.
So 10 people, a couple million dollars to support a $20 million, $30 million revenue stream and growing, we are very pleased with what that acquisition will bring us over time.
It is <UNK> again.
I think a lot of it is volume driven, but over the last several quarters, we have made a significant investment in trying to expand existing relationships, to get them used and utilize more of their existing lines with us.
And use us more as primary relationships.
So that's one thing that we have done.
We also, probably over the last 12 to 18 months, have added about 50 new relationships there.
We're up to maybe 180 or so mortgage warehouse relationships.
So we believe that we are absolutely gaining share there.
And so it's a combination of all three of those factors, and again, we feel good about the performance going forward, even though it will fluctuate quarter to quarter.
We think the long-term trends, in terms of our ability to grow that business, is sloping upward.
I think it's in the 440 range.
In terms of what we think about in positive operating leverage.
I think, generally speaking, we talk internally in the organization about targeting a 2 times operating leverage.
And for all of our senior leaders in our business, some of them are going to do well beyond that, some of them, because we are investing in certain businesses, might be challenged to do that, but overall, 2 times positive operating leverage feels good to us.
If we do that, we think that we can continually improve the efficiency ratio by year-to-year, 100, 75, 100 basis points, keep chopping it, and chopping the wood down.
This quarter we were at 70% on the efficiency ratio, I believe, and so, we obviously have that on our bonefish.
That's still part and parcel with how we get there, positive operating leverage, and focusing on driving those revenues is going to be a big part of that as well.
More expense leverage this quarter.
I think that's relatively normal.
You're going to have modestly different payouts, based on which producers are paying, and where their incentive commissions are on the grid, and such, but that to me, is within the range of normalcy in terms of variable comp decline commensurate with the revenue decline.
Yes it does appear, both in CCAR as well as DFAST, that there's going to probably be more flexibility in the process, in terms of timing and examination, et cetera.
I don't really expect it will have a tremendous impact on the time or the energy we put into completing the DFAST.
I think in terms of MOE and the bright line that is still at $50 billion, that line may be a little less bright if you lessen the impact of DFAST, but it's still a reasonably bright line, and I would say that it's pretty important.
So I think that MOE opportunities and/or growth through reasonably-priced transactions is still an important part of creating leverage in the industry, and building the capabilities longer-term to invest in product tools and solutions for customers.
But I don't think there's very much, that's changed, in terms of the way I would think about the $50 billion bright line today, as based on any of the conversation around CCAR and/or the DFAST process.
So I do believe that threshold will get moved up over time.
There was, I think, a consensus even articulated in some ways by the Fed, the regulators in late ---+ or in 2015, not necessarily late 2015, but there was a reasonable place that could be moved up, and focus more effectively on larger institutions.
I think that's the right answer.
I think that changes the equation a whole lot more than anything we've heard.
So actual moving that bright line probably has more impact on my thinking then a tweak here or there with stress testing, et cetera.
Thanks.
Sure.
It's <UNK>.
As you know, last year, at the end of the year, we took some actions to reduce asset sensitivity, and if you were to look at the asset sensitivity for our Company year over year, it would be down.
So we have done some things, mostly in the securities portfolio with some bond swaps, some macro hedges, et cetera, to do that.
And they have been successful.
There hasn't been great entry points honestly, to do more of that this year.
Or else we would probably would have.
Our business is still very oriented towards natural asset sensitivity, meaning that most of our businesses are generating loans that are LIBOR-based or floating rate, and so we recognize that.
And one of the reasons that ---+ among many, that the franchise finance business was so attractive to us was that it was a more fixed rate versus variable rate type lending business, that we thought would also help us with our asset sensitivity.
So, I think as <UNK> talked about at the beginning, we don't have high hopes for a lot of rate increases, but we do expect or hope for one in December.
And so, if lower for longer continues to persist, we will look for opportunities to continue to chop away at our asset sensitivity, while also remaining ---+ also keeping that optionality if rates do rise.
This is <UNK>.
I will get in the ballpark, and then we'll let <UNK> pin it down.
I think we're just under about $300 million in loans, I think we're just under about $200 million in energy and energy-related credits in Houston.
The business that we see there, and the opportunity is really, really strong.
Gary Olander and the team of bankers that he has assembled there are doing a fantastic job.
Their calling efforts are in relationship building with customers of very strong credit quality and long-term relationship potential.
So we are very, very pleased with the progress that we see in that business, and the opportunity to continue to grow there looks very, very good.
We think as it relates to energy, and to some extent, other parts of the opportunity in the marketplace, we think we are uniquely positioned, in that we have minimal exposure.
We have the opportunity to lean in, or to be a little more front-loaded in terms of how we use our balance sheet to build and create long-term relationships.
So we're very optimistic about the trends we see there.
<UNK>, this is <UNK> again.
We do see that as an emerging and improving opportunity.
In some ways it does look like that marketplace is ---+ particularly the environment around commercial real estate lending has slowed very significantly.
Pricing has shown improvement, structure has showed improvement.
You are seeing better structure, better pricing.
And given our relative underexposure to that space, we do think that is an opportunity, much like we had in 2009, 2010, to look to continue to invest in our lending relationships with our strong long-term customers, but also to build some new relationships.
So we do see that as an opportunity, or an area where we can be front-footed and lean into it a little bit over the foreseeable future.
<UNK>, it is <UNK>.
I think we have talked about this before, a couple quarters ago.
We will probably reduce our branch network, again, because of changing customer patterns, about 15 to 17 branches this year.
And we will probably save in the neighborhood, annualized $4 million to $6 million of expense by doing so.
And we can do that because we've got such a strong branch network here in Tennessee, already where we have multiple places in terms of physical branches, that customers can migrate to.
And our retail bankers in the markets do an excellent job of preparing customers that are going to have to move, and preparing them for that.
We support it with call centers, we support it with direct mail, et cetera, so we have been very pleased with how that migration has taken place.
So we save that money, and as I talked about earlier, we are investing a significant amount in online banking and digital banking, which is our probably our most important customer-facing system, particularly in retail, which probably costs close to the same amount.
And so that's one way that we are trying to be smart about how we can take money and reinvest it for the benefit of our customers, and try to be disciplined on the expense side, and have a better product for our customers, in terms of convenience.
This is <UNK>.
We're very pleased with the progress that we see.
Jim Beck and the TrustAtlantic team have done a very nice job in the Raleigh market, building on the progress we had there.
<UNK> Reece, who is running that private banking business, is doing a fantastic job.
You may have seen that in the ---+ probably a press release in the last 30 to 45 days, we have put our mid-Atlantic headquarters is now in Raleigh, Billy Frank has moved to Raleigh, to assume leadership of that business, based on the retirement plans of John Fox, who has been running mid-Atlantic business.
We see very good calling efforts.
We see great opportunities in the whole mid-Atlantic region, from Richmond to Jacksonville.
Those, the customer calling efforts we see great opportunity in.
So we're pleased with the progress.
We are pleased with the progress that we are making in Raleigh.
We think that there will be additional talent hires that we will see over the next several quarters, as Billy and Jim and the team in Raleigh continue to build out that marketplace.
We will see it in places like Jacksonville and Charleston and Charlotte.
So we're optimistic about the opportunities we see in mid-Atlantic.
I would say it's probably more the former, than it is the latter.
I think we are starting to see what <UNK> talked about, in terms of CRE trends emerging right now.
We've had several examples of that occurring.
But I don't think that that's linked fully into what we are seeing in terms of origination.
A lot of the yield increase that we saw this quarter was loans to mortgage companies, which is our ---+ one of our highest yielding portfolios.
So that certainly helps.
And the specialty businesses in general have a little bit firmer pricing, I would say.
The core C&I business, as we have talked about before in our markets, is very, very, very competitive.
And so our bankers have been very disciplined about keeping as much price and getting paid for risk as we could, but that's a very competitive market, and that specialties have been where we have been able to get a little bit ---+ get paid a little bit more for the risk.
Yes.
We run CRE basically as a line of business, CRE is consolidated and reported as one business unit.
So those relationships, and the relationship managers are in the marketplace, so we manage it locally from a relationship manager perspective, but we report and manage the portfolio at a more centralized level.
So if you look at our breakdown pie chart of the loan portfolio, you'll see that in our specialty businesses.
That is a footprint business.
So when we total up what's managed in the market, we don't include CRE.
For Q4 yes, I think loans to mortgage companies will likely be seasonally down in the fourth quarter.
But as I talked about in the early comments, we still see pipelines that are at some of the highest levels that we have seen in quite some time.
And that's across multiple areas of the organization, not just concentrated in any one or two.
So that gives us pretty good confidence that the loan growth momentum will continue.
Will it be in the high double digits that we are seeing today.
Probably not.
We would expect over the next several quarters, something in the mid to high single digits, which I think would compare very well with the rest of the industry.
And so, we think that we can continue to see that momentum and build upon it.
I think July and August was probably in the $1 million-ish range for both quarters.
And so, that's why we felt that it was tracking largely with what we saw in the second quarter.
And then, September was much lower, probably in the $700,000 range or so.
We were tracking about $1 million a day through August, and then we hit in that $700,000 to $800,000 range.
And that's really where October has started off.
It's been less volatile and less activity in the early part of the fourth quarter, as well.
This is <UNK>.
I like the way you describe that pile of capital.
And that pile of capital actually grows as the remaining, call it $1.5 billion, $1.7 billion in non-strategic continues to run down.
Our view on how we invest that capital is really unchanged.
We go back to our focus on returns, and we focus on how we put that capital to work, in ways that create shareholder value.
And so, the organic growth and/or the very attractively-priced acquisitions, like the restaurant finance, franchise finance business, has been the greatest opportunity.
So we want to invest in customer relationships, and we want to acquire portfolios, where it makes sense.
And really, we consider an investment or an acquisition when we hire bankers or teams of bankers over time that allow us to grow new and different lines of business.
For example our investment in Nashville and the music industry, and the bankers that have come on board to help us build that business.
M&A, we think, is an important part of how we can use capital.
We intend to be disciplined about M&A.
I would say nothing really has changed very much about the nature of the M&A environment.
We do think that pricing is the key to it, that lower premium transactions, whether you see them as MOEs, or but lower premium transactions, are probably the most effective way to create synergy, and to create value for shareholders, both sets of shareholders.
And so we think that's a priority.
And then, as we have in the past, we continue to look for opportunities to return capital to shareholders through our dividend policies, as well as our repurchase programs.
So we will continue to use all of those levers.
We will be thoughtful and disciplined, as best we can, in terms of picking the timing and the opportunity.
But we see a fair amount of capital or excess capital generation that we have the ability to continue to put capital back in our shareholders hands, and invest it in the business and create continued growth opportunities.
Thank you, operator.
Thank you all again for joining us this morning.
We are very, very pleased with the progress that we see in the organization.
We continue to see a difficult but an opportunity-filled environment, and we continue to look for ways to grow our business, continuing to improve our returns and capitalize on the momentum that our team has continued to create.
Thank you again to all of the First Horizon, First Tennessee team, for all you do, to help us build this business.
If you have any questions or any additional follow-up requests, please reach out to any of us, or reach out to <UNK>, any time during the day or over the weekend, or early part of next week.
Thank you all, and have a great weekend.
| 2016_FHN |
2015 | AAWW | AAWW
#So, you know, we always do recurrent pilot training.
Our pilots come back to the schoolhouse for their recurrency.
But, in this context we have had to hire an increased pilot workforce because we have taken on more aircraft.
We had to hire in advance of the delivery of the dash 8s.
We need to hire in advance and train in the context of the two 767 CMIs.
And we have been operating at a higher ops tempo, a higher daily utilization than we had before.
We needed to hire additional pilots for our existing fleet over and above the ones that are ---+ the deliveries just because of the higher ops tempo that we're experiencing in the fleet.
That can be lumpy.
When the aircraft come in, as three aircraft are coming in roughly about the same time, that's a bit lumpy.
We did have to bump up crew training.
That will normalize going forward.
Good morning, <UNK>.
Sure, <UNK>.
With regard to 2016, as <UNK> said, we will provide a more detailed outlook and framework, as we typically do, during our February call.
At this time of the year we are still going through, finalizing everything for 2016, so we are not in a position yet to talk about maintenance for next year.
That is obviously one of the big variables for next year.
But as <UNK> pointed out, we are confident about 2016.
We will have an additional dash 8, we'll have two more 76s.
We will have lower financing costs.
We added a 747-400 during the year so we'll have a full year of that next year.
So we are feeling good as we go into 2016.
So I haven't answered your maintenance question.
We need to do that during our February call.
The second part of your question, I'm sorry was.
Sure.
Sorry.
The dash 8 we took delivery today, and that dash 8 will operate for us in our charter segment initially.
There aren't many dash 8s operating the way we do in our charter segment, so that aircraft does really well for us.
So we are excited about placing that dash 8 in charter.
We will take advantage of that.
We expect longer term that the aircraft sometime during 2016 will be placed in ACMI.
But we are not that concerned about it.
It's going to do really well in charter and it will find a home like our other dash 8s.
All nine of them placed very profitably with long-term customers and ACMI and so will this dash 8.
Good question.
As <UNK> talked about earlier we expect pre-tax income will be greater in the fourth quarter of this year than the fourth quarter of last year.
All of our segments, the earnings should be improved over the prior year.
So on a pre-tax basis.
That's the thing to focus on and that's a great thing.
We expect ACMI will be up.
As I said, I agree with you.
We expect to see charter up.
Dry leasing will be pretty similar, but perhaps could be slightly up.
We have the $0.20 tax item that we've talked about and that relates to a benefit that we recorded in the fourth quarter of last year related to our tightened dry leasing business.
We got a lower tax rate in Singapore.
It went from 17% to 10%.
That was a one-time benefit to catch up with that rate.
We obviously won't be seeing that in the fourth quarter of this year.
I think the key things for the fourth quarter of this year is last year during the fourth quarter we had a bit of an impact from the start of the West Coast port disruption.
So prices were starting to increase as a result of that.
Maintenance expense should be lower in the fourth quarter of this year.
We expect that volumes should be up during the fourth quarter of this year and we are placing the tenth dash 8 in service and we have the additional 400 that we talked about.
Fuel decreased towards the end of last year but it is decreasing during the fourth quarter of this year as well.
And so you put all that together.
Pre-tax income we think will be higher.
We certainly expect pre-tax income will be higher.
We are harmed a bit by the tax benefit we enjoyed in the fourth quarter last year.
Welcome back, <UNK>.
Sure.
Looking at the rate per block hour during the third quarter as you said there was a change in mix.
We had increased CMI flying.
Our aircraft equivalents were up four aircraft, over 30% above the third quarter of 2014.
So we went from a little over 12 to a little over 16.
We have been growing our CMI business which naturally has a lower rate per block hour because we don't own the aircraft.
We have continued to grow that, and the rate per block hour is also highest for dash 8s, so in periods when we add more dash 8s than other small aircraft type, the rate per block hour generally goes up.
And in periods when we add more 400s and 767s, in periods when more of those are added to ACMI, the rate per block hour generally goes down.
It really is a mix affect.
And it depends what is happening during any particular quarter.
We are not all that concerned about it because we understand the mix impact, but I know it is something you all look at.
But again, when we are adding four aircraft, growing our CMI business by 30% in a particular quarter, it is something we expect to see.
Love CMI, yes.
When it comes to capital allocations we try very hard to have a balanced approach.
Our cash prioritization continues to be three primary areas.
We want to maintain a strong balance sheet and have a strong cash balance.
We want to continue to invest in assets that our customers want that are modern, efficient aircraft that our customers want, and then we also want to be able to return capital to our shareholders.
So we really have been focused on trying to do all of those, and we know it is very difficult to please everyone, but we have been trying to do all those things.
Our cash balance is very, very strong.
We have been paying off debt.
Our net leverage ratio has been declining.
We recently purchased, added a dash 8 today; we're adding two 767s that will soon come out of conversion.
We continue to look at additional other aircraft if they make sense for our business.
And as we talked about and as you just said, we repurchased over 10% of our Company back in the last few years.
So from our view point we think we are being very balanced when it comes to capital allocation.
Yes, sure, <UNK>.
This is <UNK>.
As we talked about at the one or two of the calls before that we saw military demand stabilizing, and that's essentially as we see it today.
The hours this year will meet our expectations which is a high rate of flying than we had in 2014.
And we think the level we are at now in 2015 will continue through 2016 at least.
I can give you what we expect for the full year.
I don't have that at my fingertips.
For the full year on an adjusted basis we expect a 28% tax rate.
Sure, thanks, <UNK>.
So two things.
It is important to bear in mind that of the two that are delivering one will be fairly late December and one will be January.
So in terms of the impact, the majority of that impact or that impact really is a 2016 level.
The reason we've bifurcated the two here is because they are two different contracts.
The contract on the aircraft in Titan is much longer term, and the CMI is a shorter term contract.
Sure, <UNK>.
Capitalized interest we really don't have very much of that anymore.
That's very, very minimal.
There is a tiny amount here and there sometimes for a capitalized engine and that sort of thing.
Otherwise, that has really gone away.
It is a much bigger item when we had the big dash 8 order coming.
But with regard to interest expense and interest income we paid down higher yielding debt, about $155 million that had an effective interest rate, a book interest rate of about 13%, a cash coupon rate of 8% and that interest goes away which is terrific.
We took on the convertible and that's $224.5 million.
That has a rate of 2.25%, and so we will add that interest expense.
And the pass-through certificates we have, some of those got paid off as a result of us paying off the EETCs.
That was approximately $90 million and we lose that interest income.
All of that nets to approximately for 2016 about an $0.18 benefit to earnings after tax.
We are actually not in the new fiscal year yet even though you would think we are.
The FY15 contract was extended through the end of this calendar year, <UNK>.
So, the FY16 military contract is only going to be nine months, January 1 to October 30, and that has to do with some different considerations that the military had.
We are at about a 58% entitlement for both cargo impacts.
That's pretty stable to where we were.
That has not moved very much this year nor next.
But it did 2014 into 2015.
It is a normal year, <UNK>.
All right.
So a couple things.
In terms of our ACMI customers because that's their networks, their networks continue to operate as they think makes best sense for them.
DHL, our largest customer, has increased its capacity in and out of China.
It increased its capacity on the ACMI operation that we operate for them in both Trans Pacific and intra Asia.
DHL continues to have very strong volume and earnings growth and I'm sure they will talk about that when they provide their next call.
Quantas has talked about growth in their cargo business.
We operate a Trans Pacific network for Quantas from the US into Australia, north to China.
And then a Trans Pacific eastbound network for them.
Etihad has talked about growth in their business and their business and the networks we fly for them under ACMI certainly include <UNK> Kong and China.
And BST, who is a Chinese freight forwarder and for whom we operate a dash 8, while not publicly traded, is certainly growing and expects to continue to do so in this export-led economy.
Our charter growth in this third quarter, our third quarter charter growth, the military contribution was stable year-over-year.
So the growth in charter was commercial and that was predominantly Asia.
When we say Asia we mean <UNK> Kong and China for the most part.
I think we are very well positioned.
We are positioned with our ACMI customers.
Most of them are public and they talk about what they are doing and how they are growing and how they are positioning.
And then of course our charter numbers are not exclusively in and out of <UNK> Kong and China, but largely because that's where the largest freight market is.
Sure, Nate.
I guess perhaps selfishly I just want to point out that not all debt is created equal.
In looking at our debt it is really, really low rate debt.
It is generally collateralized by a modern efficient aircraft tail.
I understand that we all as financial people are focused on these things.
I just want to point out our dash 8s are financed, all 10 of them have a combined rate of about 2.8%.
That's debt that you and I would take any day of the week.
We have continued to un-encumber our 747-400s with a big pay down.
We took on 2.25% debt to do that.
I think that's really a very smart transaction.
I stand behind that.
I realize it is a little selfish and biased, but not all debt is created the same.
We have continued to lower our net leverage ratio.
So for us it really depends on what makes sense for the business.
We will take on additional aircraft.
We will take on debt associated with additional aircraft when and if it makes sense for our business and when we think there is an appropriate business case to take on the additional aircraft.
We've been very fortunate that the financing markets really understand the strength and the quality of our business and our earnings and the credit that we are.
I think that shows through and all the recent financings that we have done.
We are comfortable with our leverage, and we look at it on a plane by plane basis.
We don't have a target.
We look at it on an acquisition by acquisition basis.
We look at the NPV and the IRR for a particular aircraft.
Will it be accretive to EPS.
Who is the customer.
Is it a good investment.
Does it contribute to our overall strategic goals.
Those are the kinds of things that we look at.
I know it is a long winded answer, but we don't have a sort of specific target.
Thank you.
We are definitely in peak season, <UNK>.
We talk a bit about yields leading up to where we are now earlier on the call.
Maybe you heard it or not, but when we strip out the fuel impact, the yields that we have been experiencing so far are equal to or better than last year.
That's Atlas, our charter business.
That's what we are talking about.
We expect that to continue through the balance of the peak for Atlas.
There is a peak.
We are certainly experiencing a peak.
Others may not or haven't felt it yet, but we are.
And net of fuel, we are seeing yields equal to or better.
There may be a little bit of tapering in December and that tapering on a year-over-year basis would only be a result of ---+ that's when the West Coast port stoppages first started to be felt and fuel was dropping and as a result of that, yields were a bit higher, I think.
Overall we are in peak and that's informed an earnings framework of slightly better than $1.50 that we've put out there.
Sorry, <UNK>.
I don't have it at my fingertips and someone else asked the same question.
The adjusted tax rate that we expect for the full year is about 28% for the full year.
I think on a quarter over quarter basis <UNK> you talked about a $0.20 per share benefit that we had in Titan last year.
That's part of that tax headwind.
That's a new dash 8 that delivered this morning from Boeing.
We said that we are putting it at the charter right now because very strong yields.
We will enjoy very strong yields on that dash 8 in charter and then next year we will put it into ACMI as we have all of the other nine aircraft.
The arbitrage here is to use it in charter right now.
<UNK>, in June we issued $224.5 million of convertible debt at 2.25%.
We used the vast majority of the proceeds of that issuance to pay down EETC debt.
We refinanced 8.1% debt with 2.25% debt, essentially.
I took <UNK> <UNK> earlier through that map.
I can take you through it later.
I don't want to take everyone's time on that.
I went through the puts and takes earlier with <UNK>.
That's okay.
I can do it with you later.
Thank you, <UNK>.
Hope you are feeling better.
Sure.
We will obviously talk more about 2016 during our next earnings call.
The types of things I think that will play into that, if you take a look at our free cash flow for the nine months this year it is up tremendously over the prior year.
It is 927 year to date versus 598 year to date this time last year.
So it is growing tremendously.
I think some of the things to think about as we go into 2016 and we will obviously talk more about it during our next call, Lunar New Year is a bit earlier next year, see what impact that has.
We have an additional dash 8 which we've talked about.
We're taking delivery of today and we will have a full year of enjoyment with that aircraft next year.
We are taking on two 767s that we will have both being dry leased as well as operating at CMI.
Those are additions for next year.
We have the lower financing costs that we've talked about.
We brought back a 747-400 during this year and so that will operate for a full year, next year.
We don't have the benefit of the West Coast port congestion in 2016, presumably.
And we had some Titan return conditions that we enjoyed this year that presumably we will not have next year.
And then maintenance, we will see how that plays out.
We're in the process now of determining what we think maintenance will look like next year.
And so we don't have a number on that yet.
Those are the types of things to think about as we head into next year.
When it comes to free cash flow we've been pretty pleased with what we're generating.
Absolutely.
Yes.
We completely agree with that, Steve.
We're taking the test.
We're really excited to have it.
The aircraft are performing very well for us which means they're performing very well for our customers.
Even in a period of much lower fuel cost, frankly, that really tees up the dash 8 very well for our customers.
We believe we have growth in our ACMI business and that means growth with the 747-400 pure factory freighters.
Over time, if we continue, and as we would continue to take on more dash 8s there's an inflection point where we would begin to move 400s out of the fleet.
It's not one for one.
It's not always an additional add.
There's flexibility with the EETCs or the convertible debt and the retirement of these EETCs greatly enhances our ability to do that where and when it makes sense.
And then, just another aspect of fleet flexibility that we didn't talk about, I think there was some concern when we brought back one of our BCFs from parking.
And then we shed another BCF but brought one back at the same time under much more flexible terms.
Those have been a key part of driving the results that we've had in our charter segment.
BCFs go in the charter, they're very flexible, we could park if we need to.
We can return if we want to.
But that's been a key part about having that capacity available to us in this past quarter, the third, this current quarter, the third.
We'll manage.
That's some real flex in our fleet as well.
There's short term flex and these two BCFs which are very good for charter.
And then the mid-term flex around the 400s now that we've addressed the EETC overhang, if we want to call it that.
And it gives us better options to think about the fleet going forward.
Thank you, Carol.
<UNK> and I would like to thank all of you who are on the call today for your interest in our Company and for your questions.
We very much appreciate your sharing time with us today and we look forward to speaking with you again soon.
Thanks.
| 2015_AAWW |
2016 | ANF | ANF
#Yes, we had an exciting launch with our Epic Flex for Hollister guys and we were very, very pleased to see the results.
We actually have Epic Flex in more than just denim.
We also have it in our shirts and our polos and we have exceeded our expectations in our selling.
Going forward, again, as we've been able to react to the business, we will continue to place orders appropriately.
So, yes, we've talked about and you will see in our investor presentation the brand positioning that we've landed for Abercrombie, which is to be the iconic American casual luxury brand for the twenty-something consumer.
Today, we actually have the majority of our consumers are over 20, so we are targeting that particular consumer.
As we did this research and we pressure-tested it around the world, we actually had very positive feedback from both our existing and hopefully future customers that it was the brand position that really resonated with our customer base.
Regarding the Areo marketshare going into the back half of the year, we are working diligently on our own plans and our own strategies relative to the marketing for both of our brand positions as we move into the back half of the year.
So first regarding the Hollister remodels, Q1 and Q2 cumulatively I think we said we've remodeled 32.
We have a balance of 20 left for the rest of the year and we will continue on this initiative as we move forward.
The ones that we just reopened for back-to-school are a little bit too early to read, but prior to that, they are continuing to meet our expectations.
I think your second question was regarding the tops business (multiple speakers).
Sure.
The Hollister business specifically, we have a very agile supply chain so we were able to affect our future on orders and have been able to really specifically figure out what the customer is looking for through listening to our customer and voice of customer and have adjusted those.
As far as A&F women's goes, we've decelerated a bit into the second quarter, but we still had strong performance out there in our tops business.
The majority of the change, <UNK>, would be related to the currency devaluation we saw during the quarter, which was predominantly the pound, but also to a lesser extent the euro.
Most of it was related to the pound devaluation.
Okay, starting with what did we learn.
We learned that our customer out there globally is very excited and very positive about our brand.
In fact, we have things quoted to us.
Like there's a latent affection for the brand.
We are excited to see what the brand is up to.
So there has been very, very positive feedback and we actually went around the world and pressure-tested all of our positions and got very positive feedback.
As far as pricing goes, specifically for A&F, we are comfortable with where our ticket pricing is.
I think one of the things that we really have to work on is our degree of promotion.
As we mentioned a little bit earlier today, we've been focused on reducing our promotional activity, but as far as pricing goes, we are positioned where we believe is appropriate for the product.
And I'm not sure the last piece of your question regarding product design.
Part of our brand strategy is honestly to be very clear on our fit and our value for our customer.
We will continue to reach out and make sure our customer goes through our reviews and our online information that we are able to get from our customer.
We seem to be able to tell whether or not ---+ we are set on where we are for our fit for Abercrombie as our quality goes as far as the adjustments for design.
No, I think we feel very good about our inventory position across the globe in terms of not only the overall quantity, but the content of that inventory as we move into the third quarter.
And inventory management has been a strength of ours as we've moved through this brand repositioning, and the teams have done a really nice job at managing and maintaining the inventory levels.
Yes, we were pleased with the DTC growth.
We did see growth across geographies and across brands, so it was very widely distributed, and one of the particular good things that we saw was that mobile ---+ we were able to capture very high increases in mobile traffic and conversion was up double digits, particularly in the mobile space.
So that's an area where we've been investing and those investments are paying off.
It's also a space where our customers prefer to shop.
They are increasingly going to their mobile device to browse and as an entry point for their shopping experience.
And we've been pleased with the results to date and we will continue to invest behind the DTC business.
There were some differences, but it was broadly positive across brands and geographies.
We certainly have a promotional plan that we are able to buy our product to provide for our customer the best prices that are out there.
We don't normally comment on our promotional pricing, but we feel that we are very strategically positioned in the mall with where we are.
We are able to do good, better, best pricing if that's what you are referencing, which we certainly have out there today and we will continue to have through the balance of the year.
That varies between our core basics and the customer that we can offer them some fashion at some higher price points.
We've been particularly pleased with the performance of newness and innovation and I think that's the other thing that we are hearing a lot about in the denim space and when we get behind newness and innovation both from a product perspective, but also with marketing, we've seen really nice response from our customers, so we offer that as well in the denim space.
Yes.
Our approach hasn't really changed.
We've been on this path for quite some time.
We have had a tremendous amount of flexibility and expect to continue.
We have tremendous flexibility going through 2017 as I noted in my comments earlier.
We expect that we will be closing more stores and we evaluate those based on the economic merits of each store and the specific positioning of each mall.
So our plans haven't changed.
We've been on this path for a while and we continue to leverage the level of flexibility that we do have.
Right.
Thanks, <UNK>.
I appreciate the opportunity to clarify.
What we did say regarding comps in the back half is that the environment we expect to remain challenging ---+ we've seen very persistent traffic headwinds and we expect that to continue in the back half.
As I mentioned, with currency devaluation and safety and security concerns, we see that more pronounced in our flagship and tourist business.
And we don't see a catalyst for that to change in the near term.
We are focused and confident that we are focused on the right priorities to improve those trends over time.
With the new brand leadership that we have on board, our focus on improving the product, improving the store experience, as well as the investments we are making behind marketing, we have confidence that over time we will show improvement in both traffic and top line.
Related to the margin conversation, what we've provided in the outlook is an expectation that margins will be managed flat for the year.
We do expect to see some headwinds in the third quarter in margin related to FX and as I mentioned, the FX headwinds are more pronounced in the third quarter and begin to abate in the fourth quarter.
The other lever within ---+ or the other two levers within margin, AUR, we expect to continue to show some slight improvement in AUR as we step away from promotional activity, but we also expect benefit from AUC in the back half and that's weighted more toward the fourth quarter.
We've talked about our continuous improvement, profit improvement efforts here.
We've had a lot of success over the years taking cost out of the business and we've evolved those efforts into a continuous improvement mindset in the Company.
And we are leveraging that for savings.
It's not big buckets of money in one specific area.
We are finding savings little ---+ to use a baseball expression ---+ we are hitting a lot of singles, not a lot of homeruns, but they are adding up.
And so we expect to continue to be able to drive operating expense improvement through those continuous profit improvement efforts and the efforts of the teams across the globe.
In terms of the long-term outlook for OpEx, we have also been able to leverage those savings to allow us to invest in the things that we think are important to drive our growth going forward and that includes the investments that we made in the second quarter in marketing.
We continue to invest in the DTC space.
As I mentioned a little while ago, those investments have been paying off with strong performance on the DTC side and we expect to continue to invest in marketing as we move through the back half.
I will pick up the AUC.
You are correct.
We do expect to see AUC benefit in the back half, more weighted toward the fourth quarter and that is the result of the currency and commodity price decreases that we've been able to take advantage of in the back half of the year.
As it relates to 2017, we haven't provided an outlook on our 2017 financials at this point and would look to do that as we move into the fourth quarter.
Regarding your second question, we did have some misses in Hollister.
I think that's what we've acknowledged, particularly in the girls tops business, but considering that we have an agile sourcing supply chain here, we were really able to react to what some of those challenges were and correct them going forward.
But you know what's really exciting is when we get it right, like we did with our Epic Flex promotion for the guys back to school, our customer really responds and has been incredibly positive about that product.
We have new leadership.
Kristin has brought in a tremendous amount of energy for that team.
She brings in a lot of leadership and experience that will continue to help us drive this business forward.
Yes, we continue to be pleased.
We continue to meet our expectations with the renovations.
The only thing I said was that the most recent ones during the previous period are a little bit hard to read already, but prior to that, we continue to be pleased with our ---+ meeting our expectations.
We are just beginning to talk to our customer.
We are beginning to bring together the brand position as well as our DNA and our voice out there for our customers.
We've spent a lot of time in the past year working on our customer experience, which was really for both brands, Abercrombie and Hollister.
Through our voice of customer, we are hearing very positive things about our customers' experience within the stores, so we will continue to move along that path.
Specifically the prototype, yes, we announced a couple of weeks ago that we will be launching a prototype in the first half of 2017.
Well, <UNK>, we definitely value the online shopper.
In fact, we expect most customers are browsing, if not shopping online, so we continue to invest in the omnichannel experience and we've seen nice response to the changes that we have made.
I think the online shopper is and has been more price-elastic, so there is definitely a customer out there for the clearance business online.
However, we see nice traction with the online shopper also with new products.
And increasingly, we are seeing that customer, our customer, shop on their mobile device and we've been very pleased with the conversion we are seeing, the changes that we've made to reduce friction in the shopping experience on a mobile device have yielded nice strong improvements in overall conversion.
So we've been pleased with the DTC business and we continue to invest in that space and we know that it's important for our customer specifically as one point of entry to the brands.
Yes, in terms of the basket size, the online basket size is higher.
And in terms of new customers, we are capturing new customers through social media, but those are details that we haven't disclosed previously.
Hi, <UNK>.
Yes, we are excited about our wholesale business, and what we've seen as we've rolled out the wholesale business in Europe, specifically through ASOS and through [Next] is it has been a nice complement to our other businesses there, both our in-store and our online business, our own online business.
So we are expanding our brand reach and reaching new customers through these wholesale channels, and with our Zalando announcement last week, we expect to have now access to 18 million new customers through that platform.
So we have been very pleased with the results.
From a product acceptance standpoint, I think we haven't learned anything specific from the selling there that we wouldn't see or haven't seen in our own business, but we have seen a nice complement to our businesses in those regions.
<UNK>, it's <UNK>.
Your question regarding marketing, so competitively we can't really comment on where we are headed for Q3 but what I can tell you is that the success of the things we've been doing in the business in Hollister and we are going to start to ramp up doing in our Abercrombie business is a holistic marketing campaign, which encompasses social, digital out there.
So we are going to continue on the path that we've been on.
| 2016_ANF |
2016 | CMI | CMI
#Thank you.
Thanks, <UNK>.
Thank you very much, everybody.
I will be available for any follow-ups, if you have any.
Thanks.
| 2016_CMI |
2016 | HBAN | HBAN
#Thanks, <UNK>.
<UNK>, that is a very accurate conclusion or analogy and I think the volatility just had people pause as the quarter progressed, more confidence emerged and as we sit here today, our pipelines look good going into the second quarter.
And, frankly, they did at the end of the fourth quarter.
Again, that volatility just created, I think, a bit of a timing issue.
Well we've spent a considerable amount of time with our team and their team.
I mentioned we've gotten through much of the product matching and mapping and so the things that would be done early stage for integration purposes are well underway.
Terrific cooperation and communication and we continue to be very impressed with the quality of the people from FirstMerit that we have the pleasure of interacting with.
So we had outlined a sequential integration plan when we announced the deal.
We're certainly well on track with that.
And expecting to get approvals necessary to close in the third quarter.
Thank you.
Thanks, <UNK>.
So on the first question, <UNK>, about 70% of the margin benefit from our derivatives actually comes from the debt swaps.
So when you think about the impact of the asset swaps at about 30% of the impact and if you roll that forward, I think we see another $2.4 billion of the asset swaps coming off by the end of 2016 and the remainder come off basically by the end of 2017.
That impact is completely manageable when you think about the quarter-to-quarter impact and how slow those are rolling off.
On the second question, we really don't have a target in terms of what we're looking for.
We do think eventually it's going to be good to be asset sensitive.
We're very comfortable with our position today and how we're managing the balance sheet.
With the swaps rolling off and I think some of the changes that we've made in the non-maturity deposits, we have seen the increase in asset sensitivity.
But, again, we're very comfortable with how the balance sheet is positioned and the outlook for interest rates as we go through 2016.
Thanks <UNK>.
Our core markets have done well, so Ohio and Michigan have had good growth.
And we've also had growth in the asset finance portfolio, <UNK>.
Like what we're seeing with how the year's progressing, at least at this stage, and were feeling much more confident with the market settling down and this volatility abating from where it was in early January and February.
Yes, we had it coming down 300 to 400 basis points, I think is what we disclosed in that investor presentation.
Clearly a good opportunity for us when you think about 80% of their markets overlapping with ours, and the number of consolidations that we are going to be able to achieve.
Thanks, <UNK>.
Thank you.
We're off to a good start in 2016 as our first-quarter results provided a solid base to build from.
We delivered 7% year-over-year revenue growth, 3% net income growth, and 5% growth in EPS and an 8% increase in tangible book value per share.
So these are solid fundamentals and we're well-positioned to continue to deliver good results through the remainder of the year.
You've heard me say this before and it remains true, our strategies are working and our execution remains focused and strong.
We expect to continue to gain market share and improved share of wallet in both consumers and businesses.
We expect to generate annual revenue growth consistent with our long-term financial goals and manage our continued investments in our businesses consistent with the revenue environment and our long-term financial goal of positive operating leverage.
We're optimistic on the economic outlook in our footprint and believe the gradual transition to more normalized credit metrics will be effectively managed.
Finally I want to close by reiterating that our Board and this Management team are all long-term shareholders and our top priorities include managing risk, reducing volatility and driving solid consistent long-term performance.
So thank you for your interest in Huntington.
We appreciate you joining us today.
Have a great day, everybody.
| 2016_HBAN |
2016 | MO | MO
#All right, good to talk to you.
Sure.
Let me separate out, for purposes, my answer: this application, then the process generally.
I think that's probably the way to do it.
We remain ---+ I think you've seen PMI say this ---+ that I think the schedule remains for late third quarter, perhaps fourth quarter of this year, to file the application, which is consistent with, I think, what we've said before.
You know, these applications are quite voluminous.
There's a lot of science and clinical ---+ I'm sure you've been briefed on that; it's a lot of work.
I don't want to comment about talking to FDA about this application, but generally speaking, I can tell you how it works, which is: when you want to have applications like this, you want to partner with FDA.
And so we communicate with FDA regularly on our issues and try to get feedback from them.
I think in the pharmaceutical side, for example, it's well-known that if you're going to design clinical trials, you want to go in and talk to your regulator, and show them your trial protocols, and get feedback on that before you go to that time and expense.
So it's ---+ I would say generally it's working about the same way.
And that's what you would expect if you're going to have a good relationship with your regulators, which is what we see.
Yes, I think there are some questions to be worked through there.
I think at a very high level, without getting ahead of ourselves, I think if it's characterized as a cigarette ---+ which, as you know, there's the device, and then the cigarette, which is warmed.
The cigarettes would be covered by the MSA.
I think that's the thinking.
Let me just start, and then I'll hand it to <UNK> for a word of detail.
Remember, the productivity initiative consists of a couple of pieces, one of which is the organizational realignment.
That is largely completed.
And our organization is now really in place and going.
And then there are other SG&A savings.
<UNK>, you may want to say a word about that.
Yes, <UNK>.
We had a little bit of those savings in the first quarter, but you are correct in thinking that the majority of those savings will be progressing as we move through the year.
And that was all incorporated in the guidance.
Thanks for calling, <UNK>.
Sure.
Let's start with the competitive environment.
It's always competitive, and it continues to be competitive.
But I think you're right that there hasn't been a marked change in that regard subsequent to some owners getting new brands.
They're executing the strategies that I think they said they would execute.
They are the strategies we would expect for them to execute.
And as you might expect, we have very good plans in place.
You know, at a very high level what I would say is: we have been the market leader for decades.
There's a reason for that, through thick and thin, which is we have very good people.
We have the leading brands and the leading positions.
And so while we respect our competition, I assure you that our people are ready to compete in this new environment.
We haven't seen anything that's markedly different there.
You know, with respect to Marlboro, I'm tempted but I won't reprise the presentation that we put on in CAGNY just a few months ago about all the many strengths of Marlboro.
You're right, <UNK>.
It's modest share momentum over time, and a quarter is not over time.
I think when we were talking about this several weeks ago, we looked back, and Marlboro has actually grown about 2 full share points if you look back from the period, call it, 2007/2008 to date, which is terrific share performance for a brand that's as big as that.
You know, one way to look at the competitive environment is how PM USA did in the quarter.
So just to call out, again, a few of the highlights: it grew its income more than 9% over a tough comp.
It expanded its margins.
It had net pricing realization in-line with the long-term trends.
So it's a terrific performance, despite the fact that we have a transaction, and there are some new owners of new brands out there.
I think that's how we'd look at it.
Yes, thanks for the question, <UNK>.
Nothing significantly unusual in that.
You hit the first point, which was volume was up, so that drove it up higher.
And then every year, we have the inflation factor that gets topped on for the MSA.
So those are the two major drivers of MSA for the quarter.
But thanks for your question.
See you.
<UNK>.
Yes, thanks for your question.
No, no change in strategy or philosophy.
Look, we want to maintain an investment-grade credit rating, and that's what we strive to do.
We are pleased with the upgrades, because we think it's recognition of the strong balance sheet that we have and the strength of the businesses.
But yes, no change in the underlying strategy.
Thanks for calling.
Yes, thanks for your question.
Here's the way we think about it.
We feel very comfortable where we are at.
We always monitor market conditions and try to take advantage of market conditions.
So I'm not going to commit to any future actions one way or the other, but that's the way we think about it.
We are comfortable where we're at, but we do monitor the market conditions.
Sure.
Thanks for those, <UNK>.
Look, we did have an extra shipping day for PM USA, so it obviously flattered the volume a little bit.
We have one fewer in the fourth quarter, so on a yearly basis, which is how we think about it, it will wash itself out.
On L&M, I would say that it's doing exactly what we want it to do.
We want to have L&M participate in the declining discount segment.
That industry segment continues to decline as the premium effect in the category obtains.
But L&M is doing a very good job there, but we don't want to grow the discount category.
And L&M is doing exactly that.
I read with interest and listened to the reports about Director Zeller.
I've seen his presentation.
We continue to be encouraged and optimistic that the FDA will adopt the continuum of risk with respect to products.
It's the right thing for consumers.
I think it's the right public policy, and it should promote innovation.
You know, this is a category in which the FDA, in our opinion, should be promoting innovation to bring new products to smokers in particular.
And I thought it was great that Director Zeller went out and shared his views at the conference.
Thanks for calling, <UNK>.
Thank you, everyone, for joining our call this morning.
If you have any follow-up questions, please contact us at investor relations.
| 2016_MO |
2016 | MTD | MTD
#I wouldn't read too much into that.
We gave a guidance of 3% to 4%.
We said 4% for the full year, we said 4% for Q1.
I think it very much reflects our more detailed look at how comps are going to go; in particular we see China's probably got to do a little better in Q1 than we expect it to do for the full year, and I think that's largely explained by some specific comp considerations that they have.
So I am careful.
I think the word you used to position the question was deceleration.
I think to say the going from 4% to 3.5% as a deceleration is probably, I don't think the right analytical conclusion.
I think there's a little bit of a comp topic a Q1 that benefits us and we largely think that what we see today is playing out very much in line with what the information that we had at the time we updated you in November.
<UNK>, could you ---+ the word that you're asking, we both missed it.
I think I would also add, it's not easy to look at a trend on a monthly basis.
A month can be impacted by bigger projects, number of working days and so on.
So we don't necessarily look at monthly results to identify a trend.
I think we prefer to take averages across at least three months if not six months.
I think so maybe similar to where <UNK> finished up the answer to the previous piece, we don't read too much into the shorter period.
If we kind of look out on the China business, there is nothing that's happened, let's say, positive since we talked to you guys in November about the China economic outlook.
And I think we always have a little bit of a late cycle economically our business, so we are impacted by investment decisions and I don't think anybody is rushing to make positive investment decisions in China based on what they heard recently.
So we think it's prudent to be cautious, and we're happy it's going to be off to a good start.
We prefer that than trying to explain to you guys why we are going to catch up later in the year.
But we're not, we prefer what we got for the first quarter versus the alternative, but we are not so excited yet about a turnaround.
And we never ---+ we don't expect when the turnaround does come, <UNK>, that it's going to be a jump back.
It's got to be a bottoming for a while.
There is ---+ that overcapacity will take some time.
The fifth wave will not bring big revolutions.
It's like the first four waves evolutions, or we are strengthening all the different dimensions that we have been working on and bringing some additional sophistication.
So topics around key account management, iBase management, this install base topics, all will remain in the center.
I think where we get a little bit more sophisticated is in the area of big data analytics and leveraging it for sales and marketing initiatives.
And the example that I used in the prepared remarks, we're going in that direction that we are really applying more sophisticated analytics to the information that we have on the millions of installed instruments.
And the analytics allows us to better recognize the potential and based on the potential also use the right go-to-market approach.
So meaning, understanding if this is an opportunity where we use telesales or are we using a field sales person.
And with what kind of value proposition we approach the customers.
And there is certainly an area where we bring more sophistication with this wave of Spinnaker.
The latter one I can answer quickly.
The answer is no.
We didn't catch what you were asking for, the first one.
I think again we will have a good year.
Our material costs were down on an apples to apples basis about 3% in 2015.
I think we should have a good year.
It's important, though, to remember on commodity prices we are not buying that much, if you look at for example a machine part or a fabrication, labor time, machine time, would be a bigger cost element than the steel or the fabricating material itself.
So we didn't get hurt by material in any way, I don't mean to imply that.
It's certainly ---+ we like it going this way more than the other, but it's ---+ for example, of the 3% that we saved this year I think less than 1% is directly attributable to lower material costs.
So as we discussed it on the November call, we have done a very successful wave of field turbos in 2015, and we want to repeat that in 2016.
We are on track to implement about the same amount in terms of additional resources, so roughly 200 field resources.
We are very encouraged by the results that we had last year, and we also want to approach it in a similar way this year in terms of funding it also through cost measures that we have in other areas of the Company.
The projects or the field additions are very similar to last year in terms of the business priorities, but of course, the territories might be different, but the geographic focus remains on the markets that have reasonable growth momentum.
So we're adding again, quite a sizable number of resources in Americas as well as selectively in Europe.
So if we exclude China for a minute, in all the other emerging markets, I wouldn't talk too much industry specific.
I think actually it's more the geography than the industry.
We talk about Brazil and Russia and the challenges and the headwinds we had last year, it's actually very difficult to attribute that to a certain industry segment.
We saw it actually pretty much across the business lines and across industry segments.
And what we have seen is however that across the different emerging markets there are big differences.
We have seen actually emerging markets that did very well for us.
We talked about India, Mexico did well, Southeast Asia did actually well.
So we have multiple emerging markets that did well last year and I expect actually that this year it's also going to be mixed.
We're are going to have emerging markets that do well and there are going to be emerging markets that will be more challenging.
Partially, I would attribute also the good results that we had in certain emerging markets last year to an excellent performance of our local teams.
I would, for example, highlight countries like Mexico and Southeast Asia that did really exceptionally well and that's certainly also attributable to programs that we have in place.
Some of the emerging markets, the economic environment might be a little bit more challenging, but we consciously want to invest in these markets because we believe also in the long term, I would name you for example Turkey but also Indonesia, Vietnam, and so on, where you can see a certain cooldown from a macroeconomic environment, nevertheless we continue to invest there because we feel we can win market share and in the long term these economies will continue to develop well.
So the beta testing wouldn't necessarily apply to Spinnaker.
The way we develop things is we go out to all the different market organizations and we study different best practices, and when we see that we have a best practice, a certain sophistication in an approach and so on, we qualify that in a toolbox which qualifies in training and then we roll it out.
So in that sense, it's not beta testing, it's already reality.
We have this pilot, this crusaders of teams out there that have done good stuff that we are scaling up and rolling out.
The scale-up takes place over about a year.
We go normally with these more sophisticated levels to the countries that are more mature, and then we follow up with the other countries.
There are a few things that we drive from the center rather than bottom-up from the units, like the big data analytics, things there are from the center.
And there I would say yes, we start with prototypes and then we industrialize the things so there I am with you with this beta testing.
I feel comfortable where we stand on that one, and I know we're going to have the results out of it.
Yes.
That's correct.
In this area it's also about ---+ we really try to innovate in this area.
We try to come up with new approaches, tools, various technologies, tools, databases, and all that stuff that we are combining, and there is a very small team that is leading the thinking process on that one, and that's the prototype part, and when we have cracked that analytics, scaling it up afterwards or industrializing is normally not the challenging part.
We had a good freight number savings year on year.
But I doubt it would be big enough to move the needle.
Could it be 5 basis points.
Maybe something like that.
It will impact earnings by 1.5% for the full year, and it will impact sales by 3% for the full year.
The 4.5% I think is Q1, and the 2.5% on EPS is Q1.
No, in the sense that we need to [constantly] come out with product innovations, upgrades to existing products and so on.
That's just part of our business model.
And it's typically an individual product helps us to increase pricing and have better models and keep the growth going, but it's not that it's going to really change our overall number.
An individual product will not really change the needle.
Even the new product categories, it typically takes multiple quarters that it adds up to millions of dollars.
150 basis points, so it's about the same as we guided already back in November.
Feel comfortable with that, even that the macroeconomic environments might have changed a little bit, I feel comfortable that we can execute on that one.
No, it's actually, it has much more to do with the customers.
We have good differentiated products and as long as we do price increases every year, actually, we operate almost below their radar and they accept that.
And of course, we differentiate significantly across the world by geography as well as the business lines.
And we are going to execute it in a very similar way as we did in the past.
Of course, every year getting a little bit more sophisticated, but the approaches that we use to it is very similar.
And it is a line that I've used many times, but the biggest obstacle for price increases are often not the customers' but our internal organization, salespeople, and that's something we can work on and can control.
So I feel comfortable from that end.
I think that there are things kind of going both ways, right, <UNK>, so I'll maybe give you two examples.
Because our industrial business has been shrinking, we're moving more towards the corporate (multiple speakers)
---+ versus the alternative.
But then, maybe to your point, <UNK> made this point on Masterkong cutting their CapEx levels, the largest food company in China.
And that certainly has slowed the move to more consumer safety in the food inspection area.
So probably both of us would say that if the economy was going better, the move towards more consumer safety food inspection considerations would happen at a more accelerated pace in China than it does now given the overall economic circumstances.
So a little bit of both ways.
So, we're going to have CapEx of $120 million or so next year and that includes some significant building programs in the United States and Europe, and I think a little bit in China as well.
China is a little bit more a story about we'll be consolidating with some other facilities there.
Yes.
Give me one second, we have that number.
It's ---+ so in Q4 service was 27% of sales, and if I include service and consumables ---+ oh, sorry, that was service and consumables, and for the full year it was 30%.
It's always a little less in the fourth quarter because that's the big quarter for product sales so it impacts the mix a bit.
Sure.
| 2016_MTD |
2016 | ATNI | ATNI
#Great, thank you, Operator.
Good morning, everyone, and thank you for joining us on our call to review our first quarter 2016 results.
As usual, with me here is <UNK> <UNK>, ATN's President and Chief Executive Officer.
And during the call, I'll be covering the relevant financial information and certain operational data, and <UNK> will be providing update on the business.
Before I turn the call over to <UNK> for his comments, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause actual results to differ materially from those described.
Also in an effort to provide useful information to investors, our comments today include non-GAAP financial measures.
For details of these measures and reconciliation to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at atni.com or to the 8-K filing provided to the SEC.
And there you go.
So I'll turn that over to <UNK> for his comments.
Okay, thanks, <UNK>.
Good morning, everyone.
As usual I'll start with some highlights.
The first quarter was broadly in line with our expectations for each segment with a few positives and negatives in the details.
Our primary focus at the parent company this past quarter was on preparing for the completion of the two significant pending transactions in our International Telecom segment and closing the India transaction in the renewables segment.
Needless to say, these are all important initiatives towards investing our balance sheet to drive healthy returns for shareholders.
I think we accomplished much in those areas, though there is clearly more to do over the rest of the year.
On the International Telecom side there is the work required to secure regulatory approval and close as well as the efforts to hit the ground running post-close and ensure those businesses move forward effectively and efficiently.
Both of those activities, you will have seen, have contributed to some ramp-up in transaction expense and overall overhead.
On the renewables side, the India acquisition and investment is more of a greenfield development than a large-scale integration.
And we will continue to expend significant resources to position us to move quickly and efficiently on the market opportunity we see there.
As for the businesses unaffected by the recent and pending deals, we have seen areas of progress, but we also have areas where our execution has not been as strong as it should be.
With that, I'll turn to some more specifics, starting with U.S. Telecom.
So in this segment, the most important driver of long-term value as well as short-term movements on our P&L is the ongoing repricing of our wholesale wireless network offerings.
This effort is continuing although not always at the pace we would like.
We believe this is a compelling value proposition, but it's a slow process to reset relationships and to orient our operations and investments accordingly.
While these things don't proceed on an entirely predictable straight line, overall the initiative is so far roughly on a pace and terms consistent with the guidance range we provided for U.S. wireless last quarter and re-categorized in this quarter's release to reflect our new reporting segments.
And I think <UNK> will touch on that a little bit as well.
So operationally here the trends are similar to past quarter's data volumes have grown.
Our pricing has come down, and we continue to spend capital to augment our network capacity and, in some instances, our coverage.
Once reset, we think there will be opportunities to grow this revenue stream.
But that will likely require covering new geographies or generating new revenue sources out of the existing footprint.
And one way we've created new revenue from our wireless footprint is our retail business in very rural and tribal areas.
And revenue from this source in fact increased about 47% over a year earlier.
However, the scale is still pretty small, and so the incremental revenue currently comes with very thin operating margins.
As we continue to add subscribers and volumes and work on improving cost efficiency, though, we do believe the margin contribution will increase.
And the other thing that bears mentioning is the retail part of the business also has strategic value to us.
And it's also an important part of how we deliver value to the communities in which we're operating.
Moving onto International Telecom, as noted, a big part of our attention in this segment has been on the pending transactions involving Bermuda, the Cayman Islands, the U.S. Virgin Islands, and several smaller markets.
The regulatory approval process is not simple anywhere.
But it can be even more opaque, illogical, and slow in smaller markets.
As you may hear from my tone, it can be frustrating at times.
But we're working diligently to bring these deals to close and expect them to do so.
At the same time, we're working hard on preparing to integrate these businesses and position them for long-term success.
The competitive and technological environments don't sit still while you await closing.
And there's much that needs to be done to both maintain and enhance value.
We also have work to do on positioning and costs in existing operations.
As I alluded to in the opening remarks, we have not seen the rate of progress we would have liked in all markets.
So there's clearly more work ahead.
We did see some healthy growth in wireline revenues, but not in wireless.
And we have some cost initiatives as well that have not advanced as fast as they should.
Moving on to Renewable Energy, operating results from this segment benefited from the expected bump in solar production versus the first quarter of 2015 when our Massachusetts solar plants suffered from abnormally heavy and sustained snowfall.
Can I get an amen from [them].
All right, they're not up to amens yet.
As investors will have noted, the main variability in results from this segment over the past year has been in transaction costs.
Our Ahana subsidiary is both an operational platform and an investment platform.
The latter aspect, which is critical to growth in this sector, will continue to incur significant transactional costs from time to time, though we expect those to decline in percentage terms as the operating assets continue to expand.
Furthermore, while legal and other deal expenses both for deals done and deals not done are a fact of life, we do see room to improve our process and approach to reduce those costs.
And <UNK> will add a little more color in that area as well.
I think it bears repeating that we are excited about the prospects in India.
We think we have partnered with a strong team and that there is a tremendous need in India for more power generation and for more distributed generation of power.
What's more, the government recognizes this need and is doing a lot on both the state and federal level to encourage investments in the renewable and indeed broader power generation sector in India.
Now don't be alarmed.
We're not ignoring the many challenges of this type of investment in the market, but we really do believe the risk/reward proposition is solid.
For the next few quarters, the development of this opportunity will most prominently be reflected on the cash flow statement as we begin funding the construction of solar facilities.
Operating expenses in this segment, while not very high, will also ramp up during the next four quarters.
On the revenue side, we do not expect a significant impact until the fourth quarter, then growing from there according to the pace of our build.
While our primary focus is on India right now in this segment, this sector is moving very fast; and so long as we stay nimble and disciplined, I expect more opportunities to present themselves.
In a very modest example of that we expect to bring at least another megawatt online in the U.S. market by the fourth quarter.
So in summary, excluding the transaction-related expenses, our first quarter operating results were within the range of our internal plan.
Our three pending transactions are moving forward, each at their own pace, but all on track to be part of ATN well before the end of 2016.
And we are enthusiastic about the long-term EBITDA and cash-flow potential of the company as we move forward with these new initiatives and look forward to have additional progress to announce in the future.
And I will now turn the call back over to you, <UNK>.
Great, thank you <UNK>.
I'll cover some of the relevant financial stuff and operating stats.
So let me start: for the quarter total consolidated revenues were up 5% to $89.7 million.
And this reflects a 9% revenue growth in our U.S. Telecom operations, a modest increase in International Telecom, and a 6% increase in Renewable Energy segment.
As discussed in our earnings release, we streamlined our segment reporting structure beginning this quarter from five segments down to three segments.
This quarter's revenue increase in U.S. Telecom was predominantly a result of higher wholesale roaming traffic volumes, which were partially offset by rate declines and increases in retail wireless revenues.
International Telecom revenue growth this quarter came from increases in broadband revenue and higher roaming revenues from some of our Caribbean markets, which more than offset the impact of the sale of our Turks and Caicos operations that took place later in 2015.
Consolidated adjusted EBITDA was $34.1 million, essentially flat with the first quarter of 2015, resulting in a adjusted EBITDA margin of 38%.
U.S. Telecom segment EBITDA increased 1% from 2015, and International Telecom in the Renewable Energy segment each increased 8%.
Growth in adjusted EBITDA for (inaudible) segments was offset by increases in our holding company overhead costs, mainly related to increased headcount we brought on in advance of the completion of our pending acquisitions.
As we noted in the release, we reiterated our earlier guidance for U.S. wholesale wireless full year 2016 results, combining it with the U.S. wireline operations for a full segment view.
On a combined basis we expect U.S. Telecom revenues to be between $165 million and $175 million, and adjusted EBITDA margins to be in the mid-40s.
Operating income for the quarter was $15.9 million, down 17% from the same quarter in 2015.
Much of this decline was due to the $3.7 million of transaction costs incurred in the quarter.
These costs are predominantly related to the India Renewable Energy segment that <UNK> spoke about earlier.
We do expect these costs to continue in the current quarter and estimate the second quarter expense to be between $7.5 million and $9 million.
This unusually high estimate is closely related to the expected accounting treatment of our purchase consideration of the development business acquired to establish Vibrant Energy, our platform development business in India.
Included in our operating expense this year's first quarter was non-cash stock based compensation of $1.7 million, and that compares to $1.2 million in the first quarter of last year.
Our effective tax rate for the quarter was 30%.
But I should note that this rate does not take into account any of the pending telecom acquisitions expected to close during the year, as we anticipate recasting this rate as each deal closes.
Net income for the quarter was $6.1 million or $0.38 per share or $0.54 per share excluding the tax-affected impact of the $3.7 million of transaction expenses.
Looking at the balance sheet at March 31st, we ended the quarter with cash and cash equivalents of $391 million.
For the quarter, cash flow from operations was $28.3 million and total debt outstanding was $31.3 million.
Capital expenditures for the quarter totaled $16.4 million, of which approximately one-half was incurred by U.S. Telecom operations, and the other half by our International Telecom segment.
It's still a bit early to predict the timing of this year's projects, but we have moved up the total of 2016 estimate to ---+ slightly to be between $65 million and $75 million.
And as we noted in the release, we also provided an estimate on the 2016 build spend in the Renewable Energy segment to be between $40 million and $50 million.
And some additional operational data for the quarter, we ended the quarter with 883 base stations in our U.S. Telecom segment.
That's up from 877 at the end of last quarter and 836 a year ago.
I should note that these totals include approximately 65 additional base stations that were more retail purposed and now carrying some wholesale traffic.
International wireless subscribers totaled 287,000, fixed lines totaled 154,800, and broadband subscribers totaled 44,600.
And with that, Operator, I'd like to open the call up for questions.
It's a good run rate.
And I think too, yes, Q1 ---+ and I'm not sure why last year it was a little bit.
I think we started probably bringing in some additional folks after Q1.
But I think it's a good run rate.
And if you compare it with like fourth quarter of this year, I think it won't go much higher.
It also included an abnormally higher amount of non-stock comp due to kind of a reset of a forfeiture estimate.
So I think this quarter is unusually high for that.
Yes, it's primarily the former.
And it's really just trying to take advantage of some of the scale and as I mentioned, kind of as I like to say, hit the ground running.
And so there's some expertise and centralization of expertise necessary to do that, including things like project management and some of the more technical aspects.
Well, I think the CapEx <UNK> gave you, so that's the number.
And that's the big number, right.
So the expenses in this business are ---+ this business in India will be similar to the U.S. in that the expenses are disproportionally capital expense.
So it'll start to come in in the second quarter, really, operational expense.
But it's not going to be significant even for the segment alone.
And then once the revenue starts to come in, you quickly get to operational break even.
So I think from a P&L standpoint, nothing major until you start to get 2016 behind you.
But the CapEx, <UNK>, I'll just ---+ the CapEx will flow quickly, if that's also part of your question.
There will be additional CapEx in 2017, not so much for those megawatts, but for continuing to go.
I mean, we're still targeting ---+ 250 megawatts are actually north of that.
And we're a little bit careful about projecting that bigger number, because you learn as you go.
But sitting here today we certainly would be expecting to be building a lot in 2017.
Now debt will start to flow in to fund a good portion of that if we're succeeding with our plan.
Right.
And in the equity weighting of it will go down.
No, no.
Power pricing is quite a bit lower in India, but the good news is costs are even more ---+ you know, are even lower still than they would be in the U.S.
Yes, you know, I think we have to kind of see.
We're hesitant to give a sense of precision on that guidance yet.
I mean I think that I would just return to our statements before, that we think ---+ we see the risks in an emerging market and in this kind of greenfield development.
And we are targeting returns accordingly.
So I think that's all we really can say for now.
And then as we get going there should be better visibility.
Yes, yes.
Well, I think I'll let <UNK> answer the part on seasonality.
But I think in terms of what inning we're in, I think it depends whether you're looking at our projected guidance or where we are in the first quarter, right.
So our projected guidance takes us into the later stages of the game, if you will, for what we anticipate in the year.
But it's an ongoing process as we speak.
And so I think maybe, I'm not sure if this is directly answering your question, but I think that our hope is that the actual activity of repricing and redrawing contracts will be largely complete in 2016.
And there may be some ripples into 2017 from that.
But I think that the process of that sort of reset should be accomplished in 2016.
And <UNK>, I think the way I would look at seasonality.
So we definitely still have seasonality impact, but it's much more [moded] by the rate decline.
So I think you're going to see a little bit more of a flatter quarter.
Q1 has got the best kind of rates in the grid, if you will.
And then I think you'll see the traditionally stronger quarters not being as high in Q2 and 3 and then the fourth quarter lower.
And they're kind of backing into the guidance that we gave.
Sure.
The year on year growth part of it was from the retail ---+ from the rural business, the retail business if that's what you meant.
And part of it was from slightly higher capacity of the network.
Yes, I think the ranges that we gave encompass our expected buildout.
Well, the ---+ one was completed, which is India.
But the two telecom in India ---+ so India has been completed.
But that's, as we noted, an ongoing process of really kind of greenfield investment.
But in terms of the Bermuda-oriented deal and the Virgin Islands-oriented deal, I'd just would repeat what we said earlier, which is we expect the Bermuda one to close soon and the Virgin Islands one to take a little more time.
Yes, I mean, I think as we kind of said in each of those release, right, Bermuda on an annualized basis, $80 million to $90 million of revenue, right.
Added.
Added, yes.
Incremental.
And the USVI about $100 million.
What I would say is that the ---+ and then I think we have later kind of mentioned that in time we want to get those margins up from where we would acquire them.
So I think from a margin standpoint you're going to be more in the low to mid 20's kind of out of the gate.
And then working up from there.
But it's going to take us a little bit of time to kind of integrate and establish those margins.
I think it'll be well into 2017.
Yes, we fixed our application.
I don't know the latest and greatest on that, but we're not worried about our application.
And I think we're on that second notice along with many others.
But a timeline ---+ I don't have anything.
I don't have anything to offer other than what you're hearing out there which is it certainly looks like it's proceeding.
Yes.
No additional remarks.
Thank you, everybody.
And we'll see you in few months.
| 2016_ATNI |
2016 | VLY | VLY
#I gave a range, a range based on everything you see, as to about where we think you should be looking.
In that range.
Again, as we keep telling you, there's 1 million moving parts.
And so for me to get any ---+ even think about anything more precise than that ---+ or even you guys.
I don't understand how you guys are coming up with a number that you could be comfortable with.
There's a lot of things that will be changing during the course of the year ---+ just the debt instruments that are going to be coming off, and new coming on, and loan production coming on, loans being sold ---+ so there's a lot.
I gave you a number or some range that I thought might make sense.
Well, we think ---+ I won't answer that question.
I'm on the Board of the Fed.
People will misread it! I'm not that I know!
Yes.
We have built in some incremental increase in the prime rate during the course of the year, but not a lot.
We are not looking at the same thing that we think we are hearing from the Fed at this point.
I'll speak on it.
Gerry never told me anything.
I don't ---+.
He doesn't know!
I don't know! (laughter)
Yes, it's actually been performing pretty well.
One of the things that we did is that we capped the valuation of those loans way back when.
So even as loans went up to $1 million ---+ not loans, the valuations went up from (multiple speakers) $1.25 million, we did not do that.
And so we capped it out at about $800,000.
And they are performing at this point.
We only have one loan in the entire portfolio that exceeds 80%, and half of them are amortizing loans.
But there's a lot of loans that are way less than that.
There's about 30% of the loans that are less than 50% LTV.
That one loan ---+ I'm sorry, the $800,000 ---+.
Let me explain it.
$800,000 is what we put the value cap at.
And then we only lent a percentage against that.
It's not that we went $800,000; we were lending in most cases two-thirds of that or less.
There may be a couple exceptions to that two-thirds, but most of them were under the two-thirds.
So we had a pretty good valuation cushion on it.
And right now, as I know, they are all performing.
As far as I know.
They are all performing.
They're all performing.
We have zero delinquents.
I'm hearing from my credit people ---+ zero nonperforming.
And most ---+ almost all of them are amortizing loans, also.
They are not all a static loan.
So far not.
No.
Good point.
We are always on the outlook to grow our franchise through acquisitions.
Our primary focus has been in the Florida marketplace, because you really have to focus your attention one place at a time.
And right now we are trying to build our Florida franchise.
So we are looking for additional opportunities in Florida.
That being said, while our primary focus is not in the legacy New York/New Jersey area, if the right opportunity came along, we would be happy to consider that.
I don't know how the regulators think, but I know how we think.
I personally have my views about cap rates.
When I see banks lending, I don't care what kind of property it is, using a sub-3 cap rate, I think it's ridiculous.
So pretty much we have, like we did with the taxi medallion loans ---+ we appraise not using necessarily the cap rate that the appraiser might come up with; we have our own floors that we like to impose on our loans, which very often changes the valuation considerably.
But we are comfortable, and that's how we've always lent money at the Bank.
We did not get involved in the subprime residential mortgage market for the same reasons.
Just because everybody thinks it's a great place to be doesn't necessarily mean we agree with that.
We adjust our cap rates ---+ I think when you hear some of the cap rates that are bandied around, I think it's just ridiculous.
It's interesting that the Florida marketplace seems to use even a higher cap rate than we see up here.
So it gives me a little bit more comfort on the valuations I see coming out of Florida.
Thank you for joining us on our fourth-quarter conference call.
Have a good day.
| 2016_VLY |
2016 | CB | CB
#Sure.
<UNK>, you see or you heard me say it, it was more large account than it was in the middle market area, though middle market new business was down about 4%.
Large account was down in around 30%.
January was a much tougher month in terms of new business than February and March was better and April was better than March, as we go forward.
So we know a combination of things as we look at it.
Definitely it was a more competitive environment in January.
And January is always a competitive month relative to other months.
As a matter of fact, I have to tell you, in the softer part of cycle, you are better off to try to write your new business in the off months of a quarter.
January is tough.
April can be tough, March-April, and June, July is like January, the way people go after it.
They have some growth objectives and they want to achieve, so there was some impact from that and we see that.
But in the fourth quarter, we had a lot of people ---+ we focused for six months very intensely on planning the merger.
And there was an 11th hour jitters of people as we come up to close and everybody is focused on to a degree of the integration and the structure and who am I working for and what is my job.
And then the integration itself, all the planning of that just takes time, and it's some time away from working on new business.
January, and to a degree, February, is impacted by your activities in the fourth quarter, which is November-December.
And then we close the middle of January so everybody then has to execute.
And there's just a mountain of execution when you take it by function, by area of business, by geography, all over the world.
I'm very proud about how we have executed because people have done it.
There has not been a lot of surprises.
Everybody has known what to do and it's gone very smoothly and then people have spent a lot of time getting to know each other and getting to know what the capabilities were and learning the products of each other before you can take it out to market.
And we could really begin to feel that start to take hold in February, move into March, and as it moves into April, it just keeps on building.
So maybe that gives you a little sense.
As is characteristic, I suppose, of our organization, and of me, I'm not going to do a lot of talking about something that we're building and planning.
I'm hardly going to stick a road map out there.
We let results and activities speak.
But we have all the parts and ingredients.
We have the sticks to rub together and make fire and we have the distribution.
We have the data and the know-how and we have the insight.
We have the focus.
We have the resource that we're putting attention to.
We have the road map for technology and we're coming.
We are building right now and focused on building.
We already had between the organizations, what I call a nascent small commercial business, very modest in size and specialty oriented.
And that continues, those efforts continue, and they have a reasonably aggressive plan in action, a set of actions to achieve results in 2016, but that is not the main event for us.
This is an $80 billion marketplace and we intend, over the next number of years, to grow, to be a meaningful player.
I might say, a little like I said about high net worth, it takes time to build capabilities, to build all the services and product know-how, to have the right insights into pricing and to execute, because it's work-intensive.
The average premium sizes are small.
It's high-transaction volume and you got to win over and wire up the distribution.
And we are focused on all of that, and so over the next few years I expect that to grow and be a meaningful contributor to our business.
And as it's appropriate, we'll update you more specifically
Don't look for much out of me in 2016.
Good morning
Yes.
So the brand change had no impact on our revenue growth in the quarter.
The growth is pretty broad-based.
It came from both specialty and traditional.
It came from a wide range of geographies, from Mexico, to Malaysia, to Europe where we do a lot of specialty.
So broad, you know, broad-based.
In Mexico, it's automobile and small commercial related, but automobile, in particular.
In Malaysia, it's auto and, again, specialty and small commercial-related.
We write cell phone insurance out in Asia, and that had nice growth.
In Europe we write cell phone related insurance and that had really nice growth.
So it isn't from one place nor one geography and it is not traditional versus specialty.
It's broad-based, but it's very ---+ when I say broad- based, we're very targeted and focused about where we choose to do Personal Lines and how we choose to do it.
It's easy to put on a lot of revenue in that business.
It's not easy to do it and make a decent margin.
You know, it's a focus.
Meaningful.
It's nothing like the US And it's not going to ---+ I don't think of it in terms of ---+ if I think of the US's high net worth as a meaningful business, I don't think of international high net worth that way.
I think of it as a good business and it's a very good business and a good opportunity, but it's really focused in a limited number of territories, UK, Australia, maybe a little bit on the continent.
That's the majority of it.
The balance is small pockets of high net worth and that's mostly serviced by us out of our London operation.
Yes, it is
Yes.
It would definitely be done net of tax.
Goodwill and other intangibles would be reflected net of tax in our calculation of what tangible book value represents.
It should not.
It would decrease in relation to the amortization of the intangibles
Yes.
I've talked about this a little bit in the past and so I'm going to ---+ I'll talk a little more about it.
The first thing I'll tell you is is it's a double-edged sword and you've got to be careful.
On one hand, as I said the last time, when there's a wounded animal loose, be careful.
Stay out of the way, and don't try to corner him.
On the other hand, look, we represent ---+ and that's what I tried to say in my commentary ---+ we represent a very attractive market and alternative for large accounts seeking a deep balance sheet, great underwriting expertise, as you know, great reputation for service, global capability, broad product offering and services.
And, by the way, which has become more and more the play in large account business, your technology, your ability to deliver in a way that the service standards are met, the service expectations are met.
And those standards of service have only risen ---+ the expectations have only risen over the last decade and the last five years and three years.
People expect great data, great information in a very rapid way, self-served way, where they can serve themselves.
We have that technology.
Very few have that.
Our ability to move money, our ability to service self-insureds, our ability to risk engineer, our ability to provide primary casualty coverages including professional lines all over the world and service claims, very few can do that.
And we have been stable in terms of our capacity offering and our approach to underwriting and our pricing.
Sometimes the market moves closer to us, when the market is more disciplined in terms of underwriting.
Sometimes the market moves further away from us because others are willing to sell something at a price we considered too cheap or at terms we considered too broad.
So on one hand, we're in a market where it's competitive and some things are being sold at prices that are below costs we think are reasonable.
On the other hand, there is this pull and desire for stability and certainty and familiarity and that is drawing more towards us.
So I can tell you we just came back from RIMS, all of us there.
I have not seen a reception towards our Company ---+ towards this Company.
I don't think I've ever seen the reception like I saw at RIMS.
We were really popular kids on campus.
We have no plans at this point for buybacks and we'll keep you posted as we go, as we see how our capital develops.
I'm hardly going there.
Yes.
And, <UNK>, on international, the profitability meets our hurdle rates and it meets our underwriting standards or we wouldn't be doing it.
But I'm hardly going to put a road map out to others.
On the domestic and margin, there's been questions to us of, well, now that you are so dominant in that business, we assume you're going to now, in a sense, be predatory, take advantage, raise prices, et cetera, increase margins.
I think there's a naivete about all of that and I think that's wrong.
Our approach is to earn an adequate risk-adjusted return in the business.
The business does that reasonably well today.
There is a lot of risk in the business.
The business is regulated.
You have to file your rates and they have to be just ---+ they have to be actuarially justified and we do that, and that adds a complexity but adds a stability as well.
Secondly, we want to win customers by offering a great service at a fair price and hardly do we want to try to push it where we make our money simply on ---+ try to make more money on the cohort we have.
I'd rather grow the cohort, if we're making an adequate risk adjustment.
With all of that, what I would say is we see stability as we look forward in the margins in the business.
And we don't consider that we're making excessive returns.
On a risk-adjusted basis, we are not.
We're making reasonable returns
There is not.
Agents are ---+ they are very efficient when it comes to acquisition costs, and they are a great market leveler and they are highly intelligent.
Today.
I think I just have gone on about that for the last 20 minutes.
And I think my commentary said it, so I can't ---+ if you are looking for a point estimate, a numeric estimate of what was specifically integration-related versus market-related, I can't give you that.
Nobody knows that.
But I can tell you that the market discipline, for those who are disciplined in underwriting, absolutely is having an impact on growth rate and you can see that as you look at players who have reported.
And that definitely has an impact on us.
And you know there are times, and I've said this, been very clear, that there are times that revenue is for vanity and revenue growth is for vanity, and it's best you take your eye off of that.
And there are pockets of the business, many pockets of the business, where I and my colleagues think it's not an overly attractive market and you better discriminate very carefully what you choose to write and how you choose to write it.
And if you want to maintain underwriting margins, and that's our first objective, so I will shed revenue without a tear in any class, in any line of business, where we can't make an underwriting profit, period, and you know that about us.
The retention rates were very high and that, to me, shows me the market reaction towards us, and the demand for business from Chubb, from doing business with Chubb by both distribution and customers and the good work of our people.
When I look at the pattern of new business, how it came in and where it came in and the timing of it, it's very clear to me that the integration ---+ and in discussions with our people, that the integration had an impact.
And when I look at how we're moving month to month, I can see that beginning to recede, and people really getting on without getting out there and driving for it.
So I see a combination of both impacting it.
I can't do anything about the market and that will be what it will be.
But I can tell you, getting the organization focused, that is something we can do something about, and we're all focused on that.
Everyone is out there.
We've been to many regions, to many offices, working with our people and helping them to get on the front foot and I feel really good about the energy level and the focus of the organization that is taking hold.
And to the extent that impacts revenue growth, you can look forward to improved results as we go forward.
The actual accounting saved in the first quarter was $29 million.
Let's see, let's call it $75 million on the low end of the range.
So $100 million translates into $75 million
Yes.
We'll have losses from the activity in Texas, from the earthquake in Latin America, from the earthquake in Japan.
From the two earthquakes, from what we know at the moment, our losses will be relatively modest, nothing out-sized.
From the losses in Texas, you know, normal spring losses.
You expect these kinds of losses in the springtime.
It's the volatility of weather, more tornado-related activities, severe storm related, flooding, hail, all occurs as we know, in the second quarter.
And so this kind of activity so far to date, what we're seeing is not producing losses beyond what we would imagine or expect.
Yes.
I expect it to ramp up and begin showing potentially.
You don't know with certainty but potentially, real premium revenue in 2017.
It is direct response marketing in all its forms, digital phone-based predominantly of simple accident, travel and credit-related products, maybe some small commercial, householders-type products, to serve the customer base of Suning that is approximately 130 million people that are active users of Suning.
Suning has both 1,500 ---+ thereabouts, I'm sure I have the number wrong, but thousands of stores throughout the country and then they have a very large, very active online business.
They serve financial needs of over 30 million customers and we'll be active ---+ and do it in a digital way and we'll be actively marketing to those.
The cooperation ---+ it's one thing to sign one of these.
It's another thing to actually operationalize and we're just beginning the operational phase.
And this is something that the real meaningful benefit will come over a few years, but Suning, in very early days, is showing to be a very active and cooperative partner and is giving us a lot of access to data, a lot of encouragement in terms of use of their distribution and is very welcoming with building the business and I'm grateful for that, for that effort.
We're cautiously optimistic that this could be a great venture
It's on our paper, it's on Chubb's.
We got 100% of this.
Perfect
So I'm going to answer, give you two answers.
First, you didn't define growth the way I defined growth and the way, therefore, we define a growth company for us.
A growth company, in this business, is growth in book value and tangible book value.
That's how you define growth in a risk business, not revenue growth which is an overly simplistic way.
Ultimately you have to gain revenue growth as well, so I reject that notion of what's a growth company.
Number two, we don't give guidance and so I'm not going to start giving guidance about revenue growth, but I will say this to you.
I firmly believe that whatever the growth rate was projected ---+ and at ACE we do long-term ---+ at ACE we did long-term, five-year plans we would roll forward every year.
And we had a projection of what we thought our growth rates would be over a coming five-year period.
I have a sense of what legacy Chubb would have thought of its growth potential over a two- to three-year period, and what they would have seen.
I do firmly believe that when you sum those two together, the two together will have greater growth than the two would ---+ the sum of the two separately would.
There is little doubt of that in my mind.
How significant.
We have ranges internally from what we think might be conservative to what we think might be more aggressive.
But when I pitch it up the middle, I think it will be meaningful.
And I did say that I thought that by the fifth year, it would come into the billions of dollars range and multiples of billions, and I believe that, from what it otherwise would be.
And while that's not what you wanted as an answer from me specifically, I hope that gives you some insight
Well, you know, maintaining margins is about underwriting.
And it's about underwriting selection and it's about your portfolio.
What I love is the balance of business in this Company by geography, when I look at opportunities through Asia, when I look at opportunities in Latin America, when I look at opportunities through the United States, and I just look geographically, I see ---+ and in Europe ---+ I see so much room to move where there are some territories and some lines of business that you know to maintain margin, you need to shrink.
I see other areas where we have the capabilities, we have the presence, and it's about execution to grow in those areas.
And when you have the data we have and the knowledge we have, putting that to work, it is a job of execution at that point.
When I look at our spread of business by type of business, by customer, from large segment where it's obviously, except for the dislocation of others that puts some wind at your back, it's obviously the more difficult area to grow.
And, in fact, you're going to go sideways or shrink in many areas of that business if you are going to maintain underwriting discipline.
But I then look on the other side of the coin at the middle market and the capabilities we have in that area and our reputation and our relationships and our ability to drive more product and grow that more quickly, that gives me a lot of optimism.
I look at our A&H business around the world.
I look at our personal lines business both in the United States and outside the US and the potential in that area.
I add it all up and there are areas where you apply the gas and areas where you apply the brake, and we know how to do that quite well.
As I said, I'll never get baited into revenue growth to maintain margins.
And when my guys are feeling a little bad because they have to shed business to maintain margin, I've got to tell you what, I suck it up and I cheerlead it because it's the right thing to do.
Thank you.
Good luck to you, too.
No.
We have not figured in ---+ that's not net of reinvestment.
And, <UNK>, you have a natural growth.
I am not going to give you any point estimate number.
I'll give you a way I think about it ---+ two ways.
One, you have a natural growth rate of expenses based on your invested base of businesses, and you can see that.
You see how ACE has been disciplined in expense and Chubb was disciplined in expense, so the overall organization is disciplined that way.
You then have some investments you make in new businesses, so small commercial as an example, or maybe you are expanding your cyber business or other businesses and those will take investments.
On the other side of the coin where if we talk about legacy Chubb as being starved in some ways, and I think that's right, on one hand it's technology.
And so you will invest in technology.
But there you have a cash spend but you then capitalize and amortize over many years, so that impact will not be, as you would imagine, sort of a dollar of expense and a dollar drops to the bottom, but you've got a cash flow and then you have an amortization of it.
Those are what draws away from expense saved, and from the direct ---+ coming directly all to the bottom.
You are welcome.
I didn't help you manage your worksheet that much better.
I got it.
But we each live in our own home.
What did you expect.
How did you do your number.
I thought so.
I'm sorry, I just had to ask how'd you do it.
Yes, the one thing I'm going to say and then I'm going to ask a colleague of mine to give you a little more insight into it.
There was not a change in reserving process.
The way of thinking about reserve at either legacy Chubb or legacy ACE could produce this.
There was consistency.
And I'm going to ask <UNK> <UNK> to now just give you a little more.
Good morning, <UNK>.
I think, just by way of background as we went into the integration and we found a lot of similarities between the Companies, right, as opposed to differences.
And the differences are very much in the margin.
Both Companies have robust processes.
We've got really good teams of actuaries and good control environments.
And the methods and the assumptions in the reserving methodology are pretty consistent across like products.
And I think, too, and you've heard <UNK> emphasize this on prior calls, right, we ---+ both legacy Companies have a conservative approach, especially to long-tail casualty lines.
But there are some differences.
I put those in the margin, clearly, how it's processed in terms of timing and frequency of studies would be different.
Our reserving platforms are different, but we are working to converge those processes and expect to have that done in 2017.
So I think you'll find far more similarities in the respective processes, and we're going to enjoy continuing those in the future.
It's in our interest expense in the corporate segment.
It is.
It's a complete number.
You know what I would do, though, I would do ---+ there's 14 days of the interest expense that we didn't put into operating income, so I would just gross that out by the one-sixth of the quarter that wasn't there (inaudible).
We've had extensive discussions with our outside managers who have a real deep expertise in asset allocation and municipal and corporate credit research.
And our analysis shows that we can restructure the portfolio within securities and sectors that enhance the yield and diversify the holdings.
And I just want to reemphasize that those actions are not going to alter the risk profile of the portfolio.
We'll keep the overall credit rating at AA.
I think, over time ---+ I think we can more actively manage the municipal portfolio, but that will take time as a lot of that is long-dated.
So we that's certainly a part of it, to change from a really high rated, long-term hold strategy to a more active management in the muni portfolio.
But not ---+ your question was as a percentage of the total portfolio.
We don't expect that to change.
Right.
| 2016_CB |
2016 | SM | SM
#I would say as we rebid activity it is a little bit basin dependent.
Some areas we are still seeing as we rebid work that they are coming down.
And in others we see they are flat and not really changing much.
And then there's some specific items where we see slight increases on some tangibles.
But they are relatively minor it was really overall down for 2Q and we've locked in stuff for 3Q.
We don't really see a change there.
I hope that gives you the color you were looking for.
I think am following your question.
So, when we forecast production for a year we have certain declines baked in.
And as we are enhancing our completions we don't have a real good ability to say exactly how well it'll do so will decline wells away.
And when they come on really strong and we can see it with really high pressures and then as we start producing those pressures decline less rapidly than they would have previously.
And so we are able to open the choke and the rate is maintained.
And we found that we are getting five, six months type of plateau levels on our wells.
So when we got into 2Q we have those wells and those figures five of them started last year and then six of them started during the quarter.
That's really where the over achievement came from.
So it's not so much the base declines on the other wells it's not getting on decline as fast on wells that came on last year and the new ones this year.
Does that makes sense.
Yes.
I'll just chime in there too, I think it's important as you look at the press release, we did experience some delays in the Bakken on a number of our completions which hurt us on the oil rate.
But we offset that basically got right back to our target numbers on oil because our Permian wells have been outperforming so much, again relative to our expectations.
No more plans to drill the Middle Spraberry.
We locked in our program which is really Wolfcamp B and lower Spraberry focused because we knew what the expectations were for those.
And we basically we're really working to optimize our program.
And that's why we're getting the cost reductions we're seeing, the capital reductions we're seeing.
So we're not going to drill another Middle Spraberry well this year.
That is a pretty broad question.
This is <UNK>.
In general we're obviously very interested in continuing to improve the quality of our assets.
The types of acquisitions we look at and are interested in are ones which will perform as well as or better than our best assets.
We look at every deal that comes up in our core areas.
Certainly the Permian Basin is an area of great interest to us.
And we look at everything that has come up.
I appreciate the fact that when you look at the headline numbers on Permian deals they seem expensive.
But I think a lot of the reason for that is that people are simply proving up more and more intervals there.
If you actually look at it on a per interval basis I still think the numbers are not unreasonable.
We are continuing to look at those and I wouldn't be surprised at all certainly we are going to focus on that.
I don't know that there is a size limit that we necessary look at there.
There's a lot of creative ways to do these deals.
And I think you have to keep your mind open a little bit to that as we move forward.
We don't have a defined plan yet as I said I think at capital level similar to this year we believe that a $50 and $3 world we can grow within our cash flows next year.
We have several different scenarios we've looked at between the Eagle Ford and the Permian.
Moving rigs around that can get us to that.
I don't have exact rig counts to give you yet.
Thank you.
Well I think it's clear everybody is out looking at inventory numbers now.
I haven't seen them yet, I will look forward to that.
Thank you so much for today for your questions and for your interest in our Company.
We look forward to talking to you again next quarter.
Thanks.
| 2016_SM |
2016 | HAS | HAS
#Yes.
So on STAR WARS, I think I gave some pretty good guidance that STAR WARS was very similar to 2005 last movie year.
We used to give out specific percentage of revenues.
For a whole host of reasons, we no longer feel that that's specifically required.
So I'd rather just give you some guidance up against the prior movie year.
NERF, it is the largest brand at Hasbro if you include all brands, including franchise and partner brands, every brand.
It's the largest brand in our portfolio.
And ---+ (multiple speakers)
And MY LITTLE PONY, we're talking about the licensing income ---+ so this is in our ---+ within the entertainment and licensing segment, our new rebranded team of consumer products personnel generated the largest amount of revenues from MY LITTLE PONY business, up significantly versus year ago, and that's what we were referring to.
And I am not going to give you a percent as it relates to E&L.
Thank you.
Yes, we made changes in our North American operation back in 2012, and reorganized that business, and working with our retail partners.
We believe that North American profitability is now at a new level, and it's a relatively sustainable level.
Obviously, there will be some ups and downs over time by bits, but over time it can also grow, as we continue to leverage our brands.
I think international is just impacted by FX.
And maybe <UNK>, do you want to talk absent ex-FX, where those margins were, because they were very healthy margins absent FX.
Yes, absolutely.
I mean, every one of our components of our international segment were up, absent FX, and operating profit was negatively impacted because of the FX impact.
But again, so much of this year in the segments as well, product mix had a big impact on operating profit for the segments, as well as the cost savings.
And we continue to get cost savings through our ongoing initiatives.
As you know, we don't ---+ we had a $100 million cost saving initiative a few years back, which we completed in 2015.
But really ongoing cost savings has always been a part of our business.
And many of things you've see us invest in, and are running through some of the lines like product development and SG&A, are ongoing investments to further decrease costs throughout our business, including in our international segment.
We continue to make investments in the business to really reflect things in the currencies, and to take costs out of the business of where we're actually incurring our revenues.
So over time, our expectation is that you'll see more ---+ our margins in the different operating segments come closer to each other.
Now if you think about international, you have lot of different markets [in those].
So just by their own nature, they are going to have a slightly higher administrative expenses.
So will they ever be 100% the same.
I don't know.
But they will move closer over time, based on all the initiatives we are undertaking in the Company.
Yes, and we have seen some great growth in several of the emerging markets.
We talked about north of 20% growth in Russia and Brazil.
In China, this past year, our largest brand in China continues to be TRANSFORMERS, so you are up against a movie year.
I think that has more of a temporal impact in the year.
And over time, I would expect the trends that we've seen in our emerging market business and profitability to continue, continued improvement toward the Company average operating profit margin.
And as <UNK> said, there is some puts and takes over time, as we continue to expand our capabilities, but we're trend right.
Well, the brand performed very well for us in a non-movie year, coming off of 2014's movie.
It was down much less than one expects.
We've talked a lot about what brands do in the years following movies, and TRANSFORMERS really bucked that trend for the full year, being down about one-third versus a typical more closer to 50%.
So the television and other entertainment has really helped to support the brand, and to help drive our brand globally.
And I'll give you some more color on our entertainment plans, what's coming out of the writer's room, and plans for TRANSFORMERS theatrically by Friday.
Thank you, Rob, and thank you for joining the call today.
The replay will be available on our website in approximately two hours.
Additionally, Management's prepared remarks will be posted on our website following this call.
Our Investor event at Toy Fair is being held this Friday, February 12, and our first quarter 2016 earnings release is tentatively scheduled for Monday, April 18.
Thank you.
| 2016_HAS |
2016 | AMT | AMT
#Sure, <UNK>, it's <UNK>.
As far as our broadcast business, it's mid-single-digit percent of our revenue, a really solid piece of our Business which has very long-term contracts, as you know, in the TV and radio space.
And with the incentive auctions going on now, there are going to be a few moving parts that we think we're in a really excellent position to address and take advantage of.
You may recall three or four years ago, we acquired <UNK>hland Towers, which was I guess the second-largest independent in the space.
And so we have a really solid position to help the broadcasters that either retain or divest some of their spectrum to stay on air.
So they're going to have to have sites that are both simultaneously transmitting in a market while equipment is being taken down or put up, so we will have plenty of sites for them to move to in the process.
And we'll be able to be, we think, the real estate provider of choice as this TV station shuffle of spectrum and channels goes through.
We think it's going to be a nice, solid growth business.
It's going to contribute to our US operations for many years here.
As far as the small deals that we're doing, it's the same disciplined investment process that we've had in place for years and years.
We've got these very highly qualified teams, I would describe them as, across all of the continents globally that are continuing to always look for opportunities for us to invest and meet our criteria of those investments and get AFFO-accretive deals for us.
And sometimes those are big like in Viom or Verizon or GTP, and sometimes those are modest size like in South Africa we are acquiring the Eaton Towers, adding about 300 sites to our portfolio.
It makes a ton of sense for us tactically and strategically, and we'll go ahead and do those smaller deals.
Africa, as you saw from <UNK>'s presentation, is one of our fastest-growing regions.
Much like India, there's incredible need and demand, not only currently but far into the future, for mobile service there.
There are very low-cost handsets that are going to accelerate the adoption of 3G and 4G for people in those countries that really, really need it, and we've got a pole position there.
Certainly in South Africa, we're the independent leader.
In Nigeria, we're one of the top two.
And Ghana and Uganda, we are also the clear leader as independents, we feel.
So we've got a really good strategic positioning in the countries that we think we need to be in there.
And the trends are going to be very similar for the mid- to long-term in Africa, as they will be in India, where we think we can sustain double-digit growth rates.
And I also just wanted to further clarify and provide some color on <UNK>'s question on the JV.
We expect this JV to be a platform for us to be able to expand in the region.
And I am not going to get into any of the details relative to the JV agreement, but there's always a process within the agreement to the extent that the carriers aren't able to or don't desire to for one to be able to expand in the market without the other.
So just wanted to make sure that, <UNK>, I gave that additional color to you.
<UNK>, the answer is yes.
To the extent that there's more euros being generated in the market, there's definitely going to be more opportunity to be able to raise capital on that in the market.
So the business itself in Germany, as you know, is not a significant business for us overall from a consolidated perspective.
So we don't have significant amounts of euros being generated.
We have been able to candidly pull out a fair amount of cash from the business over the last three or four years since we've owned it.
But we're hopeful that to the extent that this platform proves successful, and as <UNK> said, we have deals over there that make sense for us that we would be able to increase our exposure into the marketplace.
And relative to multiples and things like that, we're really under NDA to be able to disclose any of those.
I think we feel really good about the values that have been ascribed to this business, and I think we have route, as <UNK> said, just a really solid platform to be able to look at other opportunities, therapeutic to the balance ---+ all of the things that <UNK> mentioned in terms of supporting our strategic goals in the Business.
We're really excited about this opportunity.
There is a ---+ the transaction deal pipeline has increased around the globe and in all of the regions, really absent the US.
So there is opportunity there.
But we don't have any plans to remark on at this point in time to invest in some of those transactions.
Our business development teams continue to look at opportunities, as I mentioned.
And relative to the buyback, I think as <UNK> mentioned, when we come back in February and talk about our goals and plans for 2017, we can get a little bit more specific.
And we'll have three or four months of more knowledge in terms of just what the activity might look like for the year.
We expect to be at that 5 times or below, clearly with this kind of cash that we're going to be getting from the JV and the additional capacity that we have.
So we feel really good in terms of ability to hit our targets that we laid out at the beginning of the year, and positions us well for next year.
Less than 5%, <UNK>.
You bet.
Thank you, everyone, for joining us today, and to the extent you have any further questions, feel free to reach out to the Investor Relations team.
We're here to help.
Have a great day.
| 2016_AMT |
2015 | BCOR | BCOR
#Hey, <UNK>, it's <UNK>.
I think this is a highly regulated industry and constantly changing, and so it's something we're going to have to stay in front of.
We have a very experienced team at HD Vest that has been doing this for years, and so we take great comfort in that.
I think as we think about regulatory exposure and the questions that people have been focused on, it's really related to the prospective DoL changes which would impact primarily retirement-based accounts or retirement assets that are either illiquid or alternative, or variable annuities which are already tax-advantaged savings vehicles for retirement.
We've talked a little bit about that in our previous call.
Basically the way to think about that in our business is about 20% of our revenue is driven by transactional ---+ transaction or commission-based revenue, and only less than 50% of that total is driven by variable annuities and alternative products.
The other thing I would say is this is a top 10 independent broker-dealer.
It's got the size and scale to deal with these types of changes and a very experienced group to do that.
Part of the DoL change is going to require fiduciary responsibility from the advisor to its clients.
If you think about our clients, they already have a fiduciary responsibility.
They are enrolled agents and CPAs, so I think it's nothing that's going to be new for them.
Then as we've also talked about, the trend in our assets under management, over time it's moving more and more towards fee-based, which will not be impacted by the DoL regulation.
So I think, look, it's a macro risk to the industry and something that we spend some time on and management at HD Vest is very familiar with.
And we think we are well positioned to deal with the changes.
But certainly it can impact players in this space, and we'll work hard to make sure it minimizes the impact on us.
Yes, <UNK>, it's <UNK>.
Look, I think this is consistent with what we've been citing as the strategic objectives over the last several years, which is to position Blucora with quality businesses that had strong growth prospects, and ideally where there was a tying together of those businesses we owned, where we could focus.
The attributes we would look for would be attributes we would all recognize as contributing to the definition of a good business, including growth and predictability, visibility.
And certainly we see those attributes in TaxACT and the opportunities to pair TaxACT with HD Vest and, in connection with that, very logically, look for new owners for InfoSpace and Monoprice, strikes us as precisely the right direction to go to as it relates to fulfillment of the strategy.
So what does that then enable.
Well, I referenced in my opening remarks the idea of unlocking value in Monoprice and InfoSpace.
I truly believe that these businesses will be more valuable in the hands of a different owner than they are right now in the hands of Blucora.
That's one of the reasons why I believe unlocking value is likely to happen in these forthcoming divestiture discussions.
And upon our executing those divestitures then bringing together TaxACT and HD Vest inside of a more lean corporate parent, we are well on the way toward a repositioning of the Company around something that I think actually has probably more recognizability and coherence inside a particular space, and where their synergy opportunity gives us an opportunity to think about reinvesting in strategic ways, as well as shifting our capital allocation view when it comes to M&A toward being much more through a strategic lens, which is always advantageous.
Also, I think importantly it puts us on a path of utilizing the NOL, which has been a significant asset and a potential significant source of value for shareholders.
This transaction definitely checks the box on that and positions us, as we discussed on our last call, in 2017 to start returning capital to shareholders so that they can start to benefit directly in the value creation that we're seeing from this.
So I think all in all, it is a very complicated set of messages that we announced a couple weeks ago, but when we get through some of these intermediate execution steps I think we'll be very well positioned and our shareholders will start to benefit.
Yes.
In the presentation that we provided a couple weeks ago in connection with our announcement, there was a particular schedule where we pointed to 2015 and 2016 results for HD Vest and also referenced a long-term model.
That's probably a good schedule to point you to in terms of guidance ---+ at least guidance that we're prepared to provide at this point, whether it is financial based or metrics based.
But I would point you back to that, <UNK>.
Then the synergy capture is ---+ frankly, just one of the sources of synergy that we actually see occurring in this transaction specifically relates to bringing some of the HD Vest investment advisory solutions as well as investment choices to TaxACT customers, either in connection with their tax planning and filing or outside of it.
We specifically modeled 2017, which is when we think we're going to be best prepared to do that in as seamless and automated a fashion as possible.
you might imagine that as we approach the end of the year and have not yet even closed the transaction, it's going to be difficult to pull that off in the coming tax season.
But that's really the source of synergy that was modeled.
I think the synergies that we think actually exist in total are coming from a variety of sources.
So in our minds, that's just scratching the surface.
Hey, <UNK>, it's <UNK>.
A couple things that I would add to that is, if you just take the guidance that we provided for the first half of tax season for next year, and do it on an LTM basis just as a proxy for 2016 for the TaxACT business, let's call that $61 million of segment income.
And if you assume we get to our corporate OpEx number of $12 million in early 2017 on a run rate basis and just pro forma that back to 2016, you're looking at adjusted EBITDA of close to $100 million, call it $96 million, and unlevered free cash flow about $86 billion, and a non-GAAP EPS of $1.29, which is really in our calculation a proxy for cash per share for shareholders.
And that is going to be up, call it, 16% to 18% versus what a pro forma basis would be on 2015.
So I think you really start to see the benefit of this asset being in our ownership structure.
And then compounding on top of that is the synergies which are not ---+ are even outside of that, that we hope to unlock in 2017.
So I think there's a really compelling case if you focus on getting through, as <UNK> said, these transitional steps and putting us on a path to provide some pretty healthy financial results and metrics into the future.
Yes.
A couple things I would say to that, and <UNK> touched on it in his prepared remarks.
I mean, we are changing some pricing and packaging this year; and I think the way to read that is we are prioritizing share growth.
We've always sought out profitable share and we'll continue to seek out profitable share.
But a lot of the pricing and packaging changes that we're going to make this year is to make us more competitive, which will introduce a little more uncertainty into our forward expectations, just when you introduce change.
We're going to make sure that we're conservative.
But I would also call your attention to a couple other things.
We're continuing to invest in tools and technology, which will ---+ or one-time investments that we believe are going to come through next year.
So I think assuming that we're going to give up a point or so in margin next year for future growth is the right way to think about it.
Then in addition to that, we're bringing Simple Tax on.
That's something we're excited about up in Canada, and we're looking to invest in that as well.
So I think that 2016 is a year of where we're changing our pricing and packaging, looking to be a little more aggressive on share, and then as well make some investments in the core as well as up in Simple Tax up in Canada.
Yes, hey, this is <UNK>.
I think the near-term focus is going to be on integrating HD Vest, making sure that the conversations and tie-ins between HD Vest and TaxACT are happening at the right levels and at the right pace, and deleveraging.
We're taking on a fair amount of debt to finance this transaction and that's certainly going to be the priority.
As we move down to a more reasonable level of net leverage, I think we'll have the option to think about acquisitions.
But certainly in the next year or so we're going to be laser focused on deleveraging.
Certainly that can be an option for us.
I think the 5.5 million filers in the US is probably the bigger target to focus on; but as Simple Tax continues to ramp up in Canada we're going to look for opportunities to connect HD Vest with Simple Tax as well.
So, probably the simple way, it's the first category you mentioned, which is just as ---+ the interesting observation that the founders of HD Vest started with was that, as it relates to financial advisory and wealth management, is the unique position that is occupied by the tax preparer, the tax professional, and that comes from two perspectives.
One is that the relationship is among the more trusted relationships of any professional services relationship that most of us have in the United States.
There are surveys they've done year in and year out that continually rank your tax preparer right up there maybe alongside your doctor as the most trusted relationship that you have.
So that's one.
The second observation was that it is precisely in the process of preparing your tax return and coming out of that filing that ideas are ---+ and opportunities come forward as it relates to how it is someone can optimize either their tax preparation or their investment objectives.
So it's really with those two observations that HD Vest was ultimately founded and has grown to be what it is today.
Well, I would say that precisely that set of dynamics when taken to the TaxACT relationship with its 5.5 million filers I think applies and gives you a sense as to why we think there's an opportunity to bring some of the HD Vest products to those filers, in the sense that there is a trusted relationship between TaxACT and its filers.
And it is also true that there is signal coming off of those filings as to what might represent suitable investment opportunities for those particular filers, based on information gleaned from their tax filing.
So that's really the extension of the ---+ why we think it can fit.
I think what we have to do to best execute against these opportunities is build the technology that will allow for, as best as possible, an automated presentation of the investment options as well as an automated fulfillment should a filer want to pursue one of them.
And also, as you might imagine, it's important to be very transparent with our filers in terms of getting their consent along the way, which we think is something that we intend to do.
And those will be forthcoming when the filers see the value in the alternatives that they can be presented with.
So hopefully that helps explain it.
It is in many respects what the advisers inside of the HD Vest network are doing on behalf of their clients.
It's taking those sets of solutions and products and bringing them in a technology-enabled way to the 5.5 million filers inside of TaxACT.
Well, HD Vest itself is a fully registered investment advisor, so they have an ability to offer that.
So it would be an HD Vest provided solution.
Yes.
They have a home office, and because they are registered, they are a corporate RIA, they can offer those services.
Yes.
No, I think that ---+ not to dismiss inorganic growth as an option for the Company going forward, it's just in this intermediate period of the need to delever.
But yes, certainly I think whether it's products or accelerating the rate of advisor acquisition through strategic acquisition, or technology-related pieces that can facilitate the HD Vest model or the HD Vest intersection with TaxACT, yes, all of those things are going to be interesting to evaluate.
We're already ---+ been in discussions with both the TaxACT and HD Vest teams around how to start thinking about segmenting the landscape of opportunities.
| 2015_BCOR |
2015 | UFPI | UFPI
#Thank you, <UNK>, and good morning, ladies and gentlemen.
Thank you very much for joining us this morning.
It's been a great six months in 2015 as we celebrate our 60 years in business.
And we closed out the second quarter with our highest profit month in our history.
We also know that the score only matters at the end of the game and we will be working hard to win all year long.
I want to think our vendors and customers and especially all of the hard-working women and men who create these results.
A quick review of our key focus areas is as follows.
Second-quarter sales were $150.8 million, an 8.5% increase over 2014.
Year-to-date sales were up $146.6 million over 2014 to nearly $1.5 billion.
By market for the second quarter sales growth was as follows.
Retail was up 8.3%; construction was up 1.3%; and industrial was up 16.9%.
The overall lumber market declined 12.6% year-over-year for the quarter and the prices for southern yellow pine decreased 6.5% year-over-year for the quarter.
The lumber market declined steadily late April through May, firmed up in late June and is mixed in early July so we will keep a close eye on the lumber market.
Overall unit sales were up almost 10%.
The profit goals, the second-quarter net earnings increased 19.2% over 2014 to $26 million.
EBITDA for the first half of 2015 is $83 million compared with $67 million last year.
And overall our EBITDA margins for the latest 12 months were 5.6% versus 4.6% for the same period a year ago.
As for inventory it is still up more than it should be at $330.2 million.
As a percent of current month sales it is 125.2% versus 111.1% a year ago.
It has dropped since the end of quarter one and we expect it to be more in line with sales by the end of the third quarter except for position buys.
Finally, accounts receivable is currently at 92.3% current.
And our write-off percentage for the quarter is less than one-tenth of 1% of sales.
We were able to post these results in spite of a few challenges such as the declining lumber market, which I mentioned, as well as some challenging weather in certain parts of the country including record rainfall in Texas.
I don't talk about weather as an excuse, rather I mention it to make sure all of us understand that we can and will perform even better.
Now I would briefly like to discuss some of our strategic priorities for 2015 and beyond.
Our new product sales initiative continues to meet our expectations.
Year-to-date new product sales through June are $120.3 million and we are well on track to hit our goal of $190 million in new product sales for this year.
As for personnel, another one of our key areas, we continue to expand our training and recruiting efforts to make sure our pipeline is full of leaders who can drive our business forward.
Part of this additional staffing is reflected in our SG&A cost as we invest in people for our future.
Acquisitions growth has been a challenge.
We have been diligently pursuing acquisition opportunities throughout our target markets.
While we have several viable candidates, as you can imagine, evaluations remain a challenge.
We have watched announcements for mergers like BFS and ProBuild, stock in BMC as well as acquisitions of US LBM and expansions by CanWel.
We remain committed to making sure we can achieve a solid return on our investment on our acquisitions and help us grow our Company.
Given our ROI targets we think that our shares are currently a much better value than paying 10 times trailing EBITDA for an unknown entity.
Transportation is another one of our focus areas.
And while there is still a pronounced shortage of drivers we have been able to manage effectively through this issue.
We continue to carry extra safety stock to make sure we can service our customers' needs.
Overall we remain excited about our prospects going forward and I have tremendous confidence and faith in our team.
We continually seek out new avenues for growth which complement and enhance our existing businesses.
Now I would like to turn it over to <UNK> <UNK>, our Chief Financial Officer, to review in more detail our financial performance and condition.
Thanks, <UNK>.
Before we begin the financials I should briefly address the impact of the lumber market this quarter.
Overall lumber prices were down almost 13%, but southern yellow pine prices, which are a high percentage of our volume, were down only 6% for the quarter causing much less impact on our overall sales levels than one might expect.
Moving on to our income statement highlights, our overall sales for the quarter increased 8.5% due to a 10.5% increase in unit sales offset by a 2% decrease in selling prices.
Unit sales increased due to a combination of organic and acquisition-related growth as businesses we acquired since Q2 of last year contributed 3% to our overall unit growth while our organic growth totaled 7.5%.
Pine market sales to the retail market increased 8% driven by an increase in unit sales.
Unit sales increased due to a combination of market share gains, improved consumer demand and our new product sales initiative.
It's worth noting that our sales to big-box customers grew 12% this quarter and our new product sales grew by almost 20%.
Our sales to the industrial market increased 17% due to an increase in unit sales.
Recently completed acquisitions drove about 11% of our unit increase this quarter while the remaining 6% organic growth resulted from share gains with existing customers as well as adding many new customers.
Our overall sales to the construction market increased 1% due to a 5% increase in units offset by a 4% decrease in selling prices.
Our greatest unit sales growth continues to be with customers that buy concrete forms as we continue to gain share.
Our unit sales to manufactured housing and residential construction customers increased by 2% and 3% respectively.
Moving down the income statement, we are very pleased to report our second-quarter gross profit increased by 16% and almost 90 basis points as a percentage of sales.
The increase in our profitability and margins this quarter was driven primarily by our growth in sales, improvement in our sales mix with industrial customers, continued improvements in our profitability on sales to the residential construction market and the growth of our business with retail customers.
One of the challenges we faced this quarter was a lumber market that dropped 10% since the end of Q1, which typically hurts our profitability on products like treated lumber.
We were able to withstand that dropped and improve our overall margins due to a number of factors including continued improvements in our sales mix of value added products and the balance of our markets.
SG&A expenses increased year-over-year for the quarter by $9.4 million, or 16%.
By expense category our overall increase in SG&A included a $3.4 million increase in wages and benefits primarily related to greater headcount and another $3.1 million increase in incentive compensation tied to profitability.
I also want to point out that our core SG&A expense without our bonus incentive remained flat at about $57 million comparing Q1 and Q2.
Overall we are very pleased to report that our growth and gross margin improvements drove a 20% increase in our operating profits this quarter.
Moving on to the cash flow statement, our cash flow used in operating activities improved by $14 million to $37 million so far this year and was comprised of net earnings of about $38 million along with non-cash expenses of $21 million offset by a $22 million increase in working capital due to our growth.
Investing activities included capital expenditures of about $28 million, including expansion area and efficiency CapEx of over $10 million.
We still plan to spend approximately $45 million on capital expenditures for the year.
With respect to our balance sheet, at the end of June we had $38 million outstanding on our revolving credit facility that has a total availability of $295 million.
As a reminder, the increase in our revolver since year-end is simply due to our seasonal increase in working capital which will then decline throughout Q3.
We expect our cash flow will be strong in the back half of the year due to solid earnings, seasonal working capital reductions and as we bring our inventory levels in-line with internal targets.
That's all I have on the financials, <UNK>.
Thank you very much, <UNK>.
Now I'd like to open it up for any questions you may have.
Sure.
Yes, the overall lumber market changes ---+ the decline year-over-year for the quarter is 12.6%.
Southern yellow pine prices decreased 6.5% year-over-year and in timing of the lumber market movement the lumber market declined steadily from late April through May and firmed up in late June and is now mixed so far in July.
That's basically the lumber market we are seeing.
We are seeing a lot of consolidation in the industry both at the mill level as well as some of the other acquisitions that I mentioned.
And from our standpoint we've looked at this as been a lot of excess capacity in the marketplace and this will help eliminate some of that excess capacity.
And I think it will be a positive thing in the future for both pricing and for the environment of making sure we are not in a overcapacity situation.
I really wouldn't comment on that, Jay.
Yes, I think as you look at just kind of relative market potential, obviously the retail channel is tied in with repair/remodel and we are ---+ our new products help us expand the percentage of growth that we can get out of that.
Otherwise we are pretty much bound to the amount of growth in the overall repair/remodel market in both DIY and independent retail.
As you look at some of the other markets there's a lot more headroom in industrial and other areas where we can grow by taking more market share and also benefiting from the growth in the market.
I did say that.
If you're asking for a prediction I would ---+ if the housing market continues to grow in the areas where we have our facilities I think we will do very well.
I think I will complement our team at doing a great job.
I think we have really good sales volume and you are right, there was certain pockets where weather is an impact.
And there certain areas, particularly in the north, where I would expect to see better performance than you would see typically in the first quarter, primarily due to just weather.
Yes, I think one of the areas that we look at there and <UNK> correctly pointed out that the sales incentive and the incentive compensation are driven based on profit, not sales and our profit is growing at a more rapid rate than sales.
So you have to take that into consideration.
The other part of it is, frankly, we are investing in people for growth purposes.
But at the same time it is one of our focus areas and our goal is to make sure that we do reduce the rate of growth in SG&A to less than overall sales increases.
But you have to take out the incentive compensation programs in order to make that connection.
We didn't buy back any stock in Q2.
Well, thank you again and thank you for your investment in us.
We are very proud of our 60 years in business and thankful that the founders and the builders of the Company gave us such a terrific platform from which to grow.
Our goal is to make them and their descendents as well as our current and future shareholders proud of what we add to the legacy.
Thank you again and have a great day.
| 2015_UFPI |
2017 | PKI | PKI
#Thanks, <UNK>
Good afternoon and thank you for joining us today
I'm very pleased with our performance in the third quarter as PerkinElmer delivered revenue and EPS at the high end of our previously communicated guidance range, and we continue to make excellent progress on our strategic priorities
Similar to previous quarters, I will briefly review our financial results, discuss overall market conditions and update you on our progress during the third quarter relative to our strategic priorities, while Andy will discuss our financial results and future guidance in more detail
Turning to our financial results, we generated revenue of $550 million during the third quarter, which represents growth of 8% over Q3 last year on a reported basis and 5% growth organically
Adjusted operating margins expanded by 30 basis points to 19.3% and adjusted earnings per share was $0.73, representing growth of 14% over Q3 last year
Year to date, our financial results are tracking favorably to our original guidance in the beginning of the year
And based on our fourth quarter guidance, we are on track to exceed our full-year guidance communicated back in January for both the top and bottom lines, delivering organic revenue growth of 4% and increasing adjusted earnings per share by low double-digits
Markets continue to be favorable
For the first time in over five years, during the third quarter, we experienced positive organic growth in every region of the world and every end market in which we operate
Looking specifically at our end markets, pharma biotech grew mid-single digits as strength in service and high content imaging was offset from continuing headwinds in our radionucleotide business
Diagnostics also grew mid-single digits as emerging markets continue to outpace developed markets
Our food business was very strong, growing over 20% due to several key customer wins and strong performance from recently introduced new products
Both environmental and industrial markets grew low single-digits as environmental is continuing to see strong growth in Asia, positive results in Americas, offset by declining revenue in Europe
Our sales to academic customers are – also grew low single-digits and recovered from a slow start to the year as funding outside the U.S
has improved
Turning now to our performance against our strategic initiatives, within Diagnostics, we continue to make good progress strengthening our core areas, while expanding our addressable markets
In Q3, we launched our new mass spec platform, QSight, for the clinical market and have received a very positive response from our customers
During the third quarter, QSight was registered as a Class 1 instrument with the FDA
In addition, we have completed CE marking for the European market, enabling the instrument to be used in clinical applications beyond newborn screening, and we are diligently working to extend our existing and new clinical assays on QSight
Moreover, our Diagnostics portfolio continues to address the escalating demand for greater access to quality healthcare across emerging regions
The performance in our Tulip Indian diagnostics business is encouraging on both the top and bottom lines as we expand Tulip's in-vitro diagnostics offerings throughout India
These solutions add in the prevention, screening and diagnosis of communicable diseases such as malaria, HIV and hepatitis, which are critical issues in that part of the world
Turning briefly to our cord blood and cord tissue banking business, you may have seen earlier this year the announcement of newly published research that shows encouraging developments related to the use of a child's own cord blood to treat cerebral palsy
The Phase II clinical trial led by Duke University, and with participation from some of our ViaCord families, will hopefully drive greater awareness around the potential of cord blood and cord tissue by helping further penetrate this market over time
We also continued to make good progress on the key growth initiatives for our Diagnostics business that I've discussed previously and thought I would provide a quick update
As I've mentioned before, Vanadis is our solution for prenatal screening that leverages high precision imaging in an automated platform, enabling a much more efficient and less expensive option versus current NGS-based NIPT testing alternatives
In the last month, we have submitted an article with data demonstrating its performance, which should be published before year-end, and we expect another article to be submitted before year-end
One research system has been installed in Europe and another will be installed shortly
These units will continue to generate more data on the Vanadis platform as we continue to validate the assay
To date, the results look very encouraging and compares very well to the current commercial NGS alternatives
As a result, we continue to be very enthusiastic about the potential for Vanadis and remain confident that our commercial launch date for the first half next year will be met
Our PerkinElmer Genetics offering of whole genome sequencing services has begun testing samples and we have already signed a number of contracts with both academic institutions and rare disease pharma companies
During the third quarter, we also announced our collaboration with In-<UNK>pth Genomics or IDG
PerkinElmer Genetics is supporting IDG's program which brings genetic diagnosis to patients across a wide range of neurological conditions
We will provide clinical whole genome sequencing, interpretation services and diagnostic reporting to IDG and IDG will then use the de-identified genomic and clinical data to support their R&D, generating a better understanding of the cause of hundreds of rare diseases
We continue to be excited about our pipeline of opportunities as we focus these capabilities around our reproductive health business and rare diseases
And finally, one of our major priorities for the remainder of the year is the closing of our acquisition of EUROIMMUN, which will augment our immunodiagnostic offerings with autoimmune and allergy testing
Over the past few months, we've made great progress working towards this closing and we have also used this period to facilitate collaborative discussions between employees of both companies to explore future opportunities
It has been an exciting time and we are very much looking forward to uniting as one organization
The only remaining hurdle is regulatory approval in China and we are still planning for a Q4 closing
As currently, our commitment for EUROIMMUN's minority shareholders continues until the end of this year
If we determine this is unlikely to occur, we will either purchase those shares outright or simply extend the timing of the shareholder commitment
I look forward to communicating the closing as soon as it happens
And after spending time with leaders and employees at EUROIMMUN, I am ever more encouraged by the opportunities presented by this combination
Moving to the DAS business, which was created about one year ago, we've undertaken a number of significant actions to achieve our objective of accelerating profitable growth by disproportionately investing in the most attractive market opportunity, while continuing to improve commercial execution
Year to date, we have launched 11 new imaging and detection instruments which are generating significant interest among customers across the environmental, food, industrial and life science research markets
Several more are still in development and slated to launch over the next couple of months
Looking specifically at our food franchise, which is focused on adulteration, quality and safety testing capabilities, we continue developing new innovations while also seeking to acquire attractive assets to expand our $200 million-plus food portfolio
During the quarter, we won a number of large tenders spanning the U.S
, Australia, Europe and China that reflect a high demand for unique applications utilizing Perkin and <UNK>lta technologies
These include whole grain analysis, the establishment of product quality grading based on sugar content, and the measurement of food fermentation for textile production, just to cite a few
On the services side, our OneSource business continues to win competitive tenders with key pharma customers due to the breadth of our offerings which range from asset management to scientific services and lab location
A strong indication of the faith the market has in our offering was evidenced by a recent significant win, which represents the largest initial contract in the history of OneSource
Also, during the third quarter, we have initiated the implementation of new technology-based solutions to improve our customers' experience and provide additional insights into their lab operations, as well as facilitate our ability to expand in the higher margin service offerings
From an operational execution standpoint, we are making good progress on the third component of our strategy, which is focused on continually improving our operational execution and strengthening our margin profile
In particular, our utilization of lean manufacturing methods has resulted in a 13% reduction in our manufacturing floor space globally since the end of 2015. In addition, during the same timeframe, material costs have been reduced as a percentage of revenue by 700 basis points to 24% of total cost of sales
Through these initiatives and others, we remain confident in our ability to improve product gross margins significantly over the next several years
Also, I recently attended the opening of an important expansion of our Chinese manufacturing facility to broaden our capabilities to produce several of our DAS product families
By better aligning our manufacturing footprint with the location of our customers, we should facilitate future growth in this important area of the world
These operation improvements, as well as our ability to leverage our SG&A costs, have enable us to make additional investments in R&D in 2017, which we believe will translate into increased revenue from new products in 2018 and beyond
Relative to last year, investments in research and development have increased 12% or 40 basis points as a percentage of revenue, enabling us to accelerate R&D innovations for solutions and serve higher growth markets
So to summarize, during the quarter, we continue to meet or exceed our financial commitments
However, more importantly, the combination of the successful execution of our strategic growth initiatives, favorable market conditions and the opportunities afforded by the upcoming EUROIMMUN acquisition, reinforces our belief that the growth of both our top and bottom line should accelerate in 2018 and beyond
I'll now like to turn the call over to Andy
Yeah, sure
So, it's targeted at three customers
First of all, our reproductive health area, and in that area I think there is a lot of cross-selling opportunity
So, I think as we talked about last quarter, our newborn screening business very often is reflexed into NGS for confirmatory testing
So, one of the things we're doing is we're now doing some of the confirmatory testing with our newborn screening customers
The other area where we see good synergies with our reproductive health business is in the ViaCord area where we have some 350,000 cords that are stored, and of course, ongoing business, where we see interest very often where those customers would like to have some whole genome sequencing done
So, I would say that's the first area that we're focused on
The second area was the one that I mentioned in the prepared remarks where we're doing work with IDG and they're having us do some whole genome sequencing with regard to neurological disorders
And then the third area I would mention would be in the pharmaceutical area, particularly in the orphan drug, where we're working with several pharmaceutical companies to help them particularly identify potential patients for clinical studies
So, I would say that's the initial focus of the business
We're seeing early days but good update
And while it's a startup right now, we do anticipate as we get the higher volume that we can get the operating margins equal to or maybe even a little bit better than the company average
So as I mentioned before, this is one of the first quarters in a while where we actually experienced growth in all three regions, so whether it's the Americas, EMEA or APAC
And so, if I look at each of those, I think the U.S
, we continue to see generally pretty good growth across all areas with maybe the exception of academia was a little light
But other than that, we see good growth in Diagnostics
So, I would say if you look at newborn, first of all, while births now have sort of more flat in U.S
, I would say prior to this quarter, we actually saw them down a little bit, we think, now
At the end of the third quarter, if you look on a trailing 12-month basis, it's more sort of flat
But our ability to continue to expand the menu and expand what we do, also mentioned the genetic testing business that we're now seeing good growth on the Diagnostics side, pharma continues to do well and the environmental and safety areas
So, I think good demand within the Americas
I think when you look at Europe, again, probably not as strong as U.S
but good strength on the pharma aside, I would say we saw a pickup on the industrial markets in Europe and food was very strong
And then, of course, the highest growth area for us was in APAC, obviously, led by China
China was up sort of mid-teens for us, and that was pretty strong across the board with possibly the exception of industrial, and that was really more of a comp issue
I think last year, if you look at China, our industrial business was up high-teens
So as I sort of mentioned in my prepared remarks, we're seeing pretty good strength, again, across the globe and across all the application areas
Yeah
I think, as you mentioned, that will be Europe first
I think it will be somewhat metered by the tenders
That's one of the things we're looking at relative to the potential for revenue in 2018 and we want to try and time that at least as best as we can to some of the tenders in some of these countries
So I think initially, if you look at 2018, that'll be a large determinant to how quickly it gets ramped up in the market
But again, the intention would be pretty broad based across Europe
Again, one of the important aspects of this is because this goes in, as we've talked about, into more of the biochemical markets, we've got a very strong commercial footprint in those markets already, basically, the leader in biochemical screening
So, we think this will be something we can penetrate relatively quickly
So, it will really be more gated by the timing of, again, the tenders, more than anything else
Again, just to remind, our plan is to have CE marked, so it will give us access the markets actually, other than just Western Europe
So, EUROIMMUN continues to do well
So if you look at the results through three quarters, they continue to grow organically in the high-teens area
I would say they're growing in 2017 in excess of what we assumed in the model
And so, one of the things we have been spending a fair amount of time on over the last several weeks is how we can be prepared to penetrate the U.S
market sort of as quickly as possible
And so, that will be clearly one of the top priorities that we've identified in the collaboration and synergy discussion
So, the plan would be to try and really drive growth in the U.S
relatively quickly
Good afternoon
So, you're right
The relationship historically was that we used the Waters mass spec in our solution
I mean, fundamentally, everything else that was in the solution, and again, when we service our customers, we go from the filter paper to the puncher to all of the sample preparation information to the detection information as far, and then, also the software and informatics
So moving forward now with the QSight, the plan would be to replace the Waters mass spec with the QSight
And so, going forward, it will be an exclusively 100% PerkinElmer solution
Are you talking about globally or China? I'm sorry
So, I would say if you look outside the developed markets, mass spec is relatively small from a penetration perspective
But of course, today, the developed markets are a large piece of it
So from an opportunity perspective, I would say roughly 30% of the market today is probably covered by mass spec, and again, the current market, and probably 70% is more biochemical
When you look at the opportunities going forward to expand the market, most of the emerging markets don't do mass spec today
They do just biochemical
So on the first one, yes, we continue to see penetration of incremental customers particularly outside the U.S
And so, I think that's a good significant component of the growth going forward
And on the second question is it's sort of early days there
I think that's a more significant opportunity for us going forward
So, we're hopeful, as we get into sort of 2018 and later, that we'll be able to get more pull-through on the PerkinElmer products
So, I think it's combination of things
And first of all, as we've been focused on new products, so we've got to get some new products out into the marketplace, and I mentioned I think over the last nine months or so, we've got 11 new imaging and detection products out in the marketplace (32:26)
The other thing is I think disproportionately investing in those areas where I think we've got both greater growth opportunities and stronger competitive positions
And the ones I would specifically spike out would be food, in the pharma services area, some of our imaging capabilities, and maybe, finally, the inorganic applications like ICP and ICP-MS
So, making sure we're really sort of focusing in those areas
And then, the other area is just expanding our capabilities
So, I mentioned the fact that we just very recently opened up a manufacturing line in China for our DAS products
And I think locating more of our capabilities closer to our customers where else to be more nimble and respond more quickly, and also, starting to adopt more of our products to the needs of those specific geographic regions
So, I think those are the three key areas that I think we can sort of drive higher organic growth for DAS
So, I think we felt like we got all, if not, 95% of the revenue that we missed in Q2. I think I mentioned last quarter is because the majority of the shortfall was on the instrument side, I think we felt actually by the latter part of July and maybe it spilled into early August, we had shipped all that
So, I think that was helpful to achieving our sort of the top end of our guidance relative to this quarter
I think relative to the areas we're seeing, I think it starts off with getting the traction on the new products, and so, that's driving food
I think we mentioned a couple or at least one nice win in OneSource, so I think that'll help us here in the fourth quarter as we start to ramp that program up
And I think some of the things that we've got in place on the Diagnostics side
I think we'll see it on the genetic testing side, some improvements, where we've got some expectations at QSight, starting to see some nice growth in the fourth quarter
So, we think we've got pretty good alignment to the growth targets that we've laid out for Q4.
I mentioned before that we had a pretty tough comp in China relative to Q3 last year, it was up high-teens
So, I think a little bit of that was a comp issue
But I think your question implies that we're seeing some recovery in the industrial end markets and we would agree with that
So, I think we would be disappointed if we didn't see industrial start to pick up here, not only in Q4 but as we get into 2018.
Steve, I'll take that
And that's a great question because it has been an important initiative of ours and a focus of ours
So if you look at new products, we started off the year and said, we're looking at about a $50 million help from new products, sort of incremental
And if you sort of track it through the year in the first quarter, we think it was in sort of the $13 million range
For the second quarter, it was about $21 million
We think the third quarter is maybe just a tad above that, maybe more like $22 million for the third quarter
So actually, through the nine months, we're now a little bit above our target of $50 million
So to your point, we feel good about the progress we're making here
And I think that, ultimately, is the lifeblood of our growth
The key is to make sure we're in attractive end markets and that we're bringing innovation to our customers to drive the incremental growth
And so, we continue to be very pleased with that
As we think about into 2018, I mean, we'll give 2018 guidance obviously, sort of in the earlier part of next year but we continue to be optimistic
And because as we get traction this year, it reinforces our confidence in, first of all, the process of how we're driving new products, and just as importantly, the team
So, the other aspect is over the last maybe 18 months, we have been upgrading the leadership of the R&D organization and it's great to see that it's making a difference
I mean, I think when we set the targets out for the 22% operating margin couple of years back, we targeted sort of 6%, 6.5% R&D spend
And I think year-to-date, we're at 6.3% or something like that
So, I think we're pretty comfortable with that number
And then, when you think about it relative to product revenue, it gets you up in the sort of 7.5%, almost 8% area
So, I think we're fine there now
Of course, with EUROIMMUN coming into the company, they do spend more as a percentage of R&D
So you will see, in fact, the R&D percentage go up, but I think that's just sort of a math exercise with EUROIMMUN coming in
But I think for the, I'll call it the historical PerkinElmer portfolio, I think where we are now seems pretty good relative to our ability to invest in the areas that we think are important and drive the organic growth that we've talked about
I don't think there's any bad guys in Diagnostics right now
I mean, generally, we feel like Diagnostics is on track to do the sort of 6% or 7% organic that we've talked about in the beginning of the year
I think the offsets are in the areas where we haven't sort of invested in the new products within DAS
So, we thought a fair amount about the organic portfolios, so ICP, ICP-MS, even AA
I think the areas that hopefully we'll be able to focus more on in 2018, in the areas like some of the chromatography areas, some of the areas around thermal and material characterization
So, I think there are some areas where we're probably may not making the – or we're not growing with the market because, again, we focus some of our investments in some of those other areas that support the food area or support pharma, et cetera
I would say if we include in recurring services, that would be basically the majority of the growth
I would say on a product basis, we were relatively flat, when you look at things like high content imaging doing well and a couple of other imaging products being offset by radiometric detection and sort of drug discovery
So, product was relatively flat
Services was the majority of the growth
Well, I'll start off by saying it's going to be impossible to replace Andy
But having said that, it's going well
I mean, it's early days
We've hired a search firm
We've seen some preliminary list of very qualified candidates
And so, I think we feel pretty good about the ability to get a very strong person in here
I think the nice thing is because of Andy's willingness to give us a fair amount of time, I think we should be in good shape as we get into sort of middle part of 2018.
Yeah
So we continue to see strong growth in China, which is probably expected
We saw a particularly strength in Europe this quarter, very strong growth
And I think we just continue – I think it's a combination of we bought Perten, we bought <UNK>lta, we bought Bioo, and we've been in the process of trying to get those integrated, and then, also, leveraging some of the channel, historical channels of PerkinElmer and it sort of takes some time to do that and I think we're starting to see some nice traction there
And we're getting into some of the larger food customers and once we're in there, we're able to leverage additional products
So, either PerkinElmer products or pulling Perten and <UNK>lta through or vice versa
I would say we target food in sort of high single
I think in given quarters, we could probably see something in the teens
But I would say built into our Q4 guidance is food in the sort of low double-digit range
Well, first of all, we appreciate your questions
And again, we feel good about our financial performance year-to-date, as well as the progress we continue to make on our strategic priorities
Thank you for your interest in PerkinElmer and have a great evening
| 2017_PKI |
2016 | ISRG | ISRG
#We don't expect material revenues in 2016.
We are planning on clinical experiences in 2016.
The issue of broad claim language versus narrower claim language is actually was part of a discussion at the FDA workshop, and I can refer you to there those minutes, and you'll see pretty much what the exchange has been.
The issue ---+ I would not view that as something that is architecture dependent or only offered to a certain company.
That has to do ---+ in other words, FDA is going to respond to these kind of products in like manner as far as I can tell.
And so that comes down to FDA asked for a certain amount of data based on the kinds of things you want to talk to your customer about.
And if you just want to talk about broad things and not specific things, then they asked for one set of data.
And the more specific you get, the more data they asked for around that set of specifics.
So, in general, it is a matching of data requirements with claims, and so they are describing to you a strategy around what they think they can do from a data requirement point of view.
I think the playing field will be level here and to the extent the customers need a certain amount of information, then it's just going to be for all of us to go create that data and deliver it.
General surgeons routinely use that motion to do two things.
To use gravity as a retractor, so it's an extra hand using gravity.
And for the anesthesiologist to manage the patient in terms of positioning with regard to other vital signs and things like that.
So in procedures where you are trying to manage bowel, for example, it's really helpful to have table motion and that is clearly something that jumps out.
However, once we've had it, we've now been CE Marked in Europe and we've had it trialed in different specialties, I think it appeal is broad.
So we thought about it upfront initially around general surgery.
I think its appeal will be broader than that.
<UNK>, you will be our last questioner.
You made it under the wire.
Sure, I think a couple things that excite me and lead me to believe there is a lot of opportunity.
A couple.
Well, one of them is that I think in the architectures we are in today are pitted in the markets for which we have clearances, there is still a lot of procedures that are being done open and have opportunity to be done minimally invasively with our products.
And I think that is ---+ comes down to execution and delivery of some of the things we have in the pipeline.
Having said that, I think that as you just stand back and look out over the next decade and ask, do we think that robotic-assisted surgery can impact more procedures or more types of procedures than they are being impacted today, I think the answer to that is absolutely yes.
Some things are things like SP, products that look different.
SP won't be the last set of products that look different.
We think there are opportunities for other products and technologies that can really make a difference in surgeons delivering great care.
So we are excited about it.
We're investing in it and I think ask just about any surgeon, do you think that the use of computation analytics and robotics is going to improve your practice over time or become less important.
I think the answer is pretty uniform that those kinds of technologies should help them if they're well delivered and well executed.
On the revenue per procedure, I don't think there's much more than what we said.
There's a lot of factors that impact that particular metric.
It has been running at a pretty tight range, $1,830 to $1,840.
It did take over to a growth this last quarter as we saw utilization of advanced instruments more than offset the headwinds mostly from exchange.
But again, there a lot of those factors could vary in the future in terms of procedure mix, customer efficiency, buying pattern, foreign exchange.
So it is really a lot of factors there.
On Xi, the certain feedback has been outstanding.
Too soon to tell in terms of number of sites and duration as to what the changes and trends are.
But we will be watching.
Thanks <UNK>.
That was our last question.
As we've said previously, while we focus on financial metrics such as revenues, profits and cash flow during the conference call, our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes and reduce surgical trauma.
I hope the following comments from Dr.
Solomon, a general surgeon from Orlando, Florida, gives you some sense of the impact our products have on surgery.
Quote, the Advanced Technologies and improved dexterity of the da Vinci Xi System have allowed me to perform complex minimally invasive operations with a statistically measurable improvement in outcomes.
My patients are clearly and reproducibly benefiting from less pain, a shorter length of hospital stay, less time off work and lower short and long-term complications, end quote.
We have built our Company to take surgery beyond the limits of the human hand and I assure you that we remain committed to driving the vital few things that truly make a difference.
This concludes today's call.
Thank you for your participation and we look forward to talking to you again in three months.
| 2016_ISRG |
2016 | HZO | HZO
#Thank you, <UNK>.
Good morning again, everyone, and thank you for joining this call.
Before I turn the call over to <UNK>, I'd like to tell you that certain of our comments are forward-looking statements as defined by the Private Securities Litigation Reform Act.
These statements involve risks and uncertainties that may cause actual results to differ materially from expectations.
These risks include, but are not limited to, the impact of seasonality and weather, general economic conditions and the level of consumer spending, the Company's ability to capitalize on opportunities or grow its market share, and numerous other factors identified in our Form 10-K and other filings with the Securities and Exchange Commission.
With that in mind, I'd like to turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
I am extremely proud of the very strong results produced by our team this quarter.
Our team is truly the best of the best.
As we've said several times, what customers desire is new, different and innovative products; and, fortunately, our manufacturers are delivering such.
Clearly our ability to deliver the right product combined with our customer-centric approach is resonating well with boating enthusiasts, and together it is creating strong demand.
While the official market share data will not be out for 90 days, we believe our results are much stronger than the industry.
But the industry, like us, is clearly continuing to make progress and grow, which is great to see.
Let me now recap a few highlights for the quarter.
More than 49% revenue growth, driven by 44% same-store sales growth in a very material quarter, which is really outstanding.
Our pretax earnings, [removing] the gain in the same quarter last year, grew 75%.
We delivered $0.57 per diluted share this quarter.
All in all, it was one of the best quarters in our history as it represents our third-largest revenue quarter and the second-highest pretax profit quarter ever.
What is even more important to understand is that the industry is still off about 45% from a unit perspective from the prior 20-year average before the financial meltdown.
The brand and segment expansions that we executed over the past several years has made us much larger and more profitable at considerably lower unit levels than before.
We are more diversified and better able to serve a broader customer base which is driving much greater growth.
As such, our ability to produce more meaningful earnings and cash flow over the coming years is very much in place.
In the quarter, we saw a robust growth across most segments and categories.
In particular, we had an unusually strong quarter selling larger yachts, over 60 feet.
While these products carry lower gross margins, they certainly contribute to our growing cash flow and earnings.
Used boats also performed well in the quarter, yet they also carry a lower margin, relative to other products.
The bigger boat sales, combined with a meaningful increase in overall boat sales in the quarter, did pressure our consolidated margins since boats are the lowest-margin product within our revenue mix.
However, we were nonetheless able to increase our comparable diluted earnings per share by over 78%.
Furthermore for the first nine months of our fiscal year, we are at a 25% same-store sales growth, which was on top of 23% last year.
The 25% same-store sales growth, combined with our ability to control costs, resulted in our adjusted pretax earnings and diluted earnings per share more than doubling.
Our diluted earnings per share stands at $0.70 through June, with one quarter left in this fiscal year.
As we exit the June quarter, with inventory extremely clean, from an aging perspective, and loaded with fresh new models, we are well-positioned to support additional growth and profitability as we work through this important September quarter.
The April edition of Boston-based Russo Marine to our family has gone very well, with many synergetic benefits to both of our teams, a win-win for all.
As we've said, our manufacturing partners are continuing to invest more capital in R&D than they have the past eight years, resulting in greater innovation and delivering the right products that are stimulating demand.
Combined with our team's focus and approach on helping our customers enjoy the boating lifestyle, the enthusiasm and demand is growing and helping to drive our increasing profits and unit sales.
More than ever, the boating lifestyle and desire to be on the water are sought after by our customers and new potential boaters.
And with this update, I'd ask <UNK> to provide more detailed comments on the quarter.
<UNK>.
Thank you, <UNK>, and good morning again, everyone.
I also want to thank our team for an outstanding performance in the quarter.
For the June quarter, our revenue grew by more than $113 million to over $345 million.
Our growth was driven by very strong same-store sales growth of 44% which is on top of 10% growth in the same quarter last year.
A little over half of our same-store sales growth was driven by an increase in average unit selling price, and the rest by an increase in units.
As <UNK> mentioned, bigger boats helped to power our growth, but we had considerable unit expansion in almost every segment and brand.
In the quarter, the reported industry data was soft for April and May.
Sometimes it is hard to reconcile that data to our result, as we saw strong double-digit unit growth every month of the quarter, which was true generally across all of our markets.
Our consolidated gross margins compressed about 180 basis points to 22.8%.
As <UNK> said, the decrease is largely due to the strong increase in bigger boat sales which traditionally carry a lower margin.
However, the positive is that this drives dramatic gross margin dollars and ultimately earnings growth.
Generally, we are not in a discount environment.
Late-model used boats are still in short supply.
We have an improving mix of newer models in our inventory.
These are all factors that will lead to considerable annual margin improvement over time.
Selling, general and administrative expenses on the surface reflect an increase of $13.3 million.
However, you need to eliminate the $1.6 million real estate gain that we called out in last year's June quarter.
Doing so results in a comparable increase of $11.7 million which represents good operating expense leverage in the business.
We remain committed to controlling costs, and believe we can effectively leverage our expense structure as we move ahead.
Interest expense increased modestly due to an increase in borrowings to finance our inventory.
For the June quarter this year, we recorded an income tax provision of $9 million compared to no income tax provision last year.
As we've discussed the past two quarters, MarineMax returned to providing an income tax provision September 30 last year.
However, we are not expecting to pay significant dollars until we absorb our beginning NOL of about $50 million in other deductions.
We expect that our fiscal-year tax rate for the expense will be approximately 39%.
For the quarter, removing the gain last year and applying the same tax rate in both periods, our diluted earnings per share was $0.57 this year compared to $0.32 last year, an increase of more than 78%.
Regarding our first nine months, I will make only a few comments.
We are very proud to have produced same-store sales growth of more than 25%, which is on top of 23% last year.
Absent the gain last year, pretax earnings have more than doubled the $28.5 million.
And our earnings per diluted share also more than doubled to $0.70 per diluted share.
All very strong results, and certainly much better than the industry overall.
Onto our balance sheet, at quarter end we had about $56 million in cash.
Keep in mind we have substantial cash in the form of unlevered inventory.
Our inventory was up about 19% year-over-year to $307 million, yet it's down 11% sequentially from the March quarter.
Part of the planned increase in inventory is due to our expectations regarding our ability to outperform in an improving industry, combined with the need to have new models in stock that we did not have last year.
Overall, our inventory increase is less than our same-store sales growth, resulting in a planned continual improvement in inventory turns.
The rise in property and equipment year-over-year is due primarily to the marina we acquired in Pensacola, Florida, which is already yielding better results than expected for that marketplace; plus the Russo acquisition in the Boston area that we completed in April.
Turning to our liabilities, our short-term borrowings were about $177 million at quarter end, which was up primarily due to the additional inventory and the timing of payments.
Our customer deposits, while not a perfect indicator of the future due to the size differences of deposits and the impact large trades can have, continue to be up substantially year-over-year, now up 33% over last year.
We ended the quarter with the current ratio of 1.66 and total liabilities to tangible net worth ratio of 0.84.
Both of these are very strong balance sheet ratios.
Also, our tangible net worth is now up to approximately $292 million or $11.81 per diluted share.
We own over half of our locations which are all debt-free, and we have no additional debt other than our inventory financing.
Turning to guidance, we are again raising our earnings per share guidance for the full fiscal year.
Based on our performance thus far in fiscal 2016, and our expectations for the balance of the year, we now believe we will deliver same-store sales growth for the full fiscal year of approximately 20%, with the potential to exceed that if sales continue to outperform.
We now expect diluted earnings per share to range from $0.86 to $0.90, up from our previous guidance of $0.68 to $0.75.
This compares to our adjusted, but fully taxed, diluted earnings per share of $0.47 in fiscal 2015.
The adjustments to 2015 eliminates certain gains and the deferred tax asset reserve reversal.
We will continue to update guidance as dictated by our performance.
Furthermore, while we will plan to provide guidance for fiscal 2017 when we report our September results, I wanted to provide some early perspective on growth expectations for the coming year.
Most in the industry feel that mid-single-digit unit growth for the foreseeable future is reasonable.
If that is the case, we would typically outperform such growth, and likely see a modest increase in average unit selling price resulting in same-store sales growth in the 9% to 10% range.
Of course, we're going to challenge ourselves to do more, but it's not prudent to expect more than that until we advise such.
Lastly, I will comment on current trends.
As we started the quarter, our backlog continues to be up significantly over last year, and traffic and interest in new boats remains strong.
In this quarter, July and September are similar in size, and August is usually the smallest as families get ready for school.
We are well-positioned with improved inventory, and the consumer is energized about boating.
We are up against a 17% comp in this quarter last year, and we currently expect July to finish ahead of last year.
However, we have much work ahead of us in the rest of the quarter.
With that update, I'll turn the call back over to <UNK>.
Thank you, <UNK>.
What a great nine months this team has produced from a sales, earnings, and cash flow perspective.
We're seeing newer models with innovative designs and technology hitting our stores, and they are selling well.
As we look ahead, we understand the consumer is craving new desirable features such as joystick controls, improved electronics and creative designs, and innovative materials that are resonating with the consumer, and the manufacturers are delivering.
We also would expect to build on our market share expansion, given our increased depth and breadth of product along with our proven approach of delivering the boating dream to our customers.
We will continue to pursue and look to strengthen our geographic presence in key boating markets as we maintain our disciplined acquisition approach through targeted acquisitions.
We will remain patient, and are focused on strong cash-flow-producing companies that sell industry-leading brands.
We will continue to change people's lives and enhance their boating experience, and stay committed to building long-term value for our shareholders by consistently exceeding our team's and customers expectations.
And with that, operator, we'd like to open up the call for questions.
I'd say, <UNK>, the primary driver is the customer strategy that we have.
You know, we get involved with them, with events.
So, you know, we are in the Bahamas.
We've got a Nantucket event for our Azimut owners that's occurring this weekend.
We took them over to Italy.
We are up in Lake of the Ozarks.
So we're involved with our customers.
And, you know, you've heard us say that we change people's lives through boating, as it changed <UNK> and ours life as our kids grew up.
And it continues to do so.
But I'd say that's the primary driver.
Obviously, having the right product is important, and having new models that resonate well with the consumer.
And you've heard us say in past calls that the lack of new product over the downturn period really hurt our Company.
And we are starting to get them now, and you're seeing it in the results.
And so we're on the manufacturers, and they are delivering the new products and what our customers want.
But that's a big driver.
The brand expansions that we've done, Ocean Alexander is delivering well for us, as well as Azimut and Galleon and, of course, Sea Ray with their new products.
So it's a combination of many things.
But the stars have really aligned for us at MarineMax.
And most of it is it's about time.
We now have what we need to deliver to our customers who have been patiently waiting for their new products.
I think we've all said, Brunswick said and we've said, if you take the Sea Ray product line, roughly one-third was due to be refreshed in our fiscal 2015, so last year.
Not all of that got refreshed and got delivered to us in time where we could actually sell boats in 2015.
Some of that is coming here in 2016.
And then another one-third was supposed to be done here in 2016.
I'm using general round numbers.
But, again, we're not going to get that full one-third.
So I would say we're certainly less than halfway through the initial refresh in terms of what we can get into our stores and deliver.
But what's encouraging is the cycle is not going to stop.
And I can't speak for Brunswick, but I know from what our planning is with them, once these boats that have been refreshed come in and are with us for a couple of years, there's a whole another set of models that are going to be coming in the not-too-distant future.
So they're getting back to the cadence of new model development that they were on for years and years, and what made Sea Ray Sea Ray, quite frankly, and what made Brunswick strong in the boating business.
So it's not a one-and-done; it's a constant evolution of getting back into the right cadence of new product development.
And I would say probably everybody in the industry is moving in that direction, which is starting to reflect good unit growth for the industry overall as well.
But to <UNK>'s point, <UNK>, we could have used many, many more of the new products, such as these new SLXs that are coming out from Sea Ray and the SPXs that are new and the new 420, 42-foot Whaler and the larger Scouts.
So the demand is exceeding supply right now on the hot new models.
So as they continue to ramp up and to get us the new models, I think we'll see even greater success.
Yes, it actually doesn't.
It all depends on what you think the same-store sales number is going to be.
When the year started, we told everybody to expect same-store sales growth of around 10% and flow-through of around 12%.
Our guidance has something like 12% flow-through in it, and I think it's 12% to 13% to 14% same-store sales growth.
So we did reduce the same-store sales growth, just not knowing did we pull some of the business from September into June.
Let's get through the quarter of September to see what really happens from a sales perspective.
With the backlog being good, with trends being good, there's good trends continuing from June into July.
But the leverage in the Company is more like 12% in our guidance.
So on the retail side of credit for our customers, there continues to be more lenders interested in marine retail lending and getting into the industry.
Quite frankly, as automotive spreads decline and they're difficult to make money, and they're jumping into marine.
So there's more people than ever, probably than ever, lending in our industry, which is great.
Keep in mind that marine retail loans always stay on the banks' balance sheets.
They never securitize them.
So they are underwritten maybe a little differently than something that gets securitized.
But I'd say it's a continuously improving retail lending environment and has been for a while.
And wholesale is going very well with Wells.
Their bank group, yes.
The bank group.
So everything is fine on the wholesale and retail financing aspect of our business.
There's nothing in the mix that jumps out as unusual.
I did not really study that in preparation for the call.
But nothing jumps out as unusual.
It's not driven by a bunch of used boats.
It's not driven by a bunch of really big boats.
It's just a healthy mix of business.
And probably the best thing to think about from a color perspective is looking at our customer deposit line, which I know we say don't read too much into it because it can be lumpy.
We typically don't give what percentage our backlog is up or down, but the backlog continues to be healthy.
Sales trends continue to be healthy.
The industry is doing well right now.
Yes, so for fiscal 2016, which is only one quarter left, we said approximately 20% same-store sales growth.
The only way you'd get there, if we're 25% through June, the only way you can get there is some growth below 25%.
And so I think it's like ---+ it's 15% or something like that, is our same-store sales growth, with the flow-through similar to what we gave when we gave the full-year guidance.
Trying to be reasonable, conservative, all that stuff, I think at the 12% range for the fourth quarter gets you into the $0.16 to $0.20 range for the quarter.
Yes, I don't have specific answers for you, <UNK>, on that.
I can tell you that it's great to have a 33% growth in customer deposits following the June quarter.
Clearly, larger boats tend to drive bigger dollars, although we take deposits on everything.
So even a bunch of smaller deposits add up to nice growth.
I'd say, I'm going to say the majority of the deposit line will deliver in the September quarter.
There certainly will be some going into December and probably even some into the March quarter.
Our backlog when we started July, for July was strong.
July will finish ahead of the prior year.
We're up against a 17% comp.
I don't know if we ever broke down how that comp was last year.
But June ---+ or I'm sorry, but July and September are the really important months.
So you can assume we had a decent July last year, and we're going to comp above that this year.
So trends are still going reasonably well, but we have a lot of work to do.
We are not a business that has a backlog of 90% of our sales for the quarter already.
We've got to go create it.
And so, we try to be pretty reasonable in our expectations and update guidance if we can outperform from a sales perspective.
It's definitely expanding, <UNK>.
There's been a little shift in the demographics, with ---+ middle-class America is not active right now in our business.
There's some, but not like it was.
But the upper-middle class is very active right now, people that their income is $150,000 and greater.
And, of course, the high-net-worth individuals are extremely active right now.
So there's been a shift, but a lot of it is new business.
We still are getting a lot of customers trading up, but those customers are able to do it.
And, of course, as we spoke earlier, the financing part of it is getting about as easy as it's ever been.
So it's very positive.
And we're seeing the customers are very active out in our events, which is a great sign.
The industry says that boating participation is up.
So there's a lot of very good signs right now.
You know, if you get out on the water in almost any of our markets this weekend or last weekend, what you'd see is boating is extremely active.
And the shift to new models and new products with more innovation, etc.
, gives people reasons to say, hey, let's go get that new boat.
And that's what we're seeing.
Well, obviously, good question, <UNK>.
And if I hadn't been sitting in this chair for 19 years, including all the very good years from 1998 through 2007, where we produced year-over-year, over year, over year, double-digit same-store sales growth outperforming the industry every year, I would maybe be concerned.
But I'm very confident in our team's ability to outperform the industry, even with what we're up against.
It's certainly not easy; it's a challenge.
But our team continues to rise to that challenge.
So I don't think that's ---+ if the industry grows mid-single digit, we'll grow more than the industry, and then we'll have the benefit of average unit selling price growing.
At least we have every other year that we've been around.
So, we feel pretty good about that growth range.
We're giving our customers what they want and what they desire, which is a lifestyle that they can enjoy with as few hassles as possible.
And that's been our strategy since day one, and all the surveys and interactions that we do with our customers keep saying the same thing, <UNK>.
And that is, thank you; you've given us something we can do as a family, in a lot of cases, or we can do with our friends that's not only an escape, but it's a recreation that everybody can enjoy.
And when the mother of the household comes up and says to <UNK> or I or to Chuck or <UNK> or our regional presidents or whatever, thank you, I've got something I can do with my husband and our kids, and the kids are saying, thank you, I've got something I can do with my parents, that makes it pretty easy.
Not all of our industry does that very well.
In fact, most of it doesn't do it very well.
We do.
We measure customer satisfaction with Net Promoter Score.
And there was a book written on it called The Ultimate Question.
And if you look at that book and you look at what they call world-class companies, we outperform most in the book and would be at the top of the list.
So we not only deliver a great recreation, we really take care of our customers.
And that's a focus that our team has as foremost.
And it is proven to work for us.
And I think it will continue.
And I'd be very disappointed if we don't continue to significantly outperform the industry, as we have this time.
I mean, 44% same-store sales growth, when it's believed that in revenues, the industry was maybe less than 10%, I'd say that's outperforming, and we'll continue to do that.
Thank you, <UNK>, we appreciate it.
Thanks, <UNK>.
Okay, well thank you, operator.
And in closing, I'd like to thank all of you for your continued support and your interest in MarineMax.
And you know, especially I want to thank our team for focusing on their fellow team members and also upon our customers.
<UNK> and I are available today if you have any additional questions.
Thank you.
| 2016_HZO |
2017 | HE | HE
#Thank you, Cliff, and aloha to everyone.
Both our operating companies, Hawaiian Electric and American Savings Bank, delivered first quarter financial results in line with our full-year expectations and the guidance we provided last quarter.
At the utility, we continue to be leaders in the transformation to clean energy and are making significant grid upgrades to become more renewable-ready and to increase resilience and reliability.
As of the first quarter 2017, we achieved an energy portfolio powered by over 26% renewable resources and are expected to exceed the 2020 RPS goal of 30%.
At the bank, we're off to a strong start and had excellent deposit growth, increased net interest income and higher net interest margins along with improved operating efficiency.
Turning to recent utility development.
We are waiting for the PUC's decision on our Power Supply Improvement Plan, which outlined a detailed 5-year plan charting the near-term actions that will provide a foundation to meet Hawaii's 100% renewable goal by 2045.
On April 24, Hawaii Electric Light and the consumer advocate filed a stipulated procedural schedule in the Hawaii Electric Light 2016 test year rate case, subject to PUC approval.
This includes an evidentiary hearing at the end of July 2017.
On April 28, the consumer advocate filed its statement of position, and an interim decision is expected in August 2017.
In other developments, in April 2017, Hawaiian Electric completed negotiations for the third of 3 utility-scale solar facilities on Oahu with NRG Energy, which acquired the project following the bankruptcy of the prior developer last year.
The 3 power purchase agreements are subject to PUC approval.
The facilities are targeted to come online in 2019 and would get us 3 percentage points closer to our 100% renewable goal on Oahu and at pricing lower than originally contracted with the prior developer.
The project's total 109.6 megawatts at a weighted average price of $0.108 per kilowatt hour, including state tax credits, less than the cost of our fossil fuel energy.
Hawaiian Electric continues to lead the nation in the adoption of distributed private solar power, and to date, approximately 16% of all customers have PV systems, nearly 20x the national average.
In April, the PUC approved Hawaiian Electric's proposal to transfer to the customer grid supply program the available capacity from the net energy metering applications that had been submitted prior to the October 2015 cutoff but had been subsequently withdrawn or canceled.
This would add approximately 20 megawatts of capacity for customer grid applications, which could allow another approximately 2,800 private rooftop solar systems under the customer grid supply program that replaced our closed retail NEM program.
In our efforts to encourage the electrification of transportation in our state, we participated in a highly successful promotional partnership with Nissan North America, which made available to our utility customers special rebates on the Nissan Leaf.
This helped local Nissan dealerships to nearly double their sales in the first quarter, up from the first quarter in 2016.
On April 27, we announced that Nissan was extending its offer for Hawaiian Electric customers through June 30 of this year.
We are working with other auto manufacturers interested in creating similar campaigns.
Following a PUC-approved partnership, Hawaiian Electric Company and Stem tested nearly 1 megawatt of intelligent energy storage systems deployed at 29 commercial customer sites on Oahu.
The successful operation of this aggregated energy storage marks a major milestone in a first-of-its-kind pilot project showing the ability to connect many customers' energy storage units with the utility to provide dual value, savings for participating customers and better grid operations for the utility.
In April, the PUC also approved Hawaiian Electric's pilot program for customers with special medical needs to apply for a discounted electric rate.
Up to 2,000 customers dependent on life support equipment or increased heating or cooling due to a medical condition may save up to $20 a month.
This program would be effective from April 1, 2017, and run for a 2-year trial.
And in order to provide more customer solutions, the company began beta testing of its mobile outage application on Oahu and intends to go live later this year with an application after the successful launch of its outage map in the first ---+ the fourth quarter of 2016.
This is all part of the company's plan to provide more customer engagement and options.
In recent legislative developments, on April 28, Tom Gorak was not confirmed by our Hawaii State Senate as a PUC Commissioner.
Governor Ige is expected to appoint a new interim commissioner.
I'll now ask Greg to cover Hawaii's economy, our financial results and outlook for the company.
Thanks, Connie.
Hawaii's tourism industry, a significant driver of Hawaii's economy, continues to grow, setting records in both visitor spending and arrivals for the first quarter of the year.
Visitor expenditures increased 10.4% and arrivals increased 3.1% compared to the same period last year.
The state's 2.7% unemployment rate in March 2017 was lower than the prior year's rate of 3.1% and the national rate of 4.5% in March 2017.
Hawaii's real estate market continued to show strength in 2017 as median sale prices for single-family residential homes and condominiums on Oahu increased 3.5% and 2.6%, respectively, over the first quarter of 2016.
The median sales price for single-family homes on Oahu in March was $752,000, up 3.7% from last year.
According to the University of Hawaii Economic Research Organization's report dated May 5, 2017, Hawaii's economic outlook remains favorable for continued growth, although it may be a less rapid pace than in recent years.
And although construction still remains very active, it has begun to taper.
As shown on Slide 5, first quarter 2017 GAAP earnings per share was $0.31 compared to $0.30 per share in the first quarter of 2016.
Excluding the merger and related LNG contract termination costs, first quarter 2016 core EPS was $0.33, with Q1 consolidated core net income $1 million lower than the prior year.
As shown on Slide 6, HEI's GAAP consolidated ROE for the last 12 months was 12.5%, primarily due to the merger termination fee.
Excluding merger-related transaction adjustments, HEI's core consolidated ROE was 9.4%, with ROE contributions of 7.8% from the utility and 10.4% from the bank.
On Slide 7, core utility earnings were $21.5 million in the first quarter of 2017 compared to $26.7 million in the first quarter of 2016.
The most significant net income drivers were the $5 million net revenue decline largely due to the expiration of the 2013 settlement agreement which recorded Oahu RAM revenues beginning January 1 for the years 2014 through 2016.
The period in which cash reflecting RAM revenues is collected did not change as a result of the settlement agreement and have always been aligned to the June 1 to May 31 periods, and hence, the expiration of the 2013 settlement agreement has had no impact on cash collections in 2017.
In addition, depreciation expense was higher by $1 million after tax due to increased utility investments for customer reliability and the integration of more renewable energy.
O&M expenses were lower by $1 million after tax as the first quarter of 2016 included higher-than-expected Power Supply Improvement Plan expenses of $2 million after tax.
The first quarter of 2017 included additional environmental reserves of $1 million after tax for preexisting issues.
Slide 8 shows the utility's GAAP ROEs for the last 12 months ended March 31, 2017.
The consolidated utility GAAP ROE was 7.8% excluding merger-related transaction adjustments.
The consolidated utility core ROE was 7.9%.
The lag between our allowed ROE of 9.8% and our actual ROE is driven largely by our election to stay out of rate cases for 6 years and our reliance on our decoupling mechanisms.
Regarding these mechanisms, on April 27, the PUC issued an order related to outstanding items from the 2015 decoupling order.
The order requires establishment of specific performance incentive mechanisms related to reliability and customer service.
We'll be required to file proposed tariffs for the performance incentive mechanisms and sample calculations within 30 days.
The order also provides guidance for interim recovery of costs, offset by related benefits, for major projects completed in between general rate cases through a major project interim recovery mechanism.
In addition, it indicated that in pending and subsequent rate cases, the PUC intends to require all fuel expenses and purchased energy expenses be recovered through an appropriately modified energy cost adjustment mechanism rather than through base rates, and we'll consider adopting processes to periodically reset fuel efficiency measures embedded in the energy cost adjustment mechanism to account for changes in the generating system.
Our current rates for Oahu, Hawaii Island and the to-be-filed Maui rate case during the summer will do 2 things.
First, it will reset our base rates to recover the cost of investments we have been making for reliability and resilience of our grid, including the integration of greater amounts of renewable energy.
And in addition, it will reset the baseline on target revenues for the decoupling mechanism going forward.
In general, we should be able to earn closer to our allowed return, reducing our ROE lag after adjusting for structural items.
We estimate that our year-end 2016 actual ROE of 8.1% versus the allowed ROE of 9.8% was reduced by the following: approximately 50 basis points of structural items, which include nonrecoverable items such as incentive compensation, advertising and charitable contributions; also, approximately 110 basis points for items in excess of what is recovered through RAM revenues, largely due to higher plant additions and O&M that we have not received recovery of through RAM revenues due to the RAM revenue cap limiting annual increases to GDPPI; in addition, approximately 50 basis points of lag due to no return on pension regulatory assets above what was in the last test year rate case from 6 years ago.
The company has not been recovering on the full net periodic pension cost, which we've had to fund into an external trust which has been contributing to this ROE lag.
Excluding structural items, this creates 160 basis points of ROE lag, which we hope to address in the upcoming rate cases.
On Slide 9, at the bank, net income for the first quarter of 2017 was $15.8 million, $3.1 million higher than the first quarter of 2016 and $0.4 million lower than the fourth or linked quarter.
Compared to the first quarter of 2016, the $3.1 million increase was primarily driven by $3 million of after-tax higher net interest income, mainly due to growth in commercial real estate and consumer loan portfolios as well as the deployment of our strong deposit growth into our investment portfolio.
Compared to the linked fourth quarter of 2016, the $0.4 million decrease was primarily driven by the following on an after-tax basis: $1 million higher net interest income driven by higher yields on our investment portfolio and growth in our consumer portfolio and $1 million lower noninterest expense.
These increases were offset by ---+ on an after-tax basis by $1 million higher provision for loan losses, including additional reserves for a commercial real estate relationship in the first quarter of 2017 and $1 million lower noninterest income primarily due to lower mortgage banking income as a result of a reduction in residential mortgage refinancing activity.
Turning to Slide 10.
American delivered solid profitability metrics in the first quarter.
We achieved a return on assets of 98 basis points, on track to exceed our 2017 target of 90 basis points.
Our net interest margin was 3.68%, higher than our guidance range due to overall higher yields on interest-earning assets.
Overall, the bank continues to maintain robust deposit growth, strong capital levels and a straightforward community banking business model.
On Slide 11, our net interest margin of 3.68% in the first quarter of 2017 was 9 basis points higher than the linked quarter.
Our interest-earning asset yield increased 8 basis points from the linked quarter primarily due to increases in investment and loan portfolios, and our liability cost of 20 basis points decreased by 2 basis points as we reduced our higher-costing borrowings.
On Slide 12, total loans as of the quarter ended included growth in the residential and consumer loan portfolios.
However, the reduction in our exposure to national credits, a loan payoff connected with the completed construction project and the resolution and payoff of prior nonperforming commercial loan position contributed to 1.2% annualized decline in our loan portfolio for the first quarter of 2017.
However, we expect to meet our target of low, mid-single-digit growth for the year.
Our deposit growth has been consistently strong at 9.1% annualized for the first quarter of 2017.
Our stickier core deposit growth was even higher at 11.4% annualized for this quarter.
Low-cost deposits have funded our investment growth, resulting in higher net interest income.
In addition, higher yields on our loans have also contributed to overall higher net interest income of $1.8 million pretax compared to the linked quarter.
Noninterest income of $15.1 million was $1.3 million lower than the linked quarter, driven primarily by the decline in mortgage banking activity.
Overall, as we said last quarter, credit quality remains sound as a result of prudent risk management capabilities and the healthy local economy.
Our residential portfolio remains very clean.
Consumer unsecured credit quality is in line with expectations for the year, and the commercial and commercial real estate portfolios are stable with improving trends.
Provision for loan losses was $2.4 million higher than the linked quarter primarily due to reserves for commercial real estate ---+ for a commercial real estate relationship.
Our net charge-off ratio of 29 basis points for the first quarter of 2017, 11 basis points lower than the linked or fourth quarter, largely due to charge-offs of specific commercial credits in the fourth quarter.
Net charge-offs were above our target range of 18 to 23 basis points due to commercial loan charge-offs which are lumpy in nature.
Nonaccrual loans as a percentage of total loans receivable held for investment decreased to 41 ---+ 0.41% compared to 0.49% at the end of the linked quarter, a decline of nearly $4 million.
The allowance for loan losses was 1.19% of outstanding loans at $56 million for the quarter end compared to 1.17% at the end of the linked quarter and 1.13% as of the prior year-end.
Slide 14 illustrates American's continued attractive asset and funding mix relative to our peer banks.
American's March 31, 2017, balance sheet is compared to the last complete available dataset for our peers which is as of December 31, 2016.
100% of our loan portfolio was funded with low-cost core deposits versus the aggregate of our peer banks at 86%.
In the first quarter, total deposits increased by $126 million or 9.1% annualized while maintaining a very low cost of funds of 20 basis points, 27 basis points lower than the median for our peers.
In the first quarter 2017, American paid $9.4 million in dividends to HEI, and American remains well capitalized at March 31, with a leverage ratio of 8.5%, tangible common equity to tangible asset ratio of 7.8% and total capital ratio of 13.6%.
We ---+ today, we are reaffirming HEI's 2017 earnings guidance range of $1.55 to $1.70 per share as there are no changes to the guidance range for the utility and bank at this time.
Connie, back to you.
Connie.
I'll complete the summary.
In summary, our utilities continue ---+ will continue its expansion of our renewable energy portfolio and grid modernization efforts to increase our resilience and reliability while working towards achieving Hawaii's 100% clean energy goal.
Our bank will continue to focus on deepening customer relationships to drive balance sheet and income growth.
On Wednesday, our board maintained our quarterly dividend of $0.31 per share, continuing our uninterrupted dividend payments since 1901.
The dividend yield continues to be attractive at 3.7% as of yesterday's market close.
HEI, Hawaiian Electric and American Savings Bank will continue to move forward providing long-term value for our customers, community, employees and shareholders.
And now we look forward to hearing your questions.
This is <UNK> <UNK>.
I'll start with the last part of the question.
Yes, the commission can make decisions with 2 commissioners.
I will not speculate as to why the confirmation did not proceed.
I know that there was a lot of discussion about it throughout the session, and I just can't speculate why certain members voted against and others voted for.
We have seen no indication that it would.
As I said, the commission can operate with 2 signatories, 2 commissioners.
And over the year ---+ 2 years, Chair Iwase has increased staffing at the commission to be able to be more responsive to the large number of applications that have been filed.
So we don't see any indication that things would slow down, notwithstanding, right now, not knowing who the interim appointment may be.
So we haven't had an interim decision.
I think you may be referring to my discussion of the decoupling order, which is relative to the decoupling mechanisms which generally seem to be constructive, removing fuel cost from base rates and putting them through the energy ---+ the ECAC mechanism that we have, which is a very timely update for fuel adjustments.
And the mechanism allows for true-up of our generation-related costs that contribute to the calculation of the ECAC as appropriate, and the mechanism also allowing for recovery of capital expenditures between rate cases in a specific mechanism that would be moved out of the RAM calculation specifically, which, as you recall, the RAM has a cap on it.
So we view that as a constructive order relative to the decoupling mechanisms.
No ---+ this is Connie.
Whatever is in the interim rates ---+ the standard on what can be included or not doesn't depend on whether it's an interim or it's a final, but the difference between an interim or a final is that the interim can be granted on a probable entitlement basis.
And so what you'll see coming in throughout this year is, in August, we might expect an interim decision from the commission that could give us some interim rates, assuming that there is probable entitlement.
And that would be for Hawaii Electric Light, which, of course, as you know, is one of the smaller utilities on the Big Island.
And then for our large utility on Oahu, that interim would be expected very late in the year, in the December time frame.
Yes, that's correct.
If we received an interim increase, we would start looking at that interim rate.
As you know, it's been quite a while since we've had a rate case or an interim decision, so this is a new commission.
Yes.
We used a little bit different terminology.
We considered the structural as those items that are unlikely to be recovered and haven't traditionally been recovered in a rate case process, the disallowances of charitable contributions and advertising costs, for instance.
So we consider those the structural items.
So as you.
.
Yes.
In aggregate, for 2016, we reconcile that as 50 basis points of structural items, meaning that our real opportunity for ROE, if ---+ had we fully performed and had we had not other lag items, would have been a 9.3%.
So that was our opportunity.
And then the items ---+ the other items, we expect to address during the rate case, such as increased O&M and plant additions that were above the RAM cap.
I did mention the pension contributions that we've had to make, that our pensions ---+ net periodic pension costs were set in a rate case 6 years ago.
And consequently, we are under-collecting for those in this interest rate environment, and we've had to make contributions externally.
So that's been invested capital into an external trust which we're not earning a return on, and that should also be addressed through this rate case.
And that, in total, we'd estimated for ---+ as we reconciled 2016, about 160 basis points of ROE lag that can be addressed through the rate case.
In 2016, we had some benefits on the other side as well.
We had interest rate savings on debt that was refinanced at lower interest costs, so we had some offsets which will also be addressed during the rate case.
Yes, that would be the ---+ again, that's predicated on a couple of things.
The allowed ROE will also be addressed in the rate case.
So we're currently at 10%, which is a weighted average across the 3 utilities.
So ---+ or I'm sorry, we're at 9.8% across the 3 utilities on a weighted average basis.
That will be reevaluated as part of the cost of capital process in the general rate cases.
So that will establish the cap, the allowed and then you have ---+ you deduct the structural items, which are the disallowances, and that will set our opportunity to earn.
The other elements there, assuming that we get a full recovery of our revenue requirements through the general rate cases, we would have the ability to earn up to that.
So for 2016, that would have been 9.3%.
In any event, we anticipate, through the rate case process, getting closer to our allowed ROE.
Well, we haven't actually provided specific guidance on that.
You could back into it using our EPS for the years.
But we haven't ---+ we are ---+ we did report our ---+ for the first quarter at 7.8%.
And yes, the one thing affecting our actual ROE for 2017 is the impact of the RAM revenue recognition issue, which will continue on into next quarter as well.
And I think we've provided some detail on that in the supplemental slides in terms of the annual impact.
So we anticipated that the RAM mechanism adjustments this year would result in a loss of ---+ on a pretax basis, of $25 million in revenues.
That's a net number, and that's shown on Slide 22 in our appendix slides.
And that would be $14 million after tax, nearly $0.14 EPS.
So that will impact our achieved ROE for 2017, which we'd expect would be in the 7% to mid-7% range.
I might also call your attention to Slide 23, which we had put together to be helpful in understanding when interim rate increases might come in relative to when RAM mechanisms would operate.
That's correct.
Those are discretionary contributions on our part just as they are for most corporations.
We believe that it's very important for us to take a leadership role not only in our business community but across our communities.
And particularly in Hawaii, where we are island communities, it's quite important that all businesses support the community.
Yes.
No, the decline was mostly contraction.
The decline year-over-year is mostly margin rates on the gain on sale, so volume was about the same on the sales of mortgages.
The decline sequentially was principally from sort of seasonal decline in the market and the refinances really shrinking based on rates ticking up.
Just great execution by our team.
Yes.
It's been something we've been focused on for quite a while.
And I think you've seen pretty sustained good performance on that, and it's accelerated recently.
That gave us the chance, as Greg mentioned, to bump things into the investment portfolio with really good timing last quarter.
So we got nice rates on what we are able to add to the portfolio, so that's going to help NIM as we go through the year.
So far, we're good.
I think you've seen that most of our growth has been in core deposits, the vast majority of core deposits and operating funds.
So, so far so good.
Yes.
It was a big contributor.
So we were up 9 quarter-over-quarter, 8 of it was NI<UNK>
We've got about 3 of improvement in the rate on the portfolio between investments and loans, and then that was offset by some difference in the unusuals and loan fees and stuff between the quarters.
So a big help, and that's the wildcard in future quarters, is where those ---+ where the rates are and what happens to the FAS 91.
| 2017_HE |
2015 | PRGS | PRGS
#No, I think, like any review of our capital allocation strategy, <UNK>, we would look at opportunistic acquisitions, if we feel like we've got gaps in our strategic plan, road maps and so on.
Clearly, we are always assessing the opportunity to do that, and share buy-backs, and other ways that we can improve shareholder value.
So we still have a significant capacity to do that.
And ---+ but I think that you have seen, in this Management team, the prudence necessary to execute on what we have.
I think the assets we've got today are really, really competitive.
And looking forward to bringing them all together, and showing you the power of what we have got at our Investor Day.
No, we don't hedge ---+ we only hedge specific transactions.
So we make sure that, as we enter into a transaction, there will be currency moving ---+ the committed currency moving.
We actually do hedge that.
So we don't forward hedge, or anything of that nature, based on expectations.
So that's really just the policy that we have.
And we always hedge our inter-company balances, so we don't have any exposure on those areas.
Sure.
I will, and <UNK> or <UNK> can join in.
First, again, we saw that there were some markets, I would say, at the beginning.
So that's not meaningfully outside of our expectations.
So we saw that there's some market due to ---+ that were softer, as we were going into the year.
So we made those appropriate expectations on our outlook.
Specifically, in the market, <UNK>, I don't know if there's that anything you want to ---+
The guidance, and the discussion we had, is the Telerik business was at a rate ---+ trailing 12 months rate of just over $60 million, around when we acquired it.
It was $60 million when we announced, and by the time we closed a month or so later.
And that's where we said that we expected a growth rate of over 20%, going off of that base.
So ---+ and then we said the BravePoint business, it adds about 6% in total to the OpenEdge business, from a revenue growth perspective, just the pro forma impact of that acquisition.
So it is less than $100 million, but I would say our expectations for the growth and the performance of those business is on track and in line.
But again, we ---+ as we also talked about those businesses were operating in a lower margin when we acquired them, in the 10% range.
And they also, when you just pro forma-ed, again, putting those businesses together.
It, again, less than $100 million, but approaching $100 million.
That's what brought our margins down to the high 20% level, from our 35% prior.
But again, I would just say that those businesses are performing, from a revenue expectation, and from a profitability expectation, in line with our expectations.
Are you looking at actual exchange rates, Q to Q.
I'm ---+
I don't see it.
Year over year, it is going to be currency.
Sequentially, it is not down.
I'm sorry.
Sequentially, it is down.
I apologize.
Yes, about $1 million or so.
And I would say that's ---+ on the maintenance side, it is going to be based on some of the timing of the renewals.
On the services side, it depends on when engagements are completed and engaged upon.
So there can be some fluctuations in that period.
I think that if Mike Benedict was here, he would say it was superior leadership.
But I will tell you that the discipline that his leadership has brought, and the way in which the team responded, the focus that we had on the customers, building out the additional data sources that <UNK> mentioned for up-selling.
And then the other part of this, if you remember, <UNK>, is the up-front revenue recognition that Progress took in some of the long-term deals.
We let those play out, and we let them go back to the way in which we had recognized that revenue in previous years.
And that is, allowing the term of the contract to dictate when we recognize the revenue.
So if it is a three-year contract, we would recognize it over three years, instead of recognizing a bigger portion in the first year, and then a lower portion in the following years.
And that helped build our backlog, and gave us greater consistency and visibility to our business.
So it is a combination of those things that has resulted in the growth rates that we are seeing today.
I've always maintained, I think, and you've heard me in previous calls, that I really like the data business.
It is really strategic to our Company, and that we were always confident that we would be able to demonstrate that to you, when we've got our act together, essentially.
And that's what we have done.
(multiple speakers) And I want to go back ---+ sorry ---+ on the previous question about the maintenance.
On one of the previous calls, I talked about the fact that there was a piece of the deferred maintenance that was tied up on a deliverable for Telerik.
So there was a piece of that came through in Q2 that was based on the technology deliverables.
So there was some revenue that was being penned up until that technology deliverable was made.
So that was the bump up in Q2, and therefore, it caused the revenue ---+ the maintenance revenue to go down in Q3.
Sorry I missed that.
Sure.
On the Corticon side, yes, Corticon's not a substantial portion of our overall revenue.
And ---+ but it is something that we were expecting some meaningful growth, on a year-over-year basis, from some license bookings.
So again, the quarter, and the rest of year, we've softened that.
So it does impact our full-year growth trajectory, if that growth doesn't come in.
And then on Brazil, does anybody have the percentage.
5% of total ---+ Brazil is about 5% of our total revenues.
We did ---+ we always sign some large deals.
And by a large deal, it means that it could be recognized over the course of a multi-year agreement.
So there's always some reasonable deals, but there was nothing unusual, as far as the level of sizable deals this quarter versus prior quarters.
No, I think ---+ again, it was a very high level in the third quarter, up in the high 20%s, on a constant currency basis.
So that is not the level of growth that we are projecting that business to go, on an annual basis.
But we do think it is a business that, if we continue to execute, can be on a ---+ up to a 20% year-over-year growth business.
So it is a little bit higher this quarter.
But again, in line with what we expected
That's right.
Yes.
20% growth.
It probably ---+ it may have been a little bit below 20%, as far as the quarter.
But again, we had good bookings, and we are still pretty confident in the 20% for the year.
So again, I talked a little bit about, we had, at the start of that ---+ of after we acquired the business, we had to get the engine running.
And we are pleased with how the bookings are going in Q3, and have really gone for the whole year.
But I think that, that business is going to continue to be a good, solid contributor.
Thanks, <UNK>.
| 2015_PRGS |
2018 | SCSC | SCSC
#Relationship with who, I'm sorry, Chris.
Mitel.
Yes.
So for us, we're pretty used to the way these things work when a key supplier, key vendor has a key channel they want to move to distribution is we have to make sure we do it at the pace of the customer.
And so it generally takes longer than people expect it to happen.
But certainly, we expect it to be a very successful transition.
And so we've had to, again, make some investments in SG&A to support this.
And this is part of that additional investments that we talked about earlier in this call.
We have to, if you will, invest ahead of the revenue and the margin so that we're prepared to not skip a beat when this business comes our way.
And it's important to Mitel that we transition this business successfully.
And frankly, our history with transitioning these businesses is once they're transitioned they grow.
And that is the ultimate measure of how successful it is, is do we take this business that was formerly direct and grow it more than it was before.
And that is our goal: to take this business that's transitioning and grow it.
So over the next 2 to 3 quarters, we'll be able to see the results of this for sure.
Well, we have been the beneficiary of 2 dynamics that are going on with Intelisys.
One is this shift to the indirect channel by traditional carriers.
And that has been driving the growth in the past, and I think that has contributed for sure to this 20% number.
I think the other thing that's going on are these ---+ this expanded line card, if you will, of vendors, supplies.
So whether it ---+ if you look at the Intelisys list ---+ and I don't want to list everybody because then it'll take me a few minutes because we now have about 50 or 60 key suppliers there, but just as a placeholder ---+ these are the RingCentrals of the world, the UCaaS vendors.
And using them as the placeholder, those vendors are all showing growth in their markets dramatically.
And Intelisys is taking market share from their competitors; meaning the other master agents that are working with these suppliers, we're growing faster than the market.
So we think the market study that suggests the UCaaS is growing at a CAGR of about 10% and about 13% ---+ it's growing about 13% in the cloud space.
And if we're growing at the rates we are, we're going faster than that is my point.
So we're getting market share in an already growing marketplace, and that's what's exciting.
And that's why we believe there is an opportunity to gain unusual share within this UCaaS space, and that leads us to have the confidence to make these what we're calling internally some accelerated investments in Intelisys.
Great.
Thanks for joining us today.
We expect to hold our next conference call to discuss June 30th quarterly and full year results on Tuesday, August 28, 2018.
| 2018_SCSC |
2017 | VZ | VZ
#Thanks, Mike
Good morning to everyone on the call, and thank you for joining us today
As outlined in our earnings call in January, our priorities for 2017 are to leverage our network leadership, retain and grow our high-quality customer base while balancing profitability, enhance ecosystems in Media and Telematics, and drive monetization of these networks and solutions
We are executing against these priorities while positioning the business for the long-term as we progress through 2017. The first quarter of 2017 proved to be a very active quarter for us; first, we extended our network leadership, as recognized by third party testing results; second, we launched an introductory unlimited wireless data plan to address evolving customers’ demand in a highly competitive environment; third, we realigned our operating themes to enable business agility to deliver new products and next generation services
Verizon's core strength and the foundation of our future success in a connected world starts with the network, and we have enhanced our track record of U.S
industry leadership
We are consistently investing in our network to extend our leadership in both 4G and 5G
We also closed the acquisition of XO Communications fiber assets in the quarter
Our uncompromising commitment to our customers led to the launch of an introductory unlimited offering in the quarter
This measured approach in a competitive and highly penetrated wireless phone environment was positively received by both the consumer market and more importantly, our existing customer base
Our competitive unlimited offer, coupled with networks strength and reliability, allows us to attract, retain and grow high-value customer relationships across our entire business
At the end of the first quarter, we announced the realignments of our operating teams to facilitate organizational agility in wireless and fiber markets to scale and expand our Media and Telematics businesses and to maintain leadership in network reliability and new technology
These changes do not affect our segment reporting
We are confident in our strategy and priorities to provide the best network experience in the U.S
, create long lasting customer relationships and identify growth opportunities in new businesses
Executing these strategies will enable us to continues to deliver returns on our investments and drive long-term value for our shareholders
Let's review the first quarter operating performance at the consolidated level, followed by Wireless and Wireline results, Media and Telematics progress and a network technology update
Now on to slide six
On a comparable basis, excluding divestitures and acquisitions in the period, consolidated revenue declined approximately 4.5%
The primary driver was a decrease in wireless service revenue resulting from the migration to the new pricing structures introduced over the past nine months, and the ongoing transition of the base to unsubsidize pricing
These pricing moves have been positively received in the marketplace
On a consolidated basis, excluding non-operational items, first quarter adjusted EBITDA margin was 37.3%, which was slightly higher year-over-year due to steady improvement in operating efficiencies and cost management
Let’s turn now to cash flows and the balance sheet on slide seven
We are generating substantial cash flows from our operating segments
Cash flow from operations is $1.7 billion, which included discretionary pension contributions of $3.4 billion
Additionally, our ongoing asset-back securitization program provided $1.3 billion in the quarter, which flows through the financing section of the cash flow statement
The discretionary pension contributions are net present value positive on an asset tax basis given the reduction in our variable rate PBGC premiums and the expected net return on planned assets
As a result of these contributions, our mandatory pension funding through 2020 is expected to be minimal, which will benefit future cash flows and improve the funded status at our qualified pension plan
Also, the rating agencies view debt funded pension contributions as neutral to credit rating metrics
Consistent with our capital allocation priorities, we are investing in our networks
Our capital expenditures were $3.1 billion in the quarter, and we expect capital spending for the year to be within our 2017 guided range
Our balance sheet is strong and provides us with financial flexibility to grow the business
We ended the quarter with $116.5 billion of total debt, which was comprised of $110.2 billion of unsecured debt and $6.3 billion of on balance sheet securitizations
During the quarter, we completed multiple capital market transactions, including new debt issuances to fund the discretionary pension contributions, the acquisition of XO and to pre-fund the acquisition of Yahoo
These transactions included a $3.1 billion tender offer and $9 billion debt exchange, which reduced future cash interest costs and extended maturities
We remain on track to return to our pre-Vodafone credit rating profile by the 2018 to 2019 timeframe
Now, let's move into review to the operating segments, starting with Wireless and the impacts of Unlimited on slide eight
In our Wireless business, we have extended our network leadership position, while balancing operational performance in a competitive environment
Verizon is the U.S
market leader across high-value postpaid phone customers, and we have consistently stated that our top priority is protecting our base to build on our customer relationships into the future
During the first quarter, we made a disciplined decision to launch an unlimited offering, so let's spend a few minutes on the factors leading to our decision
As discussed on the last earnings call, we launched wireless plans in mid-2016 that offered safety mode and carry over data, reducing overage charges
Since the launch, the U.S
wireless phone market experienced greater competition with unlimited plans from other carriers
We chose to compete using equipment promotions during that time, while we evaluated different service pricing options, including Unlimited
At the start of 2017, competitive intensity escalated, resulted in loss of gross add share and an uptick in churn pressure
So we determine that the timing was right for the introduction of an unlimited option at the high-end of our existing plans
We are confident in our network capability to efficiently manage the expected usage growth from unlimited, because we have invested in technology, architecture and densification
Our early network performance is consistent with our high-quality of service expectations and within the current network plan
The customer response to the launch was favorable as evidenced by an immediate improvement in subscribe activity in the second half of the quarter
In the quarter, in which we added 49,000 smartphones, our phone net-adds had two distinct trajectories
Prior to our Unlimited launch, we had retail postpaid phone net losses of 398,000 customers
After the launch, we added 109,000 retail postpaid phone customers, which gives us momentum entering the second quarter
Overall in the first quarter, we lost 307,000 postpaid customers, consisting of phone losses of 289,000 and tablet losses of 255,000 offset by other connected devices
We introduced the Unlimited offering, primarily to protect our high quality base, and we achieved the desired impact as retail phone churn improved after the launch and was less than 0.9% for the eighth consecutive quarter despite heights and competition in the marketplace
Total retail postpaid churn of 1.15% increased year-over-year due to higher tablet churn, which is expected to remain elevated throughout the year as customers roll-off for free capital promotions from prior years
Total postpaid device activations were down almost 9% over the year prior, of which about 82% were phones
In a seasonally soft quarter, we had 5.2% of our retail postpaid base upgrade to a new device, down from 5.8% last year
During the quarter, 5.7 million phones were activated on device payment plans
While we may progress in the prepaid market, this remains an area of opportunity for us, as prepaid devices declined by 17,000 in the quarter as compared to a decline of 177,000 in the prior year
Let's turn to slide nine and take a closer look at Wireless revenue and profitability
Total Wireless operating revenue declined 5.1% in the first quarter
We experienced the change in the service revenue trend, which had been improving sequentially
Service revenue declined 6.1% year-over-year compared to the 4.9% decrease in the previous quarter
The service revenue pressure was a result of decreased overage revenue, lower postpaid customers in the quarter and promotional activity
Overage pressure was primarily related to the ongoing migration to the pricing plans implemented last year and the introduction of Unlimited offerings
As expected, optimize as we benefit the most from stepping down in price, primarily single line users, were the early adopters of these plans
We believe this revenue trend will persist through the first half of the year, but remain confident that these plans will be up and neutral over-time as more users step-up in price, which has already taken place
New customer accounts added after the unlimited launch on average had higher account access fees
While we absorb overages in the near-term, we expect that the increase in account access fees will replace overages overtime
Equipment revenue decreased 4.8% in the first quarter
Sequentially, the percentage of phone activations on device payment plans remain steady at approximately 76% in the first quarter compared with about 77% in the fourth quarter
We expect the second quarter device payment plan take rate to remain consistent
At the end of the quarter, approximately 48% of our postpaid phone customers had a device payment plan, while about 71% were in unsubsidized pricing
Our Wireless EBITDA margin, as a percent of total revenue, was 45.1% which was down due to the service revenue trend and the increased advertising activity associated with the unlimited plan launch
Let's move next to our Wireline segment on slide 10. At the beginning of February, we completed the acquisition of XO Communications which contributed revenue to enterprise solutions, partner solutions and business markets for about half of the quarter
Excluding XO, Wireline segment revenues maintained recent trends, declining 3.2%
Consumer markets revenue increased 0.7%, which was driven by favorable pricing, partially offset by lower customer demand
In Fios Internet, we added 35,000 customers for the quarter, over 22% of our broadband customers are in plans with speeds of 100 megabits per second or more
Fios video losses of 13,000 in the quarter were indicative of softer demand from linear video due to the increase in over-the-top offerings, mobile video consumption and competitive promotional offers, particularly in the New York market
On an organic basis, Enterprise Solutions revenue declined 4.3% in the quarter as a result of pricing pressure in the market
On a constant currency basis, this decline was 3.7%
The customer migration from legacy services, such as voice, to advanced communications product is generating a revenue headwind in the near term, while increasing customer satisfaction and decreasing serving cost over the long term
Wireline segment EBITDA margin increased to 22.7% for the quarter, up from 19% last year
Tight cost controls plus impact of last year's renegotiated labor contracts improved profitability
We expect full year improvements in margins with seasonal fluctuations throughout the year
Let's move next to slide 11 to discuss their progress in new businesses
In our Media business, AOL continues to deliver solid seasonal performance with growth in gross revenue
Revenue, net of traffic acquisition costs, decreased about 4% driven by a higher percentage of programmatic advertising
Along with our content assets, AOL’s ADTECH capabilities have enabled us to provide unique content across multiple platforms
We have assembled video platforms to leverage the growing customer demand for digital media
Our targeted content pillars, focusing on news, sports, finance and lifestyle, are already increasing the viewership
To provide the necessary scale to effectively leverage these assets, we are looking forward to combining AOL and Yahoo and operate in the combined businesses under the Oath brand
We are actively working on integration streams with Yahoo to ensure a smooth consolidation when the transaction closes, which is expected during the second quarter
Consistent with past quarters, digital video consumption on the go90 app maintained in average data usage of about 30 minutes per viewer with less than 20% to the up-traffic served on the Verizon wireless network
During the quarter, the app was updated to improve the user interface, increase content discovery and enhance the programming and advertising capabilities
In the Telematics business, we are quickly integrating the Fleetmatics and Telogis acquisitions
With these assets, we are the global market share leader and are looking to expand our offerings in this space
Total Telematics revenue was $214 million in the first quarter
Organically, IoT revenue, including Telematics, was up approximately 17% in the first quarter
Let's move next to slide 12 to discuss network and technology
We consistently invest in our networks to ensure that overall quality and capacity remains ahead of demand
Capital spending of $3.1 billion in the quarter was largely network related to maintain leadership in our markets
Fiber is a critical component of our network strategy and next generation deployments, as demonstrated by the success of our densification initiative
Earlier this week, we announced the strategic agreement with Corning with whom we have a long-relationship to supply optical fiber and hardware solutions of at least $1.05 billion from 2018 to 2020. This investment ensures that we have adequate supply of fiber
In the first quarter, LTE data traffic increased 57% over the prior-year
While still early in the cycle, the increased data traffic resulting from Unlimited is in line with our expectations, and network management tools have been effective
We are committed to remain in the largest and most reliable 4G network through technological developments in LTE, deploying small cells and refarming mid-band spectrum
As part of the densification, we are deepening our fiber assets, enhanced by the XO transaction
As previously announced, we are launching 11 pre-commercial 5G fixed wireless pilots during the second quarter and we look forward to sharing the results later in the year
Let's move next to slide 13 to review our strategy for future growth
Our long-term growth model is to lead in network, expand our customer relationships and develop new businesses in Media and Telematics
While executing on our strategy and positioning for future growth, in the quarter, we listen to our customers evaluated the marketplace and launched an unlimited offering in order to retain and grow our high quality customer relationships
We realigned our operating teams to increase business agility to deliver new products and next generation services and develop new ecosystems in Media and Telematics in order to monetize the rising data traffic on our network
Overall, we are confident in our strategy and ability to execute and deliver long-term value to our customers, partners and shareholders
With that, I will turn the call back to Mike, so we can get to your questions
So I think if you look at what Lowell said earlier in the week, as we look at the network and is consistent with all being saying for over a year ago, since we announced the fiber initiative in Boston, that as we look at the networks of the future, they are going to be built with a lot of fiber deep into the network and that network is going to be built for multiuse cases, not for a single use case; so it's going to deliver consumer to the home applications; it's going to deliver small business applications; it's going to light up enterprise buildings; and it's also going to deliver smart cities and IoT solutions too
So as we think about how you build that network out, you’re going to need fiber that’s not out there today, which is one of the reasons we had the announcement earlier this week to make sure that we have access to the physical fiber as we start to deploy it more in places like Boston around the country
Now as you say, the architecture doesn’t exist today in terms of what we could acquire
So there is options here, we can go out we could build that fiber as we’re doing in Boston
And we also look at every way that we get access to that fiber
That’s what it’s critically about, is getting access to the fiber we need to deliver the solutions that we’re looking to do
And there’s multiple ways we can get that
So depending on the location that may mean us building the fiber network
If there is great assets already in place and as the opportunity to acquire them at a good price then we would certainly look to do that
And then there is also other ways to work with partners thhrough leasing and other arrangements where we don’t have to build or outright buy
So we will look at all those opportunities as how we get access to that fiber, do we need to build the network of the future and provide the solutions that our customers are going to want as we go forward
So as you say, we could do that organically and inorganically
We’re very comfortable and confident in the assets we have and adding on to them ourselves
But if the right opportunity came along, we would look at that
And I think we’ve been fairly consistent about dealing that and we’ve also been consistent about the impact on the balance sheet
We believe in a strong balance sheet
But if the right acquisition comes along that allows us to add shareholder values in the long run and it’s the right thing for shareholders and all stakeholders in our business, we would look doing that
But we’d do it in a way that certainly reflected the need to have a strong balance sheet
Yes, there is a number of different assets, aspects to it that would make it attractive; speed to market; the quality of the assets, that’s there; and we look at all those things
But ultimately, if we have to build it ourselves, we’re comfortable doing so
And we think we can do that relatively within our investment plans
So I'll start with your first one
We really don’t breakout the quarter typically in terms of the net add numbers, and so
But when you look at year-over-year, what you’re really looking at here is the impact of going to the unlimited
And really given our customers, the functionality that they are looking for and that was a decision we made, and you saw an immediate impact in our business
And we certainly do look at that the month-by-month
And I can tell you that this isn’t a seasonality in the first quarter, the change we saw in the first quarter
But really the 398,000 negative number through the first half and in the positive 109 in the second half, was all about the response to Unlimited as opposed to any significant seasonality in the quarter
And then in terms of your second question on small cells, so the fiber deal isn’t just about building small cells
Obviously, we will build small cells with this, but there would be other use cases as we go out
So we’re not in a position today that to say the number of small cells that we will light up with this fiber agreement with Corning
I can tell you, we will continue to build the best performing wireless network across the country; and we use small cells, we use the new technologies in LTE; and moving into 5G to do that and this fiber will help us to do that
So I’ll start with your first one around wireless revenues and the ARPA decline
So as I look through the quarter, and let's see what happened in the wireless revenues
We have the continuation of the migration of the base to unsubsidized pricing
But in addition to that, what we also saw was a reduction in overage revenues
And this really was as much about the continuation of people migrating to the plans we launched last summer with safety mode and roll over data as it was about Unlimited
We've seen a good amounts of our base already roll-over to those plans where the overage starts to decline
And as we go forward, we should expect to see that continue in the second quarter and then we expect we’ll see the trend in wireless service revenue starts to improve in the second half of the year
So we do think you'll see another quarter of some pressure in wireless ARPA before we see it head-up again
And look the other piece that’s in the wireless number is when we were down close to 400,000 net adds in the first part of the quarter that's ---+ those were revenues that we didn’t bare on the second half of the quarter but we saw the reverse in those trends and look forward to that piece continuing
So on the guide, if I go back to the guide real quickie here, what we said is on organic basis we’ll be fairly consistent
So when you look at the first quarter, a year ago was $1.06 and that included about $0.10 from the assets we sold to Frontier
This year, we had $0.95 and as Mike mentioned, there was about $0.02 of pressure in there from the acquisition
So I think we’re in line there
From a revenue standpoint, they’re down 4.5% from an organic basis year-over-year
As I said, the service revenue we expect to improve and the trajectory in the second half of the year
The big thing around the revenue for the year is going to be equipment revenue
And as we’ve gone through the unsubsidized pricing, we recognized that equipment revenue at the time of the activation of handset; we’ll see what happens in the back half of the year; we’ll see the new devices that come to market; we’ll see how the holiday season goes, and that will be a key driver of getting to that revenue target
So on the last question, the Corning deal
And as you say $1 billion over three years, it’s certainly not a small number
But when you look within the overall context of our capital spend, it certainly fits in there
So as we go and build out fiber assets, I think you’ll see us do that within our total capital spend
Yes, you will see us spend more on fiber as we go forward
But historically, you’ve seen moves within our capital spend between different components
So this increase in the fiber spend will be offset by reductions in other areas, and that’s the trend you’re seeing consistently for us
In terms of capital spend for the year, the first quarter was certainly a lower quarter and we sometime see
But the first quarter is often a low capital spend quarter for us
So that’s about where we expected it to come in
In terms of the guide for the year, it's too early in the year to say exactly we will be in that range, I am confident we’ll be in that range
And as we go through the year, we’ll provide more insights into where we think we’ll end up
So on XO Communication, I wouuld say, you'd see nominal impact at the earnings level from the transaction in the course of the quarter
Your question around cash taxes, what you’re seeing there is that you say, first quarter is typically live from a cash taxes standpoint, just because of the timing of when payments are due
As you go through the year, previously we had said the cash taxes would converge closely with the ETR rate
Because of some of the activity we had in the quarter with the discretionary pension contribution and the liability management activity, with cash taxes we’re now actually come-in in a lower rate than the ETR for the year
So that's an improvement to the cash expectation for the year
From an exit rate of the first quarter, it’s too soon to say just purely extrapolate that number out
But certainly, we’re very confident that the offering is resonated very strongly with the base; both in terms of improvements in churn and also an uptick in growth that, we continue to see that; the rest of the quarter will play out based off of new devices that hit the market; and then also the competitive response, especially as we head into Mother's Day and the Dads and Grads period in June
But we do look forward to a better trajectory from the business with an offer out there that’s certainly resonating with customers
So on the churn question, I think it's, as you say, the first half of the quarter we did see an uptick in churn and then we saw it come back down in the second half with the response to Unlimited
Look, we had a lot of customers in the base who love being on the Verizon network and the performance they get
But certainly managing their data was a pain point, it was another thing to do within their lives
And so they was some interest from the Unlimited functionality and as other people are offering that, we saw some people choose to make that trade off between quality of network, but not having to manage their data
And so as soon as we went to the Unlimited offering and we gave people the option of not having to make a trade-off, they could have unlimited data and beyond the best network we saw an immediate improvement in the churn number where our base saying this is where we want to be
And we’re certainly seeing that continue as we head into the second quarter
Now your second question, so okay, there is obviously been a lot over the past 24-hours around this, so let's break this down
Lowell was asked a question in an interview about if a certain company called and wanted to talk, would he take that meeting
And he responded, sure we’d take that meeting
And if emphasis he added on just like if a couple of other companies called, we’d take the same meeting
What this really comes down to and is consistent with what he said on CNBC interview was, we’re looking to how we execute our strategy; we’re confident in executing our strategy organically
But if there is the right opportunity out there to accelerate the strategy inorganically in a way that adds shareholder value, we’re always looking at those opportunities
But I think the story was a little taken out in context, he was answering a question about, if somebody called would we take a call and would we have a conversation with them
Of course, we would
But we’re also very confident with the assets we have and the plans we have of developing the business in an organic fashion as well and generating shareholder value
So I'll take your first question then
But you mentioned, made a comment there <UNK> about re-lead in networks superiority, that would imply that at some point we didn’t ---+ we have given up the lead in network superiority, and that clearly hasn’t happened
You can look at any of the third party results of the testing they do over the past year, and you can see if anything we’ve widen the lead
So network superiority will continue to be at the forefront of what we do
We’re very confident that the customers value that
And we’re very confident that we will lead as we move into 5G; we’ll have that network out there first; have customer offering around that technology out there first; and that will give us an opportunity to work to continue to expand the business, just like we have with previous generations of technology
In terms of your dynamics in the second quarter in the marketplace, look we will have to wait and see
Right now, we’re very happy with how the customer base is responding to the offers that we have out there
We’ll have to see what the competition does
And we will continue to be competitive in the marketplace, but we will do that in a disciplined fashion
And we’ll see other quarter plays out
So for the 5G trials that we’re doing, we're using the 28 gigahertz spectrum that we have the right to use as part of the arrangement we have with XO
In terms of your broader question about our spectrum position, we’re very confident in it
Approximately 50% of our current spectrum holdings are delivering our 5G network today, so we have significant opportunity to ---+ about 4G usages there
We have significant opportunities to continue to grow within the spectrum holdings that we currently have; we’re refarming spectrum as we've talked about for a while; we still have the AWS-3 spectrum; and then on license, we’ll come into the portfolio we go forward to
In addition to using spectrum though, the way the spectrum is used continues to get more efficient based off of the network architecture and advancements in the technology; LTE advance we've talked a lot about, they continues to be additions to that
And so as we look forward, we’re very confident that we have the spectrum we need to continue to deliver the best-in-class 4G experience
Yes, we obviously saw an uptick in usage, but it was expected
One of the reasons we waited until February to launch Unlimited was we said to oursevels if we're ever going to do Unlimited, we are not going to do it at the expense of the core brand promise, which is the network performance
And so we spend a lot of time in the back half of last year, asking ourselves is the network ready for Unlimited
We did a lot of testing around the network
And so we concluded that the network was ready for that
What we've seen since we launched from a usage standpoint and it's been in line with our expectations
The other important thing of course is when we launched it, we gave ourselves the opportunity to network manage when a user goes pass 22 gigs, and so that's an important point in managing the network in an unlimited world
And so we’re very comfortable with the experience we've seen so far
So on your last comment around network quality resonating, I would say that completely disagree with that statement
We know from talking with our customers that network quality matters that they value the quality of our network
The fact that they have the reliability to get on the network and stay on the network work, no matter what they’re doing or where they are, is tremendously important to them
And that shows up in the churn rate that we have coming in below 0.9% three quarters in a row and certainly, the improvement we saw there post launch
So this narrative that network no longer matters, I think we completely disagree with and I think that shows up in the numbers and the results that we show
In terms of the margin trade-off I think, look, when you’re looking then to the ARPA decline this is a continuation of decline, because we're breaking apart the service revenue and the handset revenue
When you look at the ARPA number, which is really the billings we give to customer every month that includes the handset billing, that still up year-over-year
So we continue to feel good about that trajectory
And as you think about our move to Unlimited, we did it in a way where we will added the functionality but it wasn’t a price reduction
We think that this ARPA will be ARPA neutral overtime
We’ll initially seize the impact of optimizes and we’ll also see the impact of reduced overage
But we also have the ability for customers to come on the network on a metered plan and then step up overtime, and even our base is stepping up from some of the lower data buckets to get on Unlimited
So there is some offsets there that we think means that Unlimited is not going to be a reduction in ARPA
And this is why we say when we introduced it, we did show in a disciplined fashion, which is something you should expect to see from us as we go forward and respond to the marketplace
So on the trajectory, we still feel confident that we’ll see an improvement in the wireless trajectory as we go through the year, and a stronger overall result from year-over-year number versus last year
Now, what we will see is in the second quarter we’ll see a continuation of the impact of the optimizations, both through the customers that came onto the Verizon plan last summer and also on Unlimited
But then the back half of the year, we’ll see the trend start to improve and we continue to be confident that we’ll see wireless service revenue get back to positive on a year-over-year basis during 2018. So I think the big thing as you look there is we continue to keep pricing at the right levels
We have the opportunity to step customers up
And as we more successful in adding customers in the marketplace, as we showed in the back half of the quarter, that gives us the opportunity to move those trends in the right direction
So I think there has been a little surprise by some comments we’ve made over the past few months around this
And really internally, there was no change in how we view this
We certainly have the target to get back to that leverage ratios and credit metrics as we discussed
But we’ve always believed and maybe it's just because we’ve said it more explicitly over the past few months
But look, if you give me two options; option A is, an opportunity comes up and I say no I can't do it because it mean I couldn’t hit that leverage target; or option B is, I do a transaction that allows me to accelerate the strategy of the Company, improve my competitiveness in the marketplace and do it in a fashion that allows me to improve shareholder value versus the first option
But it means I have to push out when I get back to those leverage targets, is the right thing to do to do the second option
If it means we push that when we get to those targets because we have a great opportunity, we’re going to do that
There is no change there
But I will say that we continue to be committed to a strong balance sheet, whether or not we have any inorganic activity
So I would say they have been talking about these reductions in OpEx over the past year or two
I think you’ve heard us talk about it for more years in that now
We continue to look at and manage the cost of the business down, and I think you see that in results
You certainly can see it clearly in the results in the Wireline segment, for example
So we look at managing OpEx and reducing it, not as a program for a year or two but something we do every year
Every year we have cost reduction targets for each of the business units and they diligently work on those and have a great track record of delivering them
As I think about CapEx, one of the great things about our business is we produce a significant amount of cash flow that allows us to continue to invest in the business
And we do that so that we position the business to be able to deliver products and offer our customers just for today but as we head into the future, because the nature of the business we’re in, we're always looking at least one to two years out in terms of what we need
So we continue to do that and make sure that we're providing the connectivity solutions that our customers need as we go forward
However, saying that, we look at how we get ---+ continue to get more efficient in there
And you will see us continually do that, the cost to add capacity in the network continues to come down and it comes down because of the things our network team has done for many years and how we work with the vendors in the space
So we don’t make as much of a big deal about what we do to manage OpEx and CapEx efficiencies
But I can absolutely guarantee you it's a key focus within the business and we have a great track record of doing that
In terms of the reorganization, I think look, this is just an opportunity to make sure we stay focused on the key things to us, which is the network and continuing to build the network; not just the network of today but the networks we need going forward; the focus on managing the customer base and growing the base, retaining the base and generating loyalty; and then generating those new businesses, whether that be in the Media Co, Telematics or the broad IoT space
So it was really to make sure the organization is aligned with those strategic goals of the Company
Thanks, Mike
I'd like to close the call with a few key points
The first quarter showed our ability to compete effectively in a financially disciplined manner
We remain confident in our strategy and priorities, led by investing in our networks, creating platforms to further monetize data usage, maintaining a disciplined capital allocation model and creating value for our customers and shareholders
We are positioning the Company for long term growth; a key foundational element of our vision of the future is our strong network assets
Our strong networks will enable us to be at the center of this new connected world of people and things, and give us the opportunity to participate globally in the advancing digital ecosystems
We look forward to the tremendous opportunity to leverage all of our assets, and are confident in our ability to execute our strategy
Thank you for your time today
| 2017_VZ |
2017 | AAP | AAP
#Thanks, <UNK> and good morning
I'd like to begin by acknowledging all of our team members and independent owners across the AAP family for their efforts to better serve our customers in the quarter
Through their dedication, we’re executing well against the five-year plan review that our investor conference last November
In Q1, our comp store sales performance was down 2.7%
This result reflects the impact of a series of factors we anticipated in Q1, as well as short-term headwinds that were not planned
These headwinds impacted the entire industry in Q1. Let’s start with what we expected
As we noted last quarter, our Q4 performance benefited from two significant factors; first, the shift of New Year’s Day into Q1, which help Q4 but reduced comp store sales in Q1; secondly, a substantial increase in winter related demand was pulled forward into December and out of January
In particular, our Northern markets benefited from the cold December
Given our geographic footprint, we disproportionately benefited from this in Q4 and it disproportionately hurt us in Q1. None of this was a surprise and the fact that our comps in Q1 were lower relative to Q4 was consistent with our 2017 operating plan and consistent with what we said last quarter when we reported comp sales of 3.1%, our strongest performance in the 12 quarters post the GPI acquisition
We’ve been looking at our across business across Q4 and Q1 combined for several months now
This provides a normalized picture of sequential sales improvement
For the 28-week period, we delivered positive sequential improvement in our comp sales performance
The combined comp for Q4 and Q1 of down 0.3% was approximately 70 basis point improvement versus the comp in Q3 2016. The sequential improvement we’ve delivered in recent quarters demonstrates we’re making real progress
At the same time, we’re not immune to the macro headwinds within the industry, which resulted in unexpected substantially softer consumer demand in the middle of Q1 as reflected in the publicly available data
This timeframe was worse than expected and resulted in a slow start to the spring selling season
That said, these short-term variables tend to smooth themselves overtime and while we need to manage them as part of our day-to-day operations, they don’t change how we’re transforming the business and how we think about long-term growth
The beginning of the quarter was in line with our expectations, as was the end of the quarter
We along with the rest of the industry experienced softness in February and March
The good news is we closed Q1 with stronger performance and this is carried into Q2. As a result, we expect sequential improvement in our top-line growth once again in Q2 as compared with our Q4, Q1 combined number of down 0.3%
So to reinforce the key points surrounding our top-line performance, we’re viewing Q4 and Q1 as one combined timeframe in our transformation
Q3 last year had comps to down 1% and Q4 and Q1 combined had comps of down 0.3%
While this was less than we planned, it represented sequential improvement and we expect to deliver sequential improvement again in Q2. Our steadily improving sales performance reflects the impact of decisive and consistent actions we’ve taken across three areas of focus, giving us confidence going forward; first, our priority to put the customer first is permeating the organization
It has been and will continue to be the key driver for consistent top-line growth
Second, our sustain investments and availability, customer service and our front-line is strengthening execution and engagement
And third, better execution throughout our supply chain is driving increased fill rates, higher in-stocks and reduced order to delivery time
Together, this is resulting in a better experience for customers in both Professional and DIY
Turning to operating income, we’ve been clear
Our turnaround won’t be linear
It’s important to note that while we’re not managing our business quarter-to-quarter, our Q1 operating income results were generally in line with internal expectations at the beginning and end of the quarter with the notable exception of larger than anticipated sales softness in February and March
As in the past several quarters, our operating profit performance reflects deliberate choices to invest in our business and specifically in the customer to position AAP for the long-term
When sales slowed down in the middle of Q1, we could have made a short-term decision to pull back on customer service
But in fact, we made a deliberate decision to sustain investment
At times, we know the difficult choices need to remain to fully capitalize on the significant opportunity we have to drive growth and margins over the long-term
Given the early stage of our turnaround and focus on reinvigorating the customer experience, the choice to sustain investment and customer service in the middle of short-term whether related softness was one of the easier decisions made in the quarter
These investments are beginning to pay-off as evidenced by sequential improvement of comp store sales along with progress on core input metrics, including improved in stock rates, significant reductions in turnover and faster delivery times to customers
The other drivers of our operating margin decline resulted from fixed costs deleverage due to the comparable store sales decline and our continuing efforts to optimize our inventory
Tom <UNK> will provide more color on the financial shortly
At the same time, our productivity agenda is on track and ramping up nicely
We’re now executing against the framework we’ve been constructing over the past several months
As the program boost and design to execution, we’ll realize considerable productivity savings in the back half of the year for our annual operating plan
As a result of these factors outlined, we delivered an adjusted operating margin rate of 7.1% and adjusted EPS of $1.60. Taking all this into account, we remain confident with the progress we’re making as we execute our plan and expect sales and customer momentum to continue with more operating leverage as we enter the back half of 2017. We’re performing well relative to our primary input metrics as the beginning and end of the quarter was in line with expectations
Unfortunately, the middle of the quarter was below plan as was broadly experienced across the industry
We also believe the sales softness was short-term in nature given recent trends
Importantly, Importantly, our productivity agenda ahead of plan
We’ve now conclude that we can drive more gross savings in a shorter period of time
We will do this while continuing to position the business to grow faster
We’ll begin to see improvements from our productivity initiatives in the second half of this year, which will help us meet bottom line targets
With Q1 behind us, I am pleased to report that we are now officially transitioning from Phase 1 of our transformation plan to Phase 2. Phase 1 had three overarching objectives
First, refocus the organization from top to bottom on the customer
We have lost faith of this top priority and needed to regain a customer first culture to ensure a long term growth
Everyone at AAP needed to raise their gain by putting the customer first in everything we do
Across our businesses, we are now seeing adoption of a mindset that everyone's number one priority is sharing for the customer
Second, develop and align the organization behind a clear strategy and five year plan to accelerate performance
In addition, we have defined and are now executing against the new set of foundational cultural shifts we need to make
And third, build a world class leadership team that can execute our plan in the short term while transforming our business in the future
We are re-advancing Advance Auto Parts and I am excited by the fact that we have built a new and highly skilled leadership team by attracting top talent from multiple companies and industries
This when combined with deep parts experience throughout the organization give us a team which can both perform in the short term while transforming our business over the long term
In Phase 1, we made deliberate and sustained investments and availability, customer service and our front line
This has improved input metrics and sales trends were getting market share performance moving in the right direction
With Phase 1 complete, we’re turning our attention to Phase 2. Our objective for Phase 2 include; first, elevate focus on the customer and continue to narrow the performance gap; second, flawlessly execute the multi-year productivity plan we have been developing
We have a significant opportunity to thoughtfully and permanently remove unnecessary costs; and third, challenge our new leadership team to elevate our focus on attracting and developing talent throughout the organization
With stronger talent, we will build new capacities required to win in the future and evolve the culture to deliver value
We have been hard at work with our growth agenda and over the past three quarters developing our Phase 2 initiatives, we’re very excited about the capabilities we’re building as we test and learn new ideas throughout the country
We’re now beginning to scale the top performing initiatives
First, we’re improving the customer experience and driving consistent execution across our network for both Professional and DIY customers
In Professional, it all starts with improving availability
Here we are building on the successful pilots we ran last year
Our availability transformation positions the right parts closer to the right customers by store reduces order to delivery time and drives growth
We have now added more stores to the availability transformation and we are seeing similar robust performance improvements that we saw in our lead markets in 2016. As a result, we’re expanding in select market throughout the balance of the year
We’re also augmenting this improved availability with an enhanced technology platform
We piloted this last fall with exceptional results and made the decision to invest in the back-end analytics engine combined with front end consumer facing technology for customer account managers to improved sales productivity
With better insight into our customers, our customer account managers are able to more effectively manage their time with customers to better meet their needs
This will be fully deployed in Q3. In DIY, we’re equally focused on improving our customer and team member experience
We’ve been running DIY experience pilots in a number of stores and markets
These pilots are standardizing the in-store customer experience store-by-store and region-by-region
So every store has the same consistent processes, the same consistent training and the same consistent approach to servicing the customer
In addition to making critical investments in the customer to drive growth, the second pillar of Phase 2 is the focus on our robust productivity pipeline
Since we announced the productivity agenda and corresponding targets last November at our Analyst Day, we’ve been aggressively putting the structure and leadership team in place to execute a sustainable multi-year productivity program
As we said previously, the productivity muscle simply is not exists at AAP
Our agenda includes thoughtful planning to change the work, investment and infrastructure and people to drive it and an intense focus on increasing visibility and performance management of costs
Our new leadership team has been instrumental in applying both longstanding experience and fresh perspectives to build our productivity agenda
As a result, we’re updating the target we shared with you last November of 500 million in productivity over five years and we now expect to achieve 750 million in gross productivity over four years, reflecting both the significant increase and acceleration
Over the past several months, we’ve been aggressively challenging our sales to think differently about the work and how to thoughtfully and permanently remove waste from our system
The additional 250 million has resulted from our new leadership team challenging the status quo and will allow additional investments in our customers while expanding margins
To be clear, the productivity target is not sales dependent, it’s a gross number and some of this cost benefit will be used to fund growth initiatives, while the vast majority of it will drive margin improvement
Our productivity agenda continues to focus on the three pillars we shared last November; first, zero based budgeting or ZBB; second, the optimization of our supply China; and third reducing material input costs
We’re very excited about this work
Allow me to share some examples
First, on ZBB, we’re standardizing our first to cost control while eliminating redundancies and unproductive spending
There are substantial opportunities here throughout the <UNK>
Our ZBB agenda includes fundamental process redesign, policy changes and a complete rethink of how work it’s done
This has been completed in many areas throughout the <UNK>, and we expect to realize cost savings from this in the back half of 2017. Second, the simplification and optimization of our supply chain will drive both effectiveness and efficiencies
We are looking at our supply chain very differently than we have in the past
We’re starting with the customer and working back to better meet their needs while leveraging the formidable footprint we enjoy today
In doing so, we’re building new capabilities and leveraging the entirety of our asset base
The great news here is that this approach provides the dual benefit of new capabilities and productivity without requiring additional investment in new buildings
As an example of supply chain optimization, we’ve already consolidated fleet management companies, transitioning from three partners to one
Previously, Advance, Worldpac and Auto Part International negotiated three contracts separately, which resulted in three different suppliers and three different contracts
We’re moving to one
In addition to significant savings, AAP will benefit from enhanced analytics and coordination across our entire fleet associated with having a single dedicated partner
This is a material simplification opportunity that leverages scale, dramatically improves asset utilization and lowers cost
Third, let's talk material input costs, again we’re taking a very different approach been in the past
We’re conducting deep dives on product categories to better understand the material cost of the skews in our assortment and what type of collaborative value engineering we can do with our suppliers or brand partners as we now refer them, who are helping us find the wins both of us need to drive accelerated growth
This work has already been conducted on several product categories, resulting in increased cost transparency and an improved material cost structure
We are working with our suppliers and partnership to apply this rigor n process across many categories throughout the balance of the year
To-date, we’ve been building the foundational elements of our productivity agenda and have a high degree of confidence in our plan
We are now ready to drive execution of this plan, which will generate meaningful savings this year and beyond
In summary, as we enter into Phase 2 of our transformational journey, we’re investing in customer service and execution to narrow the top line growth gap versus the industry
We’re dramatically increasing the focus on our productivity agenda to drive margin expansion and perhaps most importantly, we’re we are increasing our proficiency in growing talent and evolving our culture
This is not an overnight process but we’re pacing as expected and we will continue improving each quarter
As I said from the beginning, the opportunity to drive shareholder value at AAP is substantial to fully capture the opportunity ahead
We’re taking focused disciplined approach to accelerate long term growth, while staying lesser focus on improving execution and performance for the balance of the year
With that, I’ll pass it to Tom <UNK> to share financials
When we looked at the investment that we are essentially needed to make in the first quarter of this year, last year the changes that were made in our customer facing hours in the stores was quite negative for the overall customer experience
So we made the conscious decision to invest back in the customer in the quarter
Well, <UNK> let me step back, I mean we’ve gone in the construction of our strategic plan, we’ve obviously look overall longer timeframe than individual quarters
And what we concluded last year and we communicated to, I think the analyst community in November, was the company it really lack focus on the customer period for quite some time
As you know, we’ve been losing market share for seven years and over that timeframe, habits get built-up, our people take a different approach to the customer that we would have liked, different than we would have liked
And as we built-out the strategy itself, we wanted to make sure that we were change that approach with the customer up and down in the organization; so from a leadership team perspective; from a planning of our customer facing hours; from the standpoint of how our stores either active with customers
So as we build out the five-year plan, we look at what we needed to do in 2017 and 2018 and beyond; as you know, we started to make some of those investments last year in the back half of the year
So we’ll start to lap those as we get into the back half
But without a doubt, as we plan the business in 2017, we knew that the first part of the year was going to require investment in the customer
Well, first of all, we’re building a world-class team here in AAP
And as I look around the room, most of the people in the room in here today work with Advanced nine months ago
So that part is dramatically different than when I arrived here
The team we’re building is committed to really building our performance culture up and down in the organization, and that excludes existing leaders at AAP, who’ve been in the industry a long time and are really stepping up
Bob <UNK> in the room here with us today, he is got 30 years of parts business experience
We also brought, some of the new people we brought in, have come from the part of the business
People like Mike Broderick who similarly has 30 years of experience and is now our chief merchant
Bob and Mike are really committed to dramatic improvement, performance improvement here at AAP, so that part is really exciting
I think we’re also injecting smart talented new leaders that have exceptional industry experience up and down the organization
So we brought in Tom <UNK> from Amazon, as you know; Leslie Keating Frito-Lay; Natalie Rothman from Pepsi; we brought in Maria Reyes to run one of our divisions from Private Equity, Mike came to us from Tyco
And these are global leaders who are bringing a completely different mindset and approach to transform AAP
So that might fundamental leadership team is pretty much in place now and now of course we are going the next level down and Tom and self with sitting here, there is two people in the room today that Tom has hired from other companies that have joined us, that are going to add tremendous value
How are they acclimating, I think that’s a great question and integrating to the <UNK>
We still have work to do, I think to build the team work and the energy around the opportunity going forward, these are very talented individuals
They are bringing different perspectives in
But you can snap your fingers and have the top 200 people in the company immediately gel
So I think we have got a little bit of work to do there, but I feel terrific about the talent that’s joining new organization
And I have been really excited by the fact that we have been able to recruit such talented people in, and we have been very successful of that
Yes, let me take that one
No we’re going to stay with our guidance of approximately 250 million
The additional gross productivity number is not dependant on that
With respect to breaking down the 250million, you hit on the key points; it's IT; it's new stores; it's maintenance
We’re not going to go into further detail other than the bucket of that way
We’re not going to comment on the specific margin outlook in the second quarter
We do feel really, really good about our ability to thoughtfully remove cost and improve our flow through as we get to the back half for the year
First of all, I’ll let Bob talk a little bit about with changing on the Professional side of the business
I think it's changing pretty dramatically
Bob, can you talk about how you are pulling together the Professional side
And <UNK>, let me get to your second question, which was around the pacing of the investment
If you think back to what we showed last November, <UNK> lacked focus on the customer, no cohesive strategy inability to execute notable capability gaps on the leadership team
But as we laid things out and constructed the new leadership team from Bob to Tom <UNK> to Leslie Keating is come into our supply chain to Mike Roderick, I mean we really saw an opportunity to drive the productivity agenda faster
And the opportunity there is significant
We really see that a line of sight to the entirety of the 750 million over the four years, it's in the three buckets that we described in the prepared remarks
We plan it strategically, working from the customer back
I mean we’re routing our productivity agenda in the customer
It's not just taking cost out, so we’re routing in the customer
And then we’ve done a very rigorous bottoms up planning exercise that essentially phase of the productivity by year, by period, by geography
So we feel really good about our ability to take the cost out without disrupting the customer
So let me step back from this one <UNK> and provide some context
And our approach is to provide guidance once a year
And consistent with our focus on offering for the long term, we're not going to provide regular updates as a matter of course
The long term outlook for the industry remains very, very compelling for us and we remain focused on executing the key elements of our transformation plan
With respect to 2017, well Q1 had a weak patch in the middle of quarter that impacted the entire industry
We've actually seen improved trends over the last several weeks and based on this, we expect a more normalized environment for the rest of the year
And our investments in the customer are clearly having an impact and with our productivity initiatives kicking in the back half of the year, we feel all of this will drive significantly improved results
<UNK> And then as you think about those long-term productivity targets that you updated today, does the timing change at all, so you shorten the timeframe
Does that impact 2017 or more of the incremental savings in ’18 and beyond?
Well, first of all, <UNK>, we really excited about this productivity agenda
I can't tell you how excited we are, it's been nine months in the making
Obviously, we’ve been working on with our entire team
As Tom came in November, he really brought a dimension to how we were thinking about that we started to accelerate things that hadn’t been accelerated
We brought Leslie Keating in who is a terrific executive, track record of success with productivity Mike Roderick with significant experience interacting with the supplier community being both on the supplier side and working on the part side of the business
So the construction of the productivity agenda is something that we’re very, very excited about
As we look forward we’re going to continue to look at ways to be ahead of where the customers going
Obviously, we want to go over the path is moving and to that end we are going to continue to look places to invest to sustain long term growth
What we showed in November was our goal is to perform above the industry average in terms of sales growth and to expand margin significantly from where they are today, that stands as we sit here today
We’re not going to update exactly how that’s going to play out in the next 12 months, but we should be able to update you towards the end of the year and how that will in fall
But the 750 million obviously is a four year number now, so we are in '17, so '17, '18, '19, '20 is the timeframe for the 750 million
Well Mike, I certainly understand the question
I am go back to as we planned the business for 2017, knowing what we knew in November, which was the challenging situation we were dealing within the front half of the year, reducing customer facing hours, really an inability to execute
We’re still billing out that productivity muscle, some gaps on the leadership team at the time
We obviously plan the business accordingly
From our standpoint, if we hadn’t reflected on the factors I just mentioned and used that in our plan, it would have been somewhat responsible
So we did plan the business to be back half loader in terms of margin flows through
Obviously, we’re’ mindful, we are attracting four in the year but we can’t really speculate on hypotheticals right now
We’re focused on executing our plan and really positioning the business to deliver long term value and that include investments in the customer and building out the productivity
So our transformation is well underway and we are confident we’re going to show the impact of our actions on both top and bottom line in the second half of '17 and beyond
Well, just on your question on will it be better about the year, absolutely, no question about that <UNK>
We haven’t talked a lot about the sales number
But there was, as we said in our prepared remarks
We have the date flip, right? The date flip is pretty basically
We knew exactly what that was going to be worth in the fourth quarter last year
We also had this significant pull forward pull forward or winter related demand into December
In particular, in our Northern market, which we had an idea that was happening, and obviously we finalized our plan in November and early December
So we didn’t know how big that December was going to be
And when you look at some of the categories that performed well in the fourth quarter, they were winter related categories and a lot of that got growing out so not all of that was plan as we planned to first quarter
That said, in the last several months as we continue to really work this productivity agenda hard, Tom <UNK>, Leslie Keating, Mike Broderick, Bob <UNK>, we were really, really pressing hard to take real cost out of the business sustainability and that’s why we feel very good about the long-term prospects to get at the margin expansion opportunity that exists
I mean, our goal is to perform above the industry average, which as you know is 3% to 4%
Everything we look at, says this is a very healthy industry; car park, 2016 new vehicle sales; vehicles in operation; miles driven; average age; all of them say 3% to 4%, which means that we have to be above that in order to achieve our comp sales goals
Sure, yes Matt, I think the way to look at it for investment in the customer is really four buckets; the first one is customer service hours referred to its labor, the second how much is describing is our fuel the front line or filed incentive, the third is parts availability and supply chain, making sure we are getting the right part at the right time at the right place, and then the last is promotion
And just a little bit more color, I mean as Tom said, when we came in and are looking at the <UNK> and its transformation we really need to build the foundation
So are we over indexing and our investment in the customer, absolutely
Is that going to give more surgical overtime and optimize; certainly
We are always going to invest in the customer, but overtime we are going to be able to do it more efficiently
As our productivity agenda catches up is well, this is all going to hit together and we are going to have an inflection point
So that’s the way I think about the investment in the customer
I mean, we’re accelerating our efforts on this now
As you know, we took a bit of step back from what we had been doing, which was more of the old PCR work which was consolidating stores, converting stores, relocating stores
As Leslie has come on in conjunction with Bob, we have really starting to work from the customer back on our asset base
We have got plenty of assets; Leslie would say that, Tom would say that, I would say that
We just haven't leveraged them the way that they could be leveraged and to their potential
So making sure we put the customer first in everything we are doing and construction our supply chain from that is where we’re headed
And we are making some pretty big strives on that
I'm not going to get into all of the details for competitive reasons
But we’re pretty excited about how our enterprise, customer facing tools, technology and supply chain will evolve overtime and really start to improve our key metrics on order to delivery time, having the right part in the right place, our availability in the market, all of those are part of the plan
And the idea is to leverage the entirety of our asset base, not to approach it from the previous approach which trying to integrate advance and Carquest, and we’re looking at it more broadly
So as you well know, many of the strategic accounts have put out or the industry there looking for both the year agreements with their suppliers
And so a number of those come up over the last six months and so
And I’ll tell you that we basically have one certainly in every single one of them, so we’re winning
And we’re winning because of what we basically bringing the capabilities of the organization and certainly what we’re working on, which we shared with them
And we see them as our strategic partners, they basically have looked at us certainly from what we’ve already been able to provide today
And certainly, now, certainly leveraging all the banners across the enterprise, they know what’s coming as well
And as I mentioned that new model that we’re putting out there, they’re extremely interested in that, we’re going to leverage that as well
But I will say, for the most part, customer-by-customer, we’re winning and we’ll continue to win in that particular side of the business there
And as I said, it’s growing, and it will continue to grow
Obviously, we look really close that those things said before we handle these RFP
I mean I think it’s a natural outcome that the large customers in the Professional side of the business or growing get lager
So we’ve got to manage that in our overall portfolio
We reported not going to comment specifically on the size of it, we’re pretty excited about the fact that Bob has coming with his background, with his leadership team
They’ve done a great job packing up what we consider to be the most, the best portfolio in part in the industry, including the training institutes that we’re standing
Bob standing up, integrating the Carquest Training Institute with the Worldpac Training Institute which provides tremendous value to our large customers out there in the marketplace
So we’re going to continue to leverage the scale of all of our businesses to build a more attractive portfolio for our customer based
And overtime, we believe that will help us winning the market
Well, we’re pretty excited about Speed Perks, Dan
We’ve got an opportunity to do a better job connecting directly with our Speed Perks members
I will tell you that will evolve overtime
We want to make Speed Perks more sticky it should be more than just a promotional coupon off events
And so I’ll leave it that but we’re working pretty hard on at a better connect, our physical and digital assets, and that includes the Speed Perks program
Dan <UNK> Well, I know your competitors claim that there is minimal price elasticity for demand in this industry, and we’ve had this amazing gross margin expansion cycle the last 10 years
But do you think we’re at the point now where it becomes necessary use pricing to drive market share?
Yes
It certainly not a huge part of our agenda going forward, we’re looking very carefully and strategic pricing
But in terms of a weight on gross margin, we don’t see that
Dan <UNK> And then just one follow-up question, can you talk about why the higher productivity savings today
It doesn’t sound like, we’re going to see much change in the second quarter, doesn’t really begin to kick into the third quarter
And even then, it really doesn’t really begin to gather momentum until 2018? So curious as to why today was it necessary to talk about the savings, particularly when you’re not comfortable talking about the net savings, on the gross savings?
Well, for sure, comps are the primary focus for us at the moment
We’re driving at customer investments we’re driving at things that matter to our customers, both on the professional side of business and on the DIY side of the business
And our goal is to continue the sequential improvement which we talked about
And obviously relative performance is important within our market share
We don’t get a lot of market share data band
But what we do we pay very close attention to it and we are making progress there
We are not gaining share, okay, to be clear
But we are narrowing the gap in terms of our performance and we are going to continue to stay focused on that
And overtime, the goal is to narrow that completely and then obviously at some point perform above the industry average
So that is the primary focus
Well, first of all, the 750 million is literally down to the dollar, right? The 750 million is planned out over the next four years
We know exactly where that is in the vast majority of cases, that 750 million is not sales, and there is a very little of that moves up and down with sale
When you go to one fleet company from three companies, that doesn’t have anything to do with what we sell
If I am able to reduce the touches which are way too high in our current supply chain, if I can take the touches down, that’s worth something
If I can reduce the number of miles driven on the same number of deliveries in the same amount of sale that takes cost out without driving sales; so we’ve constructed the productivity agenda such that is not sales dependant
So we’re not looking for leverage on these cost out measures, because they tend to be waste or redundancies or things that that can be reduced
And given where our relevant margin is versus the industry average, I think, you can probably see that we have pretty good opportunity to do that, because we have peers in our industry that have already done it
So we’re focusing on essentially looking at our asset base and our model and how we invest with the customer and how do we close the margin gap as we’re driving at the customer agenda
We’re not going to comment specifically <UNK> on the quarter, I mean but we’ve seen a dramatic improvement in our comp obviously coming up a difficult Q1. Your second question was on the ---+ repeat your second question? <UNK> Analyst So you talked about some of the availability type initiatives that you're rolling out
Just kind of curious what kind of comp lift that you're seeing in the test markets?
Very strong, very, very strong lift
We’re now up to I think we’re up to five markets and we’re continue to see the same performance improvement
We’re not going to give a specific number, but it’s very, very strong and very compelling
<UNK> Analyst And just on the Q1 gross margin, just curious if you could give sort of breakout a little bit maybe like how much of that decline was merchandize margin and how much of those deleveraging on occupancy costs and other fix cost?
First of all, great question, <UNK>
I mean, we’re ---+ with Leslie coming on we’re taking a very different step back on the supply chain; again, starting with the customer
She is actually conducted or our team is conducted a series of interviews with customers to better understand the need
We spend a lot of time on DIY consumer insights last year, professional customer insights last year
We’re augmenting that this year to really make sure we understand we’re delivering against what the customers want
She is also looking at it end-to-end
So we’re not looking at discrete parts of our supply chain
We’re looking at the entirety of the supply chain, because a lot of times, in supply chain, you can reduce costs in one area and increase it in another area
So it’s really end-to-end look at it
As part of that, we have, she would say, we would say, Bob would say, all of us would say, we have significant inefficiencies in our current supply chain
We have many nodes, many assets
Obviously, our stores operate at fulfillment centers, as you know
So taking a step back and looking at the entirety of our supply chain and the seamless movement of parts across it, is something that is very much on the agenda and we’re building up the plan to better integrate the various notes we have within our supply chain, which ultimately will improve our order to delivery time for our customers
As you said, take miles out take cost out and reduce our inventory overall
So that’s the goal and more to come
Yes, we are not going to comment specifically on that, but everything is on the table, to be clear
We are going to operate as efficiently as we can
Let me make a comment on that
First of all, I think what customers want wasn’t anything, if they want consistency and execution of delivery
So when they know there’s deflation in order they know when you are having
So I think critically important at Worldpac we have always remain to be focused on making sure that we have that same execution day in and day out
So customers count on that, number one
Secondly, they all have to do certainly with the product assortment as well
Worldpac has unique product assortment, certainly has dispatches repair shops throughout the entire North America
And so that also is not the part of where lion share of a lot of their business is basically schedule
And so therefore that it's valid to schedule delivery
However, there is again more and more pressure on reducing the order cycle time and Worldpac is taking the number of steps to reduce the order cycle time as well
So that’s part of the trends in the industry we’re all doing it
So I think as I mentioned earlier where we are transforming the professional experience with these new start up type of pilots that we have, one that we are starting next week is having all of that capability under one roof
And that’s going to transform and differentiate Advanced from the rest of the industry
Thanks operator
We would like to conclude our call by thanking all of our team members and independent our owners across the AAP family for their efforts to better serve our customers in the quarter
In addition, as we approach Memorial Day, we would like to thank all the members of our military for their service
We are making major changes at AAP and we remain focus on the substantial long opportunity we have to drive shareholder value
We look forward to updating you on our progress once again in August
Thanks for joining us
| 2017_AAP |
2018 | MYE | MYE
#Thank you.
Good morning.
Welcome to the Myers Industries' First Quarter 2018 Earnings Call.
Joining me today are Dave <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Executive Vice President, Chief Financial Officer and Corporate Secretary; and Kevin Brackman, Chief Accounting Officer.
Earlier this morning, we issued a news release outlining the financial results for the first quarter of 2018.
If you've not received a copy of the release, you can access it on our website at www.myersindustries.com under the Investor Relations tab.
This call is also being webcast on our website and will be archived there along with the transcript of the call shortly after this event.
Before I turn the call over to management for remarks, I would like to remind you that we may make some forward-looking statements during the course of this call.
These comments are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements.
Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K filings.
I am now pleased to turn the call over to Dave <UNK>.
Thanks, <UNK>, and good morning, everyone.
Thank you for joining us.
We're going to start on Slide 3 with an overview of the first quarter of 2018.
It was a straightforward quarter for us.
We're pleased with our results.
We're seeing continuous improvement in the enterprise in many different areas.
Starting on the left of the slide, we generated free cash flow of $11.6 million or 7.6% of sales.
And we're on track to exceed our target of 7 ---+ of over 7% in 2018.
Overall, we saw a strong sales in the quarter, up almost 12% organically.
And that was led by a strong performance in our food and beverage markets with ---+ it's our third consecutive quarter of double-digit sales growth.
Our pricing action and benefits from the manufacturing footprint realignment that we conducted last year are driving year-over-year margin expansion and sequential margin expansion.
And we reduced debt in the quarter by $6.7 million, decreasing our leverage ratio to 2.3x.
And overall, we're on track with many of our strategic initiatives that we've outlined in the past.
We did see a few challenges in the quarter within our Distribution Segment.
We saw some top line challenges, particularly driven by the exit that we conducted about a year ago from a lower profitability line in our Patch Rubber business.
We still do, however, in our Myers Tire Supply business have some underperforming territories.
And so our focus there is on getting a better sales team in place and on onboarding those reps and training them properly.
A couple of the bright spots within that segment through the quarter.
The gross profit of the business did improve and expand year-over-year, and we did have a successful product promotion in March, and we are going to continue that type of continuous improvement throughout the year.
With that, I'm going to turn it over to <UNK> to go through our numbers.
Thanks, Dave, and good morning, everyone.
Today, I will review our first quarter 2018 financial performance as well as our balance sheet and cash flow.
So if we turn to Slide 4 of the presentation, I will walk you through an overview of our first quarter operating performance.
And as always, all the numbers in the presentation reflect continuing operations.
So starting from the top, net sales increased 11.7% to $152.6 million compared to $136.6 million of the first quarter of last year.
If we exclude the impact of foreign exchange, the increase in sales year-over-year was 11.4%.
The increase was primarily the result of higher sales of niche products to the agriculture end market within Material Handling, partially offset by declines in the Distribution Segment.
Gross profit increased $5.4 million year-over-year due to higher sales volume and price, partially offset by unfavorable mix and higher raw material costs.
The benefit from the pricing actions mitigated raw material inflation during the quarter.
And the gross profit margin also benefited from the footprint realignment and restructuring actions that we took in the Material Handling segment in 2017.
Adjusted EBITDA increased $1.2 million to $18 million compared to $16.8 million of the first quarter of last year.
The increase in gross profit was partially offset by higher SG&A costs, mostly due to increased variable incentive compensation.
As a result, the GAAP diluted earnings per share were $0.25 compared to $0.11 in the first quarter of last year.
And adjusted diluted earnings per share were $0.24 compared to $0.14 in the first quarter of last year.
If we turn to Slide 5, I will give you an overview of the performance of each of the segments.
If we start from the top, Material Handling, sales increased by 18.6%.
The increase in sales was driven primarily by the double-digit growth in our food and beverage end market due to improved demand in agriculture.
Sales growth combined with pricing actions in our Ameri-Kart business, which serves the RV and marine markets, also contributed to the increase in sales year-over-year.
Our consumer end market was down double digits due to timing of orders that are expected to be delivered in the second quarter of this year versus the first quarter of last year.
Adjusted EBITDA in the segment increased $2.1 million to $23 million.
The increase was primarily the result of higher sales volume, partially offset by unfavorable mix.
Pricing actions partially offset the increased raw material costs during the quarter.
And additionally, the footprint realignment and the restructuring actions that we took in the segment last year are driving the operating flexibility and the margin expansions that we aimed for.
The cost savings from these actions are expected to be $8 million in 2018.
Moving to Distribution, net sales declined by 7.2%.
The decrease in net sales was partially the result of the deliberate exit of a low-margin product line in our Patch Rubber business.
Net sales in the Myers Tire Supply business was also down year-over-year, as sales continued to be impacted by the sales team turnover in open territories.
The sales volume decline was partially offset by higher pricing resulting from a new pricing structure that we put into place at the beginning of the third quarter of last year.
Adjusted EBITDA in the segment declined by $0.5 million compared to last year.
Positive price and favorable sales mix only partially offset the negative impact of the lower sales volumes.
Higher compensation costs driven by investment in headcount also contributed to the decline in EBITDA year-over-year in Distribution.
If we turn to Slide 6, I will give you an overview of the balance sheet and the cash flow performance.
So as Dave mentioned earlier, we generated strong free cash flow of $11.6 million for the quarter, which was only slightly below our free cash flow generation during the first quarter of last year.
As you may recall that free cash flow in the first quarter of 2017 included some large non-repeating past due collections of account receivables.
We reduced our debt by $6.7 million during the quarter, partially due to the higher EBITDA and also partially as a result of a sales leaseback transaction that we completed for our distribution center in Pomona, California.
And the net purchase price of the transaction was $2.3 million.
As a result, our net debt-to-adjusted EBITDA ratio decreased to 2.3 at the end of the quarter.
Working capital as a percent of sale in the first quarter was 6%, and working capital has been overall consistent in the last several quarters.
And finally, the capital expenditures in the quarter were $1.2 million compared to $0.5 million in the first quarter of 2017.
And with that, I'll turn the call back to Dave, who will review the '18 outlook.
Thanks, <UNK>.
And I just want to highlight something before we move on to our outlook in ---+ around the cash flow.
And I think the highlight of our cash flow has been the consistency over the past several quarters and that's what we aim for.
As I've said many times before, we believe that cash is the best measure of performance, and we're very pleased with the results of a very consistent cash flow performance over the past 1.5 years.
Switching to Slide 7.
We'll start with the ---+ going through the 2018 outlook.
And we're going to ---+ we're reaffirming the ---+ our sales outlook of low to mid-single-digit growth for the year.
And I'll break up the discussion into 3 buckets: at the top, our consumer and our food and beverage have been strong performers over the past several quarters.
We expect that in the second half we're going to have some challenges, mainly based off of some difficult onetime comps from 2017.
So consumer, we're expecting to remain flat.
Given the comp, there will be some growth in share gain in that market.
And then on the food and beverage side, we've already had, as we highlighted earlier, some solid growth in the first quarter.
But we do have a more difficult comp in the second half due to outperformance that we had in the fourth quarter.
Second bucket I'll talk about is the vehicle segment.
We're seeing continued strength there and ---+ particularly in the RV markets.
I'd tell you the auto manufacturing market is steady.
It's had a strong growth over the past few years and that's steadied out.
And then the last, third, I'll talk about here are the industrial and the auto aftermarket.
We're expecting industrial to be flat.
And auto aftermarket, we're expecting our performance to be up low single digits.
And I think we've underperformed in those markets in the past.
I think we're seeing steady demand in both of those 2 markets, so we're expecting an improvement in performance as we look forward in both of those.
With that, we'll open up to questions.
Sure, okay.
So let me break ---+ make sure I got your questions, Chris, because there were a number in there.
I'll talk a little bit about the promotion that we did, then we'll talk a little bit about the SG&A investments.
I think that's probably a better way to describe what <UNK> was talking about here and how that relates to the sales force turnover.
So let's start with the promotion.
As ---+ I think we've highlighted to you all before, when we do things strategically, we try to do them as cross-functionally as possible.
And so one of the initiatives that Chris put in together when he first arrived was to build a cross-functional team around certain areas.
And so this was a combination of effort from our marketing team, our product team, our sales team, and frankly, our operations team as well to deliver and to go out and really push the sales force to find new customers with a targeted promotion and do it in a cross-functional way so that there was a good coordination across all functions.
I think they did a great job at that, really actually outdelivered our expectations on it.
These types of things obviously do require some sort of either spiff or some sort of discount.
But I think if you look at our ---+ I look at gross margins to understand how we're doing from a pricing power standpoint, and we did well in the first quarter in that.
So I think overall, it was a success.
And it was a ---+ it's ---+ I'll call it the next set of actions we're taking.
Our Distribution has had several years of underinvestment.
We've been pushing a number of different investments last year, and I think we're on to the next set of investments.
We've seen some good results from the investments we made last year, not across the board, so now we're continuing to invest in new things to continue to improve the performance of that team.
Those investments also include some additional people.
We've had some turnover, additional turnover, and that's been a problem that we've had in the past as well.
And really, if you think about it, it's around the certain underperforming territories.
And when we brought in new folks, I think we haven't done as good of a job over the past year or 2 of getting those new sales people up to speed and that leaves some frustration with those folks in the field.
So our strong sales professionals have really performed well as we've given them new tools.
Some of our newer salespeople have not and that has led to some additional turnover that we experienced later last year.
And so those are additional headcount that we're adding.
It's really not a net add, but it's replacing folks that have left.
And so ---+ but there is a gap there and there is a learning curve there.
So we're altering our approach here in 2018 to how we're onboarding the sales force.
I met with about 20 sales reps about 3 weeks ago, one-on-one as ---+ not one-on-one, but them in a room with me and Chris to talk about what we're trying to accomplish here at Myers Tire.
And they spent a week training here in Akron.
And we think things like that, different approaches that we're taking this year will help us.
Yes, that's a fair question.
I mean, our goal is to certainly ---+ we know what we've been able to accomplish historically so we know what kind of profitability results we can get if we can grow this business.
And so that's the goal.
I mean, I think I talked about this last quarter on the conference call.
Certain businesses, you have a fixed cost problem.
We just ---+ we have the right base of people and investments in this business.
We have to grow the top line now.
We've done ---+ the organization has done a nice job of expanding the gross margins.
So when we grow, that will flow to the bottom line.
It should be a nice benefit for us, but we've got to get the trajectory of the top line going in the right direction.
As you know from talking to me, Chris, that's not always my focus with everyone that top line at all cost, and it's not a ---+ the case here either.
But this is a top line challenge that we have and we ---+ we're not willing to, at this point, just willy-nilly cut costs here.
We have some targeted investments in this fixed cost that we're really trying to help grow the top line.
And when that starts going up, we should see that flow to the bottom line.
Well, it's ---+ I think if you look at our outlook here on Slide 7, we're expecting to grow this business this year and that's our target.
That's our goal.
Well, I think it's ---+ so let me break it into 2 parts.
There is ---+ the first part is the environment you're playing in, the industrial environment.
And I'd say it's steady now.
It's ---+ I don't see any signs that it's going one way or the other.
We've had good increase in activity in that market.
I'm talking in general here macro, not Myers specific.
I think the U.S. manufacturing world has improved over the past 2 years and it's nice and steady right now.
And you're seeing that in a number of indicators, industrial production, capacity utilization, ISM-type metrics.
Within our business, we're in the phase of 80/20 where we're trying to figure out or we're figuring out where we are strong and where we're going to really emphasize our opportunities for growth.
80/20 is a growth tool, but when you start it, you're simplifying it first.
And so simplification often drives a little bit of consolidation.
And so we're in that phase right now.
The portions of our business ---+ and this is not just 1 or 2 P&Ls.
There's a number of different businesses that fit into this category.
Some of those are growth areas and some of them aren't for us.
And so we're going to, in some cases, ride whatever the industrial economy is doing.
In other cases, we want to take share.
And right now, we're ---+ what we have not done is take share because we're trying to isolate where exactly we think our strengths are in that ---+ in the niches that we want to play in within the industrial economy in general.
Sure.
Where we are in the process is, it's ---+ we've done a lot ---+ I think, the team has done a great job over the past 18 months building relationships, building deal activity.
So we're seeing deals.
I think pricing is still high, in general, across the market and that's ---+ that takes a little longer than a couple of quarters in some market ---+ some public market volatility to change.
So I think expectations are still high on the ---+ it is a seller's market still.
And that just means you have to find the right property to go after.
You can't be ---+ but that's always the case.
So it's really ---+ I don't treat it any differently per se, but it's just ---+ I think certain businesses sell at a higher multiple than they deserve, and we just exit those processes quicker because we don't see that.
Okay, so a couple different questions there.
I'll go backwards.
The first is no.
We can ---+ we have pricing ability everywhere.
Some of them ---+ I will say some of our contracts are indexed, so those are ---+ the mechanism is fixed, but that still allows for pricing.
I'd characterize it this way, it's improved.
We have a bit of a lag, and we have spent a lot of time over the past 3 or 4 months as inflation has been ---+ become more steady to improve upon our pricing processes.
I'd say, as we highlighted in the ---+ our previous call a month or so ago that we tend to be able to capture cost increases, but not capture margin.
And so we're working on that.
And you're seeing a little bit of that in the first quarter.
But still, we're overcoming cost inflation, but not completely with.
So you get a little bit of margin compression when that happens.
So that's how you should look at it.
And that takes a little time to get those additional processes in place.
You have starting backlog that you can always reprice, customers negotiate a timing for certain price increases, et cetera.
The last part of your question was about the environment.
I think that inflation is coming back.
It does ---+ there are probably some purchasing people and some of our customers that have never seen inflation, so they're not used to it.
But it's ---+ so there's a little bit of inertia there.
But inflation is coming back a little bit and it's normal.
I think this is normal stuff.
This isn't ---+ I think we're in a fairly abnormal environment for several years with deflation, so this doesn't surprise us.
We're improving on our processes.
We're dealing with it.
And I think our customers are understanding that and it's ---+ when you go in with facts and you explain the facts to your customer, there's ---+ and you have a good relationship with your customer, those outcomes usually end up pretty well.
And our business model of being ---+ of having strong customer intimacy in our niche markets drives that level of frankness with our customers.
And so I think we are in a good position there.
No.
We don't really forecast our profitability or earnings, <UNK>, so I.
.
I would say, <UNK>, just to give you a couple of color here.
Particularly, in Material Handling right now, the ---+ what you saw in the first quarter in terms of comparison in 1Q '18 versus 1Q '17, the cost of resin obviously was higher.
The cost of resin right now has stabilized, so the exit rate compared to where we were at the end of the year pretty much confirmed in the second ---+ in the first quarter actually was a little lower.
So I would say that with the pricing actions that we implemented and Dave talked about will allow us in ---+ for the continuation of the year to have some positive value gap.
Right.
So I think that our goal is to get to growth by the second half.
And that's what we're indicating here in our outlook.
And I'd say from a status standpoint, we ---+ I'll break it up similarly to how I broke up our 5 macro markets here.
There's ---+ there are really 3 groups of territories.
We have territories that are very strong, and those territories are performing very well now, and they're performing better than they were before the tools that we implemented.
And so that tells me that the tools work in the hands of a great sales team.
And I'm ---+ we're working on building a great sales team everywhere.
We don't have that yet.
I think we've brought in some ---+ I was very impressed with the group that I met with, as I highlighted earlier.
I think we are starting to recruit a higher level of talent.
We're bringing in strong people, and we're training them better.
That's been a big ---+ I think we missed that.
I'll be the first to tell you when I think we missed something, that's one I think we missed.
We didn't train our new people well enough.
So we're focusing on that this year.
There's a middle group that has done a good job of using the tools, and every organization has a middle group and that's fine.
What we're really focused on is how do we get the territories that have underperformed back up to a growth level because that's really what's pulling down the top line for the ---+ of the entire group.
So it really does break out that way.
The underperforming territories, as you would imagine given our results, are just underperforming by a lot more than our top-performing territories that are over-delivering.
So we've got to change that equation, and I think we're on the right path here with things like bringing in and training our people better, things like promotions that give a new salesperson a reason to walk in the door with a new customer that they maybe have not had in the past, things like that.
Yes, I'll frame it to you this way, again.
I ---+ that's an important metric to us.
We look at that.
And we look at gross margin and how that should improve over time.
Those are things that we really hold our team accountable to.
I'm not going to give you any specifics on it, but that's an area that to us is a very important metric in how we judge our performance when we're comparing period-over-period.
And so we aim to continue to improve that as we go forward.
That's our goal, again.
I mean, it's ---+ a lot of different moving parts in here with ---+ particularly with cost inflation that does compress that a little bit.
But I think when you do things like large cost takeouts like we did last year, we expect to see that come through in the incremental gross margin.
Right.
I think there are 2 dynamics at play that are what I'd call extraordinary.
One was that ---+ the storm activity, weather-related.
We hope frankly to not see that again.
That's an abnormal environment.
I think they're ---+ generally, you can say there's probably going to be a storm, but we really saw an outsized demand there from the storm activity last year, and we don't expect that to repeat.
And then on the ---+ I'd say on the food and beverage side, primarily in the ag, there was a ---+ I think, there was a bit of pent-up demand from a couple of years of a lower market as well as the M&A activity that was occurring at our customers.
They tend to shut off capital spending during those periods.
Large scale M&A, so these are extended time frames for combining.
And so throughout that period, they tend to not have the kind of resources that they would normally have.
So those 2 combinations drove, I think, the second half last year that had some onetimes in it that I don't think we'll see again.
Sure.
I think that RV is ---+ has a pretty strong correlation to the consumer's sentiment.
I will say again I think that industry as a whole has done a wonderful job of not only marketing but designing products that people want and are using, but they've been ---+ experienced historic growth.
And I think that any reasonable person would look at that and say that, that at some point it starts to taper off even if they continue to deliver the same volume that they're doing every year.
They're geared up for it.
All of our customers have done a really nice job of expanding and managing through a strong growth rate, which is hard to do.
It's almost as hard or harder sometimes than the other way.
But I think you've got to keep an eye on consumer's sentiment.
And I think this year, continues to ---+ we continue to see good demand.
But I think at some point, it just has to kind of taper off a little bit.
So ---+ and we're expecting that and we're preparing for that.
Sure.
I'd say there are 3 things that we've done.
And I'll be the first to admit, we're not an example to be held up as some new economy-type company.
We're a manufacturer and a distributor and many of our products are sold business-to-business and direct, and so there is a very human element to a lot of it, which is good.
We like that.
However, I will highlight a couple of things that I think are changes that we've made.
There are ---+ some of them are subtle, but they're important.
First of all, we sell through online quite a bit in some of our ---+ through some of our channels.
So particularly in the Industrial Distribution is an example.
That's an area where we are as robust in e-commerce through our customers, if you will, as any other product out there.
So ---+ that we ---+ and we do see a decent amount of demand that comes through channels like Amazon, but also our customers like Grainger.
So we do take advantage in that sense of the platform that our customers have.
The second piece I'll highlight is that the e-commerce is really an information flow more than anything.
It's a channel that's as transparent as you can get, and that's one of the innovations of it.
It's nice in that way.
It also can be difficult in that way.
But we get ---+ you get feedback from your customers with these online reviews, I mean people critique you.
And that's good.
We want to hear from people, and in some ways, we've been able to ---+ particularly in situations where we don't have that direct link to the customer because we sell through a ---+ either a retail ---+ a large retail channel or through an industrial distribution channel.
We don't necessarily know how our end users like or dislike our product.
And we've been paying more attention to that because it's important, and people are actually spending the time to give us that feedback, so you want to get it.
And then lastly, to your point, specifically on the Distribution side, we do have an e-commerce platform there.
It's not the most robust.
It's something that we're looking to improve.
It's a starting point for us.
And we want to learn ---+ before we really invest heavily in that, we want to learn exactly what our customers want from that type of platform.
And again, I kind of go back, to me, e-commerce is an information management type of play.
It's an ease of access to some extent, but it's also a how can we learn from what we're seeing because there is a lot of data that comes from these kind of things.
And we're not specifically geared up yet to deal with that, but it's ---+ we're aware of it and it's something that we're starting to pay attention to more.
Thank you.
We thank all of you for your interest in Myers Industries and your time and participation today.
As a reminder, a transcript of this call will be available on our website within approximately 24 hours.
A replay will be immediately available via webcast or call.
Details can be found on the Myers Industries' website under the Investor Relations tab.
Thanks.
Have a great day.
| 2018_MYE |
2017 | CTAS | CTAS
#As you probably have seen, we have talked about $130 million to $140 million in annual synergies fully realized in year four.
We have also talked about this being fully accretive, or accretive, in our second full year.
That would be our fiscal 2019.
As we move forward, we certainly have had a lot of assumptions about those synergies, but I will tell you, over the course of the last seven months, one thing that I need to make sure is clear is we've been operating as two separate companies, and that was a requirement so that we were not jumping ahead of the regulatory process.
And I tell you that because we are just now ---+ we just closed yesterday; we are just now getting into the confirming of our assumptions.
And we need to do that before we can provide more timing, more specific timing, on the synergies.
But we do feel like we will be accretive in year two.
And in year one, we are going to have some one-time expenses that are nonrecurring in nature, things like rebranding, asset impairments, severance, lease breakage type things, and we are going to be going to work over the course of the next several months really confirming what those amounts will be.
Once we do that, once we confirm our assumptions for the integration plan, we will have a better idea of what fiscal 2018 will look like, and our expectation would be we certainly share that in July.
But having said all of that, we certainly do think that there will be synergies in year one.
We're just not ready to provide any specific numbers.
I would say that we would likely have either left them the same or possibly narrowed by bringing the bottoms up a little bit.
So we ---+ third quarter, we are very pleased with the third quarter.
I think we've got some nice momentum and execution going on in the business, and we are poised to have a good fourth quarter.
Yes, <UNK>, it's <UNK>.
You are right.
The 15 basis point is part of the math.
I would say, in addition to that, we had a very good, strong quarter from a new business perspective, especially as it related to garments.
And so not only do you benefit from the new business in terms of that additional recurring revenue that you will receive from the garments going forward over those five-year agreements, but when you have new business installed related to garments, you also have some good revenue in terms of peripheral charges, set-up fees and emblem costs, so that definitely helped as well.
But really outside of that, <UNK>, there was nothing extraordinary.
It's just the continuation of execution of the game plan, you know, quality service.
Retention remains strong, a very strong organic revenue growth quarter, something we are proud of, given all the excitement of the pending acquisition, but just continuation of what we've done the last six years of growing that topline in that 5% to 7% organically, and, again, proud of those growth rates compared to the competition, which has been posting much, much smaller organic growth rates.
As it relates to why not provide some sort of guidance, whether it's cash or something else, you know, <UNK>, we're going to get busy right away, and we're going to get busy on the integration items.
And as we do that, the business is blur.
It's not like we're going to go through the next two, slightly over two months, and have two distinct businesses still by the end.
They are going to get blurred because we are bringing them together, and we are going to be doing quite a bit of integration work.
And it's just ---+ it becomes very, very difficult to keep those pieces separate.
And because of that, we are not ---+ I don't like the idea of trying to dissect that.
If we do come up with the purchase accounting results during the quarter, and we feel that we are in a position to provide them, you may see us do that, but our first goal is to really understand it and get it right, and then provide.
As we've talked about, yes.
We think that's fair, and it probably ---+ we would probably have narrowed it by bringing the bottom-up.
We feel good about the fourth quarter, and the third quarter I think is very indicative of the second half of the year that we expect it to have.
So, yes, the answer to your question is yes.
The amortization period will be 10 years most likely.
We expect that to be in the range of about 3% to 4% of the deal value.
And would it be accretive without that.
I think yes.
I think the answer, <UNK>, is yes, that you can kind of think about that as, what, a $66 million to $88 million annual number.
It will be a fairly large non-cash number.
That will be our goal, yes.
We will likely provide GAAP guidance, but we will ---+ our goal will be to give you some of these large items to give you a sense of what the performance detail will look like.
Yes.
Definitely, new businesses continues to be the strongest driver of the growth.
As we said, it's new business in terms of new customers.
We are still selling that 60/40 split of 60% of the new business wins are new programmers versus the 40% taking market share.
So, that's been very consistent through this year and really in the near past as well.
New business also includes the penetration of our existing customers.
That is certainly part of our vision, and that continues at a very good pace.
A lot of the hygiene products that we've talked about in the past, our Sanis signature series, a new offering in the last couple of years, that's really helped us with penetration.
Retention has been roughly 95%, so still strong, no significant change in that.
So, really no significant movement in any of the key components of organic growth drivers.
No, it's a broad mix of wins versus small, medium, large competitors.
We have not included any revenue synergies in that $130 million to $140 million.
Those are cost synergies, and they come in four primary buckets, and in no particular order.
We think of them in terms of material costs, so a sourcing benefit.
We think of them in terms of production improvements, so the more efficient use of capacity.
We think of them in terms of the route density allowing us to use less fuel because of more dense routes.
And then we think about it in terms of overhead and the reduction of duplicate overhead.
Did not include any revenue synergies in that amount.
And one of the reasons we didn't is because we need to get through the integration work.
We need to get them on to our systems.
We need to optimize the routes.
And we need to have our new G&K partners really trained and comfortable in selling our product line.
And that takes a little bit of time.
We do expect the benefit to be bigger.
We are ---+ first of all, the additional revenue certainly provides better leverage of the system, but certainly operating on one system in total certainly will create additional benefits for us, and better visibility into all of our new customers will certainly help us in terms of identifying cross-sell or penetration opportunities, identifying where certain industries ---+ we have customers in certain industries where we believe we've got a good product mix to provide value, but certain customers in that industry don't have some of those.
We think there's a lot of opportunity, and certainly, by adding the G&K volume, that certainly helps it out.
I want to add too that the more benefits and then really not a lot of significant additional costs.
That's the beauty of the acquisition.
Just another positive is that we get to leverage G&K over that existing $140 million spend.
So, we will have some additional licensing costs, nominal amounts, but the capital investment is not going to increase.
We think there's a lot of runway there.
As <UNK> said, about two-thirds of our new business comes from that no-programmer segment, and it's been that way for a long time.
We talked a little bit about what that no-programmer may look like.
It could be outdoor tradespeople that are now renting our Carhartt products.
It could be culinary people now renting our Chef Works product.
It could be healthcare workers now renting our scrub rental programs.
There are lots of opportunities there, and there will continue to be.
The margin profile is, I would say, is not significantly different from any other type of account.
But certainly we know that, with all of our customers, the more penetration that we can have, the more products and services that we can add to them, the more valuable those stops become, usually the lesser the probability that they leave us because we are more fully penetrated.
So once we sell any account, penetration becomes really important afterwards.
I would ---+ so, first of all, I don't know the penetration of G&K.
Again, we haven't had visibility and insight until really starting today, and we'll start to learn that more and more.
So it's hard for me to try to estimate what any revenue penetration might be.
You know, we have told ---+ we've talked a lot about that.
If you think about our Uniform Rental customers, for example, the highest penetrated item is our mats, entrance mats, and I would say about 60% of our Uniform Rental customers have entrance mats.
That doesn't mean they have as many as we believe that they should have, but it means they have at least some presence in the entrance mat.
In addition to that, all of our other products are less than 20% penetrated.
So we have a lot of runway on our own.
And I would suspect that G&K's profile is, from a Uniform Rental and mats, is probably not a lot different than ours, although that is purely a guess.
And I would say that the broader line for us, likely in the hygiene and the chemical cleaning, first aid and safety fire protection, those become nice opportunities.
I don't have any kind of information as far as quantifying that, because we just don't know enough about those customers.
And an example would be, you know, I'd want to see, or we would want to see, the profile of the G&K customers, and that's when we start to analyze or look for the opportunities in terms of what other products and services we can provide to them.
So we need some time to be able to do that.
As it relates to your second question of retention, again, I don't have specifics on that, but I would say that they are probably not too different from ours, although I would suggest that, because our growth rate is so much higher than the industry in general, that our retention is likely a little bit better.
So, your first question is, yes, I would say almost all of that revenue and operating income would fall into the rental segment.
As it relates to the second question, you know, we will give some thoughts on SAP when we provide our guidance in July, but I would suggest that it's going to be lower than $40 million to $45 million for ---+ probably because we've seen that we've been a little bit more efficient this year than we expected.
And you know, the additional ---+ any additional costs related to an integration of G&K will come in the way of a lengthened integration or implementation process.
So, I wouldn't expect that it drives up our costs in fiscal 2018.
I would just ---+ I think we've talked a little bit about it drives the implementation process into fiscal 2019.
So, we will see a little bit more expense in 2019 than we initially expected because of the duration with G&K.
But again, the process has been going well, and we've been spending less than we expected, and I would expect that results in lower numbers for 2018.
I would say from ---+ what are we seeing differently.
From an economic standpoint, I would say that our third-quarter, from an economy standpoint, didn't really feel any different than our first two quarters of this fiscal year other than there's a lot of ---+ there has been a lot of sentiment about maybe the new administration being a little bit more pro-business, etc.
But I would say I'm not sure that's translated much into what we've seen on the Street.
Having said that, it's been constructive environment.
And with the exception of the oil and gas vertical, which we have in fact seen get a little bit better, we haven't seen much of a change one way or the other.
And because of that, as you've seen, we've continued to execute well and continued at the organic growth levels of the first half of the year, and in fact even a little bit better.
And I think that is simply, as <UNK> mentioned, good execution, good new business productivity.
Our salespeople are doing a great job.
As it relates to your second question of are we seeing any irrational behavior, I would just say that it's always ---+ it's always very competitive.
Once we get in to talk more to our G&K partners, we may find that it was probably a little bit more aggressive on G&K customers.
But we certainly know, when an acquisition is announced, the competition gets very aggressive around the acquired customers and I would say that's kind of par for the course.
First Aid, we were pleased with the results overall.
As we talked about in the prepared remarks, we felt like, last ,quarter that we had hit a bottom, and that became reality, and then we expect those organic growth rates to continue to climb.
That business should grow in the high single digits.
That's what it grew coming into ZEE and that's what we expect going forward.
In terms of the margins, though, the gross margins continue to improve.
We mentioned in the prepared remarks how much the dollars are up over a couple of years, 50-some-odd%, 18% year-over-year increase in gross margin dollars.
The incremental gross margins have been very strong.
Last year, they were in the 30% range.
This year, the last two quarters, they were 100%.
So gross margins are moving along as we expected as we continue to realize those synergies.
SG&A, we do have a little bit of a heavier investment in the selling part of that component, as we mentioned in our first quarter.
We invested in the sales force to be able to grow that acquired big block of ZEE business.
And they've only been there, what, a quarter or two at most.
They will continue to become more productive.
They will grow that topline.
We'll get that leverage.
And so we are optimistic about not only the topline growth, but the margin improvement going forward.
Yes, I think, <UNK>, as <UNK> mentioned, we've made an investment in our sales team there.
ZEE did not have a sales team, and so we have ---+ as we came out of the system conversion, it was time to start really selling in a little bit more ---+ well, in higher volumes, and that's what we did.
We invested to be able to do that.
Do we have the confidence that those margins can get into those mid to high teens.
We certainly do.
And if you go back to our fiscal 2015 results, we were at about 13.8% for the year of fiscal 2015, but the last three quarters all exceeded 14%.
And with the addition of the ZEE business, that certainly is going to benefit us long-term.
And we really like the business.
It's doing exactly what we would expect that it should do, and those margins will continue to improve.
Thank you for joining us tonight.
We will issue our fourth-quarter earnings in mid July, and we look forward to speaking with you again at that time.
Good night.
| 2017_CTAS |
2016 | PWR | PWR
#Thank you.
First I would like to comment just in general, that we are confident in our ability to execute in our core business, and we do think the end markets are robust, and we will continue to strive to deliver on earnings.
Thank you for participating in our call.
We appreciate your questions, and ongoing interest in Quanta Services.
Thank you.
This concludes our call.
| 2016_PWR |
2015 | SFNC | SFNC
#Sort of scary, isn't it.
Okay, I'll start with that and <UNK> and Bob may want to jump in.
I'll tell you that of all the numbers that we report in this quarter, we're a little disappointed in the non-interest expense and we're really to blame for that because as we did the acquisitions, we probably didn't press the pedal as hard as we could have.
Making sure that we didn't cut into any of the muscle in any of those locations and once again I want to remind you that both with Liberty and First State, we did not close any branch locations.
So we expected minimal cost saves to begin with.
We also had the severance payments for those folks at First State who were not retained in the third quarter.
So, that's a little bit of a tick up.
We also had a change to our incentive programs that you probably recall our shareholders had to accrue in June of this year and some of those accruals added about a [$1 million] to our expenses this quarter, sort of catch-ups.
So we've gone from a one-year incentive plan to a multi-year performance plan and some of the shares that were included in that plan were sort of a catch-up this quarter.
We have some room for improvement there and if you're asking what we expect going forward, I would tell you that probably $62 million to $63 million a quarter.
That's what we would consider to be normal as of today's operations.
Obviously, our budget process is underway and what our expenses will be in 2016 is going to be a prime focus for us.
I guess what I'm telling you is we're still trying to get our arms around all the integration pieces from quite honestly 11 bank conversions over the last two years and now that we're all under one umbrella, it's pretty clear to us where we have opportunities to improve and I think we'll target those in 2016.
It's Dave and let me clarify a couple of things.
First, the non-interest expense on the GAAP basis was [$67.9 million].
The non-core items were [$1.3 million, so our core non-interest expense was $66.6 million] and as <UNK> said a minute ago, we had several items that did come up during the quarter that were somewhat acquisition and timing related.
They were core items but some of them may not be recurring going forward.
We also ---+ the foreclosure expense was elevated for the quarter.
There were several properties that appraisals came in on an annual basis and those were updated.
So what would I give you as <UNK> said, there was [about $3 million of that $66 million] that is really non-recurring on a regular basis but it is core items.
So that $63 million range as <UNK> said is how we came back to that number.
That's correct.
I'd be glad to try to that.
Our legacy loans were up $228 million.
Of that number, $36 million migrated from acquired to legacy.
So we had a pretty good net legacy loan growth of $192 million.
We did have $151 million decrease in the acquired bucket.
Some of that was anticipated with the result maybe some pay downs in Liberty and First State customers, but we also had a considerable amount of impaired loans paid off this month, some $17 million which we like to see.
So we're still pleased with our legacy loan growth and the markets that are still driving that are the Little Rock MSA, Wichita, actually Pine Bluff in Southeast Arkansas, St.
Lewis & Jonesboro markets.
They're still very, very good for us and we see a lot of upside potential in those markets.
It's probably a little aggressive considering that I'm not real sure all of the play downs have happened yet.
So we still plan in the 7% to 10% range.
We think that is sustainable over the next couple of quarters [anyway].
Well, yes we were at our peak lending level in the third quarter.
It will start paying down in the fourth quarter and accelerate into the first quarter of next year.
It used to be a real significant issue, but based on our current size and the percentage of agri loans that we have in our portfolio today, while we'll see a little tick down, it won't have the same seasonal impact that most of you have been used to seeing over the last three or four years.
Our accretion for the quarter was $14.9 million.
What we did, on a run rate, there's about $7.5 million in normal accretion that's being amortized related to the purchase accounting for the quarter.
As <UNK> mentioned, we had significant pay down in some non-performing impaired loans that were acquired.
Those loans had substantial marks on them.
Those are non-accretable marks while you still have them on the books.
When they pay off, you accrete that to income.
So [about seven of that million] was related to those loans.
Yes, if you go back a couple of years, we used to talk about the excess accretion, but now that we no longer have the ---+ under the FDIC loss share agreements, it's all the same number.
So this quarter and going forward, all you'll see is the total accretion that's on the books and we back all of that out to get to the core NIM.
Well I can give you the quarter for the total.
We had $14.9 million total accretion in Q3.
In Q2 it was $10.1 million, and it was $10 million in Q1.
And I would say, the numbers change every quarter, but somewhere in that $7.5 million.
So going forward, we would expect $7.5 million, that will be decreasing over time but yet on the other side, we don't know what loans will pay-off especially in the non-performing.
We want those to pay-off and as they do, that number can increase.
So, that's one of those volatile numbers that ---+ it's hard to project.
No, <UNK>, this is <UNK>.
No, it really doesn't change.
That's where our projections going forward is that the accretion is going to be about $7.5 million.
What it will do is it will eliminate the indemnification asset amortization.
That's been running about $2 million in negative non-interest income on a quarterly basis.
So, no, you won't see any change in the NIM based on the exiting the loss share, but you will see a bump in our non-interest income of about $2 million a quarter by eliminating that amortization.
And <UNK>, under GAAP, the accretion is completely separate from loss share.
So whether you're in or not, the accretion is the exact same.
So there's nothing to do at all with the loss share.
Just as <UNK> said, just that loss share exit in the non-interest income.
Exactly.
Yes, the numbers I gave a minute ago <UNK>, total accretion was just FDIC and non-FDIC.
Well, what we're at 80 now.
That's a whole lot better than 70, which I think is about the number we were about a year ago.
85 to 90 would be the ideal spot for us.
We've had great shift in our balance sheet.
Our securities are shrinking a little bit.
Our loans are growing and we'd like to continue that trend.
I'm not sure we want to actually manage that through running off any more deposits.
I'm pretty comfortable with where we are.
Our cost of funds is reasonable.
We may have a little bit of an opportunity over in our Tennessee market where their costs of deposits were a little higher than ours, but we're pretty comfortable with our level of deposits right now and I wouldn't see us taking any proactive efforts to run-off anymore of those deposits.
And <UNK> what you're seeing on the liquidity is we did have a decrease in the security portfolio of about some $120 million, $130 million.
A lot of that was due to calls and as the 10-year dropped and rates dropped for a period of time, we're holding back reinvesting that.
Our intent is not to hold back for a long period time, but we're looking for the right opportunity to put it back in.
So you'll see our security portfolio go back up we would expect over the fourth quarter.
That will keep us at that 80% level.
We've said this several times, we don't intend to keep a $1.8 billion security portfolio.
We've let drop down to [about $1.6 billion].
If we had the loan growth there and the deposits held where they were, we'd be willing to let that security portfolio migrate down to [$1.3 billion, $1.2 billion] somewhere in that range.
Well, I would say yes it does.
I'm not sure we can quantify exactly what that is.
As you're probably aware, we have really beefed up our risk management team internally to prepare for that and as we're taking a look at DFAS expense and other compliance expenses.
In the first year of DFAS, we're probably going to expect $3 million of expense and past that point, probably $1 million of ongoing expense with regard to the additional staff validation and all those other expenses that deal with the DFAS process.
We've talked about the government amendment cost to us and we still expect the [by roughly $5 million] (multiple speakers).
So there are going to be some significant expenses once we hit that point, but all of the DFAS expenses will be prior to that $10 billion mark.
So I would expect over the next 12 to 18 months, a lot of that expense will be built in to our expense structure.
Well, they're probably ahead of our projections.
I'm not sure that ---+ we couldn't have done better as we mentioned earlier.
From an expense standpoint, we've been really pleased with our revenue generation and of course we're going to have a Trust Company.
Those are [due will be] on board with another $1 billion in managed assets.
So we expect that number to continue to rise as far as revenue goes.
Our target was below 60% for the fourth quarter.
I think I feel pretty comfortable that we're going to able to hit that.
As we're talking about internal goals for 2016, I'm going to really press for a 55% or lower efficiency ratio because I think that's very realistic now.
If you had asked me a year ago if that was realistic, I probably would have said no, but I think we've done a really good job of managing both sides of that equation with some obvious upside potential on the expense side.
I would tell you <UNK>, we're not aware of any other relationships that may have pay downs.
That usually comes early on in the process.
I hope we're not talking about pay downs going forward.
We usually build in 10% to 20% pay downs in both loans and deposit run-off.
So far we've not hit those numbers with any of the acquisitions.
We're not anywhere close with First State and we think we're stable up in Springfield and we're actually grown that portfolio.
We've hired a couple of lenders up in Springfield.
We think Tennessee has great upside potential.
So I'm not expecting any more, but my caution is that the run-off has not hit our model numbers.
So we still want to put that out there for consideration.
I would tell you that what we did this quarter is going to be pretty normal going forward assuming we don't have any unexpected problems.
One of the things that we need to realize with regard to our provision is that the loans that migrate from the acquired loan bucket to the legacy loan bucket and therefore the ones that are going to require an allowance are only the good loans.
So if we have acquired loans that are impaired that have a credit mark against them, they will stay in that acquired bucket for the life of the loan with that credit mark against them.
So, whereas a normal portfolio will have risk ratings across the entire gambit that will require allowance against them, what's migrating over are only the good loans out of the acquired portfolio.
So that percentage is likely to continue to shrink because we're only adding good loans to that legacy portfolio.
Well, they just figure into our normal loan loss calculations based on their rating.
But as <UNK> said, when they migrate over obviously the provision will need to go up, but it's going to be at the lower applicable rate because they're much ---+ the healthy loans.
The impaired loans don't move over.
They're not moving the needle much on the allowance.
So, as <UNK> said, I think what you saw in the third quarter plus it could be a little bit higher because of the migration, but not a lot of difference.
Yes, I think what you'll see, third quarter is going to be our highest of the year.
Fourth quarter will tick down a little bit with the seasonality, but I think we're still comfortable in that [380 to 390] range probably and Q4 going down closer on the [380] side.
Keep in mind, in Q1 it will drop.
That is our most seasonal quarter, while there's not as much of an impact as <UNK> said a little while ago on the ag piece, but when you take ag piece, the credit card piece, Q1 will drop and it will be below [380] and you'll notice the significant drop in Q1.
<UNK>, its <UNK> <UNK>.
The Trust Company Ozarks, our entire staff there are doing a great job.
They're all hanging in there with us.
We have just been looking for the closing.
They are just part of the regulatory process.
We will close this next week as we mentioned earlier.
All of the people are still in place, maintained all the customer relationships.
They're excited about joining our operation.
We're excited to have them.
We're making plans to do some relocation of actual facility to move them over to our largest concentration of banking associates and banking assets in Springfield.
Everything is going according to plan at this point.
<UNK>, I'll say this, we're probably 30 days behind where we anticipated closing in the first place.
We were a little bit late getting in our applications and getting the S4 filed and then the SEC had just a couple of minor questions related to the S4.
So, every time something like that happens, you can add a week or two to an expected timeline and that was the delay.
No real issues at all.
Well I would say that, it really hasn't changed our strategy much.
We're still trying to stay as shown in our investment portfolio on our reinvestments as we possibly can.
I think we mentioned a couple of years ago, we made some longer term tax-free municipal investments of sort of balance out our yield in our securities portfolio.
From a loan perspective, it's pretty competitive out there regarding pricing.
Right now, what we try to avoid are the long-term fixed rate commitments.
So we're trying to keep that maturity at a very short reasonable rate.
So the markets adjusted, at least the ones we compete in seem to be very similar.
So I would say we hadn't changed our philosophy a whole lot.
We like to see some certainty in market-driven rates instead of artificial rates but that's the environment we work under and I think we would have to fair well.
Well, that's a good question with regard to timing.
The earliest it would be over the next 12 to 18 months.
And quite honestly, nobody's asked about M&A yet, so I'll just go ahead and talk about that a little bit.
We continue to be pretty active in some discussions with what we think would be some very good merger partners across our footprint and even outside our footprint.
I have no timeline for any of that today except that we believe that is still a great strategy for our organization and just depending on what might develop over the next six to nine months.
We really might not have any choice as to the timing of spending that DFAS money.
I will tell you this.
We have spent a lot of time with advisors who have been through this DFAS model creation and it's an eye opener, at least it was for me to find out everything that's involved.
So what the timing is going to be, I can't tell you exactly.
If we're successful with some of these merger partners, it would be sooner rather than later, but organically, if that was going to be our growth strategy, you're right, we can delay that DFAS preparation for some period of time.
Well, I would tell you that I would expect expense savings to make up for any additional expense of DFAS to stay in that $62 million to $63 million range.
Yes, I would say that that's probably accurate.
If we're at [58 or so now to get to 55] would be an achievement that I would think would be very good for 2016.
We would be prepared at any time to announce a deal, if the right deal came alone.
I feel pretty good about where we are today.
All the integration is behind us.
We're sort of doing the post-mortem now to say okay, what did we do well, what can we do better, how do we manage the next acquisition.
So we're learning as we go along.
The timing is not always up to us.
Most of the time it's up to the merger partner and really what works for them.
So we continue our discussions and as that gets slotted appropriately, we would announce that.
We would be prepared any time to do that.
So I really can't tell whether to expect something in first quarter of 2016, second quarter or fourth quarter of 2015.
I mean, discussions are ongoing today.
Well I would say individual acquisitions would not be greater than what we've done in the past.
We just got through with a $1 billion and $2 billion acquisition at the same time.
So there aren't a whole lot of [lows] out there that we're looking at today, but cumulatively, we could over a 12 to 18 month period accumulate many more assets than what we've done recently.
Regulatory-wise, I will say this that it's my belief that our regulators expect us to continue to be active in the M&A arena and they expect us to get to the $10 billion level.
And this is my take, okay, nothing that they said obviously.
I think they expect us to be mature in our process instead of promising that we will do it at a later date.
So the way they're looking at our readiness is a little bit different than it has been in the past and I think that's a good thing because last thing we want to do is get into an acquisition, file an application, and all of a sudden say, well, you really need to have this done before we're prepared to give you approval.
So we're trying to avoid that pitfall.
I don't see that happening.
You just never know and I'll say this too.
We continue to hear that public comments and activist comments are becoming more and more prevalent.
Recently there have been some favorable rulings that have said, look, these comments really don't hold water.
So we're going to ignore them and let this transaction move on through.
We hope that's what's happening.
As you know, we had a six-month delay because of the public comment with both the Liberty and First State transaction.
So you never know when that's going to happen and what we would consider to be a normal approval process goes into overdrive and a whole new set of eyes come into the picture, if a public comment happens.
You never know when that that might occur.
Okay, well thank you all for your interest this afternoon.
We appreciate all you do for our Company and if you ever have any questions, feel free to call Bob <UNK>.
You all have a great day, thanks.
| 2015_SFNC |
2017 | KIRK | KIRK
#Thank you, <UNK>, and thanks to everyone for joining us this morning.
We were pleased with our overall third quarter performance.
Our initiatives to control SKUs, optimize promotional activity and rework targeted areas of our assortment are driving improved performance in sales and merchandise margin.
At the same time, operating expenses and inventory remained well controlled despite significant disruption during the quarter from Hurricanes Harvey and Irma and some disruption and cost pressures in our supply chain.
Total sales increased approximately 5%.
The top line benefited from strong momentum in e-commerce and solid contribution from new stores.
Comparable store sales increased modestly and were up 2%, excluding the impact from hurricanes.
And we achieved that increase with a gain in merchandise margin over the prior year, reflecting the merchandising initiatives that are taking hold.
As I mentioned, Hurricanes Harvey and Irma presented significant challenges during the quarter and resulted in the loss of 359 selling days and the closure of 109 stores during the period.
As of last week, we are still down 1 store in Houston area, but all other locations that experienced downtime have now reopened.
We expect the remaining store in Humble, Texas to open this week.
We're seeing favorable trends in the Houston market, which is typical post these events, and we factored that recovery into our estimate of net loss sales.
In addition to the hurricanes, we faced pressure on our supply chain as we worked through constraints related to a cyber-attack that affected one of our key logistics partners on the West Coast.
Downtime caused by the attack led to a temporary logjam of inventory and resulted in higher-than-anticipated labor and transportation costs as we dealt with a compressed flow ahead of our busy season.
These issues also likely dampened sales in the early part of the third quarter due to lower store inventory levels.
Overall, I'm very pleased and impressed with how our teams have managed through the distractions.
We continue to make strong progress on our strategic initiatives, and we're doing a much better job of blocking and tackling, managing the day-to-day business with better tools and improved cross-functional communication.
We're encouraged by the trajectory of the business as we approach the heart of the holiday season.
Our fall Harvest & Halloween assortment helped to drive a mid-single-digit positive comp in October, and we saw strong contributions from our furniture, floral and gift categories during the ---+ during Q3 as well.
Our holiday seasonal assortment got off to a nice start in the latter part of Q3 and has performed exceptionally well, thus far, in November, contributing to strong overall sales momentum in the early part of Q4.
Seasonal merchandising is a core strength of Kirkland's, and we're excited about this year's offering that complements more robust statements in gifting and entertaining for the holiday.
We've also completed much of the everyday assortment refreshes in art, textiles, fragrance and gift.
For example, our textiles category has been reoriented with an expansion of accent pillows and an anchor position in our holiday cozy shop, a store presentation built for the season to emphasize the comforts of home.
We've also increased our year-round investment in fashion pros.
Fragrance is showing improvement with an updated jar candle assortment, reflecting better quality and esthetics and refreshed offerings in candleholders and oil diffusers.
We've removed gadgets and toys from our gift assortment and placed more reliance on gourmet food, comfort apparel, personal care and other items geared to holiday activities.
And we continue to upgrade our art assortment with enhanced styles and current trends.
We are focused on optimizing our mix of price points within the category as we head into 2018.
We hope to benefit from newness in each of these categories in the fourth quarter and will apply numerous learnings to our 2018 plan.
Our pricing and promotional initiatives are beginning to bear some fruit.
While traffic remained a challenge, we were happy with our sales mix for the quarter.
Average ticket and conversion were both up over the prior year, offsetting a mid-single-digit decline in brick-and-mortar traffic.
We achieved a higher initial markup from alterations in our product mix and price adjustments in less elastic categories such as furniture.
That, in turn, enabled us to remain highly competitive while supporting the merchandise margin.
In addition, the improvements we made in managing our promotional offers and discounts are evident.
We've reduced redundant promotional activity, and we've augmented our point-of-sale systems to limit coupon stacking and eliminate double discounting on clearance product.
We continue to believe that strength in conversion, improvements in ticket and growth in e-commerce can combine to offset any traffic weakness, and we believe these dynamics can carry benefits well into 2018.
Our SKU rationalization test continued to indicate success.
As such, we've incorporated disciplines across the category mix to control and limit SKU creep.
Across the entire assortment, our SKU count is down over 10% versus last year, allowing us to invest deeper in the winters, clarify in-store presentations and better manage clearance margins.
We're very encouraged by our e-commerce performance.
Kirklands.com continued its strong momentum during the third quarter with sales in the channel up approximately 40%, representing acceleration from the prior year growth rate.
We're focused on enhancing the omni-channel experience, improving our online assortment, driving additional business through our vendor direct drop-ship program and streamlining our fulfillment operation.
We believe we're well positioned to effectively handle more volume this holiday season, and we expect to drive higher profitability over time as we address the supply chain.
A portion of our year-over-year growth in the top line was also due to more effective marketing.
Our digital advertising program is generating better response metrics, and redemption rates on our direct mailers are strong, driving incremental traffic to both stores and kirklands.com during the quarter.
Our creative output and message delivery is continually improving, and we see that as a significant opportunity going forward.
Our new class of stores is performing well thus far.
We're on track to achieve a slightly higher rate of square footage growth for 2017, which is largely due to fewer closings than we had originally anticipated as we were able to take advantage of more favorable terms on stores with leases coming due.
This year is somewhat of a transition year in our strategy to move to whitespace opportunities, which limit cannibalization while growing our over ---+ overall omni-channel presence.
The stores we open next year will also benefit from our SKU reduction as well as the merchandising improvements we've accomplished thus far.
We've updated our guidance to reflect improved comp trends, offset by some higher supply chain costs in the third quarter, yet, excluding the hurricanes, we're largely on track with our plans for the year.
I don't want to minimize the potential challenges as we approach the holiday selling season.
We remain concerned about overall traffic trends and a potential onslaught of marketing as the sector tries to recover from a post-Thanksgiving malaise that complicated last year's holiday selling season.
We'd also like to see some better performance from our art category.
The assortment has much improved from a design and style standpoint, and we believe the customer will ultimately respond.
That said, I firmly believe we're moving in the right direction.
We're optimistic about our holiday plan.
And looking beyond that, Kirkland's is well positioned as a provider of value-priced stylish home decor with a relevant and growing omni-channel presence.
Our initiatives to control SKUs, optimize promotional activity and evolve our merchandise assortments are gaining traction.
We believe much of this is sustainable as we start to leverage the full benefit from these initiatives, continue to develop our marketing program and improve the overall discipline around measuring and executing our business.
In addition, our store operations team is focused on measuring improving customer service while implementing process improvements to improve profitability.
Overall, we're encouraged about our overall progress.
To be sure, we have much yet ahead, but our team is hungry and up to the task.
We look forward to updating you on our progress in the coming quarters.
With that, I'll turn the call over to Nicole.
Thank you, Mike.
Net sales for the third quarter increased approximately 5% compared to the same period in the prior year.
Consolidated comparable store sales increased 0.7%, which included a 41% increase in e-commerce revenue.
Excluding the impact of Hurricanes Harvey and Irma, comparable store sales increased 2%.
Excluding the hurricane impacted state, store sales are relatively flat to the prior year with the strongest regions being the Southeast and Midwest.
Again, for this quarter, we were able to offset negative store traffic with a positive conversion rate and higher average ticket.
We opened 10 new stores during the quarter and closed 1, ending the quarter with 415 stores, which represents 14 more units or 3.5% more than the end of Q3 2016.
E-commerce generated $15.3 million in revenue during the quarter, which accounted for approximately 11% of total revenue.
This increase was driven by a combination of strong increases in website traffic and average order value.
We also saw a healthy increase in revenue derived from our third-party drop-ship initiative, which accounted for a higher portion of e-commerce revenue during Q3 2017 compared to a year ago.
Sales via this channel result in a lower initial merchandise margin but limited overhead costs.
Moving on to gross profit.
Gross profit margin for Q3 decreased 160 basis points from the prior year to 34.9%.
Looking at the components, merchandise margin increased 25 basis points to 55.7%.
Merchandise margin benefited from a higher IMU and an initiative to eliminate stacking of coupon offers, which was partially offset by the growing mix of third-party drop-ship sales.
Store occupancy costs increased 10 basis points during the quarter due to sales deleverage.
Outbound freight costs, which include e-commerce shipping, increased 125 basis points as a percentage of net sales, which was largely driven by an increase in e-commerce penetration.
And finally, central distribution costs increased 50 basis points.
Both outbound freight and central distribution costs were impacted by supply chain bottlenecks due in part to our West Coast logistics partner.
Moving on to operating expenses.
Operating expense for the third quarter was 32.8% of sales, which was down approximately 30 basis points since prior year.
The primary drivers of this decrease were corporate payroll and professional fees due to a higher rate of capitalization for supply chain projects, share-based compensation expense and workers' compensation insurance reserve, which were partially offset by an increase in store labor and advertising expense.
Depreciation and amortization remained relatively flat to the prior year as a percentage of sales.
The tax benefit for the quarter was $1.2 million or 34.5% of the pretax loss compared to 47.6% in the prior year period.
Much of this decrease from last year's rate is due to the change in accounting rules for taxes associated with share-based compensation.
The net loss for the quarter equated to $0.15 per diluted share.
Excluding the hurricane impact for both lost sales flow-through and property damage, we had a net loss of $0.10 per diluted share for the quarter.
The hurricane impact does not include any insurance proceeds, particularly business interruption, which we will have finalized in Q4.
Moving to the balance sheet and the cash flow statement.
At the end of the quarter, we had $27.9 million of cash on hand, and no long-term debt or borrowings were outstanding under our revolving line of credit.
Inventories at the end of Q3 were $107.3 million, an increase of approximately 7% over Q3 last year.
Year-to-date 2017 cash used by operations was $12.3 million, reflecting our operating performance and changes in working capital.
Year-to-date capital expenditures were $23.6 million with approximately 70% of that relating to new stores and existing store improvements, followed by approximately 25% related to IT and supply chain systems investment.
During the quarter, we repurchased approximately 19,000 shares at an average cost of $11.52 a share under our share repurchase program.
And now turning to our guidance.
As mentioned in our press release earlier today, we've adjusted some components of our fiscal 2017 annual guidance, which was provided on March 10 of this year and reiterated in our Q2 earnings release.
We expect to end the year with 419 stores, which represents a total unit growth of 3.5% over the end of fiscal 2016 with square footage growth approximating 5%.
Total fiscal 2017 sales are projected to increase at the high end of the original guidance of 6% to 8%.
That implies full year comparable store sales in the range of flat to up 2%.
As a reminder, the year-over-year sales increase includes the 53rd week in fiscal 2017, which represents approximately $10 million to $11 million in revenue.
We expect our earnings per share in the range of $0.50 to $0.60 per diluted share, which narrows our previous guidance due to the negative impact of hurricanes, supply chain business disruptions and an estimated tax rate of 41% compared to our prior guidance of 38%.
Capital expenditures should be in the range of $27 million to $29 million, up from our prior guidance of $23 million to $27 million.
The incremental capital expenditures are a result of an additional new store and rebuilding costs from hurricane-damaged stores.
Thank you, and we are now ready for questions.
Sure.
Yes.
So the supply chain disruption, for the most part, is behind us.
It was a major distraction.
It's unfortunate the way that played out.
Our turn ---+ we have a fast turn on inventory.
The seasonal sets depend on the flow, so it's really important for us.
So it just kind of got us a little bit out of whack there.
So right now, the fresh products that we have coming in is flowing unabated through our DC.
In the long run, I think we still have opportunities to make our supply chain more efficient, both for the retail side and the e-commerce side.
We're working toward that.
But this just was a onetime thing that we had to deal with in Q3.
And then the other part of your question was direct importing.
And we kicked of that initiative.
We did that during the quarter, and we're easing into that.
It won't have much ---+ it won't have an effect on 2017.
But as you move into 2018 is when you'll start to see the impact that has on our margin.
And we continue to believe it's a big opportunity to drive merchandise margin over the next several years.
So that's a big initiative for us.
Well, one of the big drivers, <UNK>, is our seasonal assortment.
We call it a seasonal category.
And in the third quarter, it's dominated by fall product, Halloween Harvest.
That performed very well during Q3.
We had great sell-through, great product.
And as we moved into Q4, that kind of transitions over into holiday theme product.
And again, it's been out ---+ an outstanding start on that category this year.
It's a ---+ it's not only fresh product, but the linkage between our merchants and our marketing execution is improving, and that's really helping the performance of that category.
So it's a big driver for us right now.
As we move through the balance of the fourth quarter, that will be a big driver.
But we're also seeing good performance out of some core categories, like furniture, to name one, that has been a strong performer for us all year.
And then we'll layer in more gifting, more entertaining products as we get around the Thanksgiving holiday and leading up to Christmas.
We felt like we had a little bit of a gap there in those areas last year that we filled with our buys this year as we plan for the season.
Yes, the sales part is a little hard to quantify.
I mean, if you look at how the quarter progressed, we were definitely softer in August, and we attribute a lot of that softness to the lack of flow on the new product.
As that started to come in, we had a much stronger and, I think I said it in the script, a much stronger October.
So that's how I would characterize the lost sales piece.
In terms of cost, I think the impact on labor and transportation were probably somewhere between $500,000 to $1 million.
And that's just, again, the flow of the product and how reliant we are on the sets that we lay out in the stores, we have to turn it quickly.
So we had to throw a lot of effort to get our Christmas product in the stores on time and all the other sets that we rely on as we got into the new floor sets in the season.
So we had to do what we had to do.
But again, that's cleared up now, and we are past that disruptive part of the supply chain.
Yes, one just overriding point I'll make is our creative output is much improved from where we've been in the past.
So our team is doing an excellent job of generating creative ways to communicate with our customers.
And the linkage, I cited this earlier, the linkage to the rest of the business, those connections have improved so much, and it ---+ the overall execution of everything we do kind of revolves around that.
So the marketing effort is much better positioned now than it has been for Kirkland's.
And in terms of tactics, this year, our digital program has been revamped.
We're doing a lot more in the way of calling customers to action through announcing events or sales that we have going.
Last year with more of a branding focus for that digital, and so we're seeing good traffic to our site and our stores from that mode of communication.
And then our direct mail example, we just issued a gift guide in our direct mail, which is to focus on that gifting push that we have for the holiday.
Very nice piece.
The redemptions rates we're getting on that direct mail are very high, and we're very encouraged by them.
And the longer we do it, the better it gets.
So those are just 2 vehicles that we have in place that we didn't have last year for the fourth quarter.
And that's in addition to just the improvements we've made on the creative and the daily e-blast that we do to our customers that are still very effective.
That's a fair way to look at it, <UNK>.
I would not assume any real impact in the first half.
I would focus on the back half there.
It depends, obviously, on the item.
But ---+ and it's a long-term process.
So if you look at our assortment, we're going to focus first on the kind of the everyday, more basic component of our assortment.
And this is going to take a period of a few years to get up to speed.
I don't believe we'll be direct importing 100% of our product any time soon.
I think you're talking ---+ we're talking about about 30% at ---+ over the next several years.
And inside that 30%, I hesitate to put a firm number out there, but it's in the hundreds of basis points, not the tens.
Yes, we mentioned ---+ sequentially, they're improving, I think, is the bigger takeaway here.
If you exclude the hurricanes, we were probably in the lower end of that mid-single-digit decline that we cited in the script.
So we're seeing improvement.
It's a little bit here and a little bit there.
But as I mentioned earlier, we've been able to offset that with a strong average ticket and some good conversion in the stores.
Right now, I would say about half of the revenue is shipped to the store.
And that's declined a bit from where we've been given the advent of our drop-ship business, which is now approaching 20% of the overall mix.
So it is still a very high number, though.
And we rely on that traffic, and it's important to the stores because we are able to get good attachment rates on those.
It's been a while since I looked at that number, to be honest with you.
I wanted to say that it's about half of the time that we get a purchase, an additional purchase, when that in-store pickup occurs, but it's a key part of the strategy.
Well, great.
We appreciate everybody's attention today and participation, and we look forward to our next call in March to report the season.
Thank you.
| 2017_KIRK |
2018 | LMAT | LMAT
#Thank you, Skylar.
Good afternoon, and thank you for joining us on our Q4 2017 conference call.
With me on today's call is our Chairman and CEO, <UNK> <UNK>; and our President, Dave <UNK>.
Before we begin, I'll read our Safe Harbor statement.
Today, we will make some forward-looking statements, the accuracy of which is subject to risks and uncertainties.
Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.
Our forward-looking statements are based on our estimates and assumptions as of today, February 21, 2018, and should not be relied upon as representing our estimates or views on any subsequent date.
Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent SEC filings, including disclosure of the factors that could cause results to differ materially from those expressed or implied.
During this call, we will discuss non-GAAP financial measures, which include organic sales and growth numbers.
A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website, www.lemaitre.com.
I'll now turn the call over to <UNK> <UNK>.
Thanks, J.
J.
Q4 was another healthy quarter in which we posted sales growth of 15% in the Americas and 22% in Europe, Middle East, Africa.
The increase was driven by valvulotomes and XenoSure.
Only Asia held us back in Q4 as we are in the midst of transitioning away from our 2 master importers in China.
Soon, we will start selling to our own group of distributors from our Shanghai office.
Eliminating this layer of middlemen is a typical move from the <UNK> playbook.
This transition left us with no Chinese revenues in Q4 2017 versus a normal rate of about $400,000 a quarter.
So the year of 2017 ended with 13% reported and 7% organic sales growth.
The key drivers were our biologic products, including 20% XenoSure growth.
We also posted 29% annual op income growth.
Over the last 3 years, our op margin was 15% in 2015, 18% in 2016 and 21% in 2017.
We are guiding 23% in 2018.
These continued op margin improvements are the result of double-digit reported sales growth and high single-digit op expense growth.
This increased profitability, our $41.7 million cash balance and the new lower federal tax rates have all combined to give us a wide array of strategic and cash return alternatives.
In this quarter, you're seeing this result in a 27% dividend hike, but this cash will also find its way into future acquisitions and internal investment opportunities.
I'd like to close by reiterating our financial goals.
We continue to pursue 10% annual reported sales growth and 20% op income growth.
Thanks, <UNK>.
Our Q4 2017 gross margin was 69.8% versus 69.5% in Q4 2016.
The increase was driven largely by favorable mix, as China and distributor sales declined.
Op expenses in Q4 2017 were $11.9 million, down 3% versus the prior year period.
Lower operating expenses were driven by general cost-cutting measures, fewer sales reps and lower sales management costs.
Combined with increased sales, this cost control allowed us to post record operating income in Q4 2017 of $6.3 million, representing a record 24% operating margin.
Our effective tax rate in Q4 2017 was 32%.
For the full year, our effective tax rate was 19% as stock option exercises reduced the rate by 17%.
We expect our 2018 effective tax rate to be approximately 25%.
We finished 2017 with a record $41.7 million in cash, an increase of $4.1 million from Q3 2017.
Cash increases in the quarter were driven by cash from operations of $6.8 million, which were partially offset by capital expenditures of $1.6 million and dividends of $1.1 million.
For the full year 2017, our cash increased $17.3 million.
Our Board of Directors recently approved a 27% increase in our dividend from $0.055 to $0.07, implying a yield of 0.8%.
Turning to guidance.
We expect Q1 2018 sales to be $26.0 million to $26.6 million, a reported increase of 9% at the midpoint and organic increase of 4%.
We also expect a gross margin of 71.5% in the quarter and operating income of $5 million to $5.6 million, growth of 25% at the midpoint.
We are also guiding EPS of $0.19 to $0.21, growth of 21% at the midpoint.
For the full year 2018, our sales guidance is $110 million to $111.6 million, a reported growth rate of 10% at the midpoint and an organic growth rate of 7%.
Our full year gross margin guidance is 71.5% and our operating income guidance is $25.4 million to $26.6 million, growth of 23% at the midpoint.
Our annual EPS guidance is $0.96 to $1 per share, growth of 14% at the midpoint.
With that, I'll turn the call back over to Skylar for questions.
Rick, by the way, thank you very much for the question and the $100 million comment.
We agree.
It is a milestone of sorts.
We'd always been told when we got to $100 million, there'd be some kind of big parade for us.
So we're real excited about that.
It does feel a little bit more substantial.
So thank you for recognizing that and appreciate that.
In terms of China, this is a fairly standard piece of our playbook.
Right now, we're in a 4-layer system.
So looking back 6 months, it was <UNK> sells to a master importer, who brings it into China, who then sells to a layer of distributors, who then sell to hospitals.
We are almost through with the transition now.
We haven't shipped out first order, but we're about to become <UNK> Shanghai ships to a subdistributor, who we now call a distributor, who ships to a hospital.
In specific reference ---+ so we're just taking a layer out.
And in this change out, we haven't started booking revenues to distributors.
If you ask the question, I think you did, how much of Chinese revenue is in guidance, we really haven't gotten ---+ in the past, we haven't broken out by countries, but at a high level, since we brought up the Chinese topic, maybe we can say, at a high level, at the high watermark, we were selling about $1.6 million in revenues to the Chinese distributors, the 2 master importers, and I feel like something between $300,000 and $800,000 is reasonable to expect this year.
It's just a question when it really does turn on.
And historically, since it's been such a small piece of our business, we haven't really worried about it.
When we got down to looking at guidance and how it affected Q4, it really did make a big difference because you lost $400,000 of revenue in a quarter.
Yes.
The ---+ thanks for the question.
The gross margin was maybe 0.5% or so below what we were talking about previously on the previous call.
The lower China sales actually helps the margin a little bit.
Those sales are typically at a little bit lower margin than our sort of U.S. and European sales.
But we had some year-end cleanup topics and we had some manufacturing inefficiencies.
I'll call it accounting stuff as sort of what we capitalize through the balance sheet stayed up on the balance sheet for a little bit longer than I thought it would last quarter.
And those are good guys coming off.
So you're going to get some of that in Q1.
You didn't get it in Q4 and you thought you would.
So it's really ---+ a lot of it caught up in accounting, sort of, balance sheet, P&L interplay there and maybe some year-end cleanup as well.
Going forward, I think you're going to get a little bit of that good guy in Q1 and you can see our guidance of 71.5% for the year.
In the year and in the Q1, you're definitely getting FX help, but in Q4 versus our previous guidance, FX really wasn't a topic.
But going forward, FX is certainly a topic if rates stay, sort of, where they are in that $1.23 range or so, euro to dollar.
So you'll get some nice tailwinds from the FX going forward from Q1 through the rest of the year, if those rates stay.
Yes, I would say the guidance is what it is, Rick, and this is what we think.
We put our pencil to paper.
And so I wouldn't want to say it's optimistic or negative guidance.
It's just what we say.
So that is where we are at.
I will say, as you look at it, <UNK> has historically and consistently sold you guys a 10% reported sales growth rate; that's in play this year.
This year is 7%, maybe a little bit smaller than, sort of, historically.
As we've talked about it with hundreds of investors, we've broken it down to 10% and 8% ---+ 8.3% is this odd number we keep coming back to, but 8% is a better number.
And I would say that if you pull out China in '17 and '18, we keep coming back to the 8% number.
And so it seems like a pretty standard guess by <UNK> Vascular, but I wouldn't characterize it as particularly bearish or bullish.
<UNK>, do you want me to take this.
Yes, Dave.
Yes.
So it has been about 14 or 15 months.
The good news is we've been integrating RestoreFlow.
And I think, as everybody knows, that's been going quite well for us.
I think the revenues are 62% above the preacquisition level.
And so of course, we're always focused on doing the right deal rather than doing deals quickly.
But that being said, aside from focusing on integrations in the first half of the year, we've been back ---+ we, me and my colleague, Luke, and other folks who help out here, pounding the pavement, trying to identify the next acquisition.
So all I can really tell you is the pipeline, there's a good number of targets in it.
We continue to focus on the open vascular surgery, peripheral vascular, dialysis access.
We like biologics but we like non-biologics too.
And certainly, with the bigger war chest cash of $41.7 million as you point out, I think that gives us ---+ starts to give us greater optionality.
So we've done 19 deals in 20 years and we're out hunting for the next one and at some point you will hear about it.
Great.
Okay.
<UNK>, thanks a lot for the great questions.
<UNK>, you're actually talking to the worldwide VP of Sales right now as well as CEO.
And the great news here is, we've found a wonderful guy to run our Frankfurt office and he starts on March 1.
So we're about, I don't know, 10 days away or so from me not being in charge over in Frankfurt.
I spent the last 7 months running over there 1 week a month, to sort of just feel the organization and understand what they needed.
On the U.S. side, we've been a little bit slower.
It's a little bit easier for me to manage the U.S. side since I have 7 folks that I've been working with for a long time in and out of VPs of Sales and we continue to search for that ---+ for the right man or woman on that side.
In terms of turnover, we had an interesting thing in 2017.
You asked about turnover.
In Europe, we had a little bit more turnover, largely Central Europe, which we're going to call Germany, Switzerland, Austria.
We had 3 or 4 turns there; that's a little greater than normal.
And in the U.S., we had a bit of a better run than we usually have.
And in 2017, 4 reps left us voluntarily.
I would say, the normal number in the American ---+ North American sales force, excuse me, is about 6 or 9, and this year we only had 4.
Something about the rising stock price, the better comp plans and maybe the better portfolio devices with that RestoreFlow acquisition kept the folks around a little bit longer in the U.S. than they normally stay.
Sure.
And you remember, of course, we don't guide based on individual products.
So maybe I'd go back into '17 and try to draw some trends, then you'll have to figure out what you want to do with those growth rates.
XenoSure grew 20% on a reported basis.
I think Omniflow grew 18% on a reported basis, if I'm getting that right.
RestoreFlow had a high growth rate, but it didn't have anything to comp against but it ---+ we don't have a comp number for you.
So that was ---+ it was a very exciting year for RestoreFlow.
And then ProCol also had a 15% growth rate in the quarter ---+ excuse me, in the year.
Dave's got a better number.
51%.
51%, sorry.
Transposed that, <UNK>.
But in general, you can think that <UNK>'s biologic portfolio continues to plow ahead at a faster rate than its nonbiologic portfolio.
Yes.
Dave can take care of that, Ray.
Ray, so the biologics in Q4 were 35% of total sales.
Yes, Ray.
In fact, I'm glad you asked that question.
So on the official sheets here, it looks like we have 90 sales reps.
Interestingly enough, we have 102 requisitions out there right this second.
Most of them will kind of fill over 3 to 8 months.
And so I feel as though the general trend is upwards here.
I'm sort of able to recirculate a little bit of the money that I saved off of the VPs of Sales in the 2 geographies as well as, you remember, I didn't take my salary for, sort of, last half of last year.
So we've been able to sort of start going, let's get a little bit more generous with the rep portfolio and that growth is taking place on both sides of the Atlantic, not necessarily in Asia.
No.
It means we have 102 spots that are being offered and ---+ with reps, as we talked about with <UNK>, you're getting them coming and going based on voluntary quits.
Once in a while, there's a forced termination.
And so even though you aspire to 102, it feels a little bit more like it's going to be lower than that.
I don't really have a great grip on what lower means.
But for fun, we could say 96 to 99 would be sort of the ---+ where we might go, although we might open up some more reps.
One of the things about the FX rate that you're seeing happening is that we are having a nice uplift this year from FX.
We already called out that we had a 7% organic number but a 10% reported number.
That entire delta, if I'm not mistaken, is FX.
And inside of that, there might be an opportunity to take a little bit of that away as well as a little bit of the Trump tax cut and use that to build the sales forces a little bit more on both sides of the Atlantic.
Stock comp in the quarter, about $500,000.
Yes.
So we built out 2 clean rooms in Burlington, actually, Ray.
So our main clean room, we expanded last year and added a decent number of square footage to that space just to give us more room.
Obviously, as we expand volume, but we also built a biologic clean room.
So a clean room dedicated solely to our biologic products; XenoSure, obviously, the first product line to go in there.
More room for the XenoSure folks, but also a larger footprint gives them a chance to build a better process around what they are doing with XenoSure.
And as the units ramp and, combined with a better process, hopefully we can get better costing on those XenoSure units as they come out of the new clean room over time.
We're also selling ProCol.
As you know, we had previously been purchasing that product from the seller of the device to us and now we're manufacturing it ourselves, although not approved and not validated to do that yet, but we're in the process of striving for that.
So we'll get that over the next ---+ I don't know, maybe 6 months or so.
So we'll see how that goes.
But ---+ so 2 biologic products going into that clean room and 2 separate clean rooms, 1 expanded and 1 new.
Last year, you had these 3 things, these discrete items, the 2 VPs and myself.
We've talked about that once already.
But we also had in the background this thing, the cost-cutting effort that sort of started in May or June.
And I think that helped out a little bit as well as, as you talk about, the gross number of reps being 90 in Q4 versus 96 the year before.
So all those things kind of came together.
I would say that's a special quarter.
I don't feel like we can be that tight for all of next year.
And I think our budget ---+ you can figure out what our op expenses are supposed to be based on all these numbers we've given you.
But I feel like it's not going to be as tight next year.
But in general, I perceive <UNK> to be a really tight company and that's why we're able to guide 23% op margin next year without ---+ sort of, over the last 4 years, we haven't really had a big updrift in our gross margin.
And so we've been able to get this op leverage from about 15% op margin in 2015, I think I'm doing this right, to 23% in 2018.
And that's been about low single-digit sales growth and high single-digit op expense growth.
A little bit of operating leverage there is what I'd say.
Right.
So I think what I was trying to say is we're not exactly about countries.
But I did call out China, so it makes sense you guys would want to know that.
And it feels to me, like we should expect the first shipment to sub-dealers in March or April of this year.
And then it should build to something this year.
And I think I gave a range on this call of about $300,000 to $800,000-ish and it's really hard to tell how this thing is going to take off.
On a $110 million business, I wouldn't worry too much about whether I land at $300,000 or $800,000, but something like that.
Maybe I take a shot at it from a sort of strategic perspective and then Dave takes a shot at it from acquisitions.
We try as hard as we can always to flash to everyone we talk to, we love dividends.
We love doing M&A.
We've done 19 deals in 20 years, as Dave mentioned before.
As the principal owner here, I feel strongly that a great company exhibits strong dividend growth.
So I'm not letting go of that at all and I'm pressing even harder.
The more we get leverage ---+ you see the tax reform, we sort of got tax reform a year early in some funny way here because of this stock option exercises.
All these things that were going on in 2017 gave us an effective tax rate of 19% and we only have an effective tax rate of 25% next year due to the Trump tax changes.
So those 2 things enable one to be a little bit more aggressive with the dividend strategy.
But I always want to say, I got plenty of internal CapEx type investments and Dave can tell you again about all the wonderful acquisition opportunities we have.
Right.
I mean, it's one of those nice problems to have, where we have so much cash coming in that we're increasing the dividend and yet, the war chest continues to build.
And so, Mike, to address your question about valuations.
Of course, I would say as a rule, we generally don't participate in auctions.
Valuations I find are very situation dependent.
But I think there is no question that as we see the public market valuations high with our peer group and then a lot of deals like <UNK>s/Spectranetics and Becton/Bard at 6x and 7x sales or CryoLife/JOTEC, Weigao/Argon in the 4x sales range.
Sometimes that translates over to certain sellers.
And then with other sellers it doesn't.
So maybe at the margin we see valuations up a little bit.
But again, it's very situational and some deals I look at, the public market seems to not be affecting at all.
So sort of hard to exactly connect the dot.
I mean, I generally don't talk about whether we'll do a deal in a specific period of time or not.
I'd say ---+ if you look at the history, and I know you it well, we've done about a deal a year but sometimes I have gone a year or 2 or 3 without a deal, and then I think 1 year we did 4.
And so ---+ and part of the reason it's difficult to predict is often we don't know if a deal is going to get done until the last minute.
And so I would say not much has changed.
It's the same team.
Maybe the team has even broadened, the bank balance is higher, so those are good things.
But we have to find willing sellers of strategically appropriate assets, and so we're just out looking as usual.
Maybe a little ---+ Mike, maybe an additional color on this is, so you're pointing out, hey, you haven't done a deal in 16 months, when is the next one.
And we're not saying when it is.
But I will say, we took a breather last year.
I think you remember, we had some recalls in the beginning of 2017, end of 2016, that we weren't too proud of.
And so we took a little bit of a breather and got our house in order.
We worked real hard on quality.
We've got a fantastic complaint rate starting up in 2018, particularly in Q1, obviously.
And so we feel like we've largely ---+ you never really do at a medical device company finally, but largely put our quality issues behind us.
And I think Dave is forced to wait a little bit when stuff like that is going on in our business because he knows it's so important to get great quality.
I feel like we're there now and that's sort of further releasing him to go off and do what he needs to do.
We have not.
We have share repurchase authorized for, I think, $7.5 million and we have not repurchased any shares yet.
20% for the year.
Yes.
It was up, I think, 16%.
Yes, 16%.
Yes, Jim, you sound great.
So sequentially, Q3 to Q4 OpEx, is that what you're asking.
Yes.
So we had about a $500,000 charge in Q3, noncash, onetime special item for stock-based comp for a departing employee that we didn't have in Q4.
And that's really, Jim, your big delta between the 2 quarters.
There were some other puts and takes as well.
Sales rep count at 90, so a little bit on the low sides, so commissions and related expenses down.
But really, if you want to flux from Q3 to Q4, that's kind of your answer.
I feel like we talked about 96 to 99, but I feel very comfortable doing a little more or a little bit less based on comings and goings of reps.
All right.
Point taken.
A pretty good one for this call.
| 2018_LMAT |
2016 | SWKS | SWKS
#I think it's clearly, there's been a disruption in the December and March timeframe, as a very large flagship phone model has seen the numbers come down and we're working through that.
And I think that from my standpoint, any inventory correction in the systems should be gone in the June quarter and we ought to be off to the races in the second half of the year
Sure.
The broad markets business has been doing quite well, we're up about 12% year over year in Q1 and will continue to be a team level or higher growth rate into the calendar year.
So what we're seeing is really a wide variety of applications in the broad portfolio.
We've got some great IoT programs that go into set top box and streaming media, in many cases, $10 to $12 per box, Wi-Fi switching, ZigBee technology, there's a connected home opportunity now that's really playing out, got some great content there.
And one of the markets that we're excited about now it's early innings but we are seeing some uptick in automotive.
We're starting to see high-end LTE telematics applications.
We've got design wins in vehicle-to-vehicle communication.
We've got customers like GM, like Volkswagen, Continental, so that's a market that we think will do very well for several years, and the opportunity there for us is outstanding.
So that's a little color and where we are, but broad has been growing quite well and quite steady
Thanks for the question, <UNK>.
Despite the backdrop right now, when you look at ---+ the model for us is absolutely intact, you look at the drivers we're making ---+ continue to make progress on the gross margin front.
Volume will have some impact on that in the short term, but we're continuing to drive that.
We know disciplined OpEx investments, we know how to measure those to manage that very effectively.
So when you roll all that together, once we get through this [pause] that we're seeing right now, when we get into the back half of the year and beyond, we see an opportunity to get there in a couple of years.
And by the way, we are not at ---+ what we delivered, we are not at the OpEx target, because the model will be in the low 40s.
We're not quite there yet so we got room to run.
That's a fair question, but you got to remember that those are averages to assume over a period.
There are events that happen quarter to quarter that can move those.
And what happened in those quarters, there were multiple things.
We were seeing some benefit from the filter asset in driving cost down, we had new product launches, all of those things can create a short-term step function that moves you in a different spot.
But sustaining 75% that's off the charts; 60% is very, very good.
So modeling 60%, you'll see you get a very, very good answer.
Sure, Tony.
With respect to Samsung, yes, we actually are seeing some improving conditions at Samsung.
We should be up in the March quarter.
We've got some new design wins that will be ramping with the GS7 platform.
And we're actually ---+ reiterating what David said about content and SkyOne and filters, we're seeing Samsung really now [soft] in earnest, some of these content-rich solutions, not only on the transmit chain but also on the receive side.
So that's a move up for us that will be sustainable.
Samsung is our number two customer.
We've got a great relationship there, so you should expect some solid results through the year.
CapEx, <UNK>.
Yes, CapEx we've talked about that a little earlier, $79.5 million for the quarter, and we're just recommending there will be a couple of quarters we'll be real close to the depreciation of around $50, and it might go up a little as we get in the back half with volumes going up.
And there may be some more investments that we make, so that's the way to think of it.
Thank you.
That's calendar, just remember that.
Yes.
That's a great question.
Clearly, for today, we're doing low band and now mid-band.
We're well up above 2 gigahertz with great performance using temperature-compensated devices.
I think BAW technology, what it will do for us in that 2017 timeframe will open up the high band, the very highest band in some of these pad configurations.
I think that'll be very good for us.
We'll be able to have the enviable trade-off between using SAW, temperature-compensated SAW in both devices and using the right application for the function.
Because if you look across the world today, most world phones, smartphones don't use BAW technology; they have a different configuration or a different band line up that doesn't require it.
But for those customers who are looking for a low, mid, high, very high performance, truly a world phone, what BAW will do will open up high band for us in which we don't participate, market we do not participate in today.
So it will increase our TAM and we'll there by 2017.
I would say that the increase over the last couple years and for the next couple of years on the RF side in smartphones or mobile is probably equally weighted between filter-enabled devices, receive and transmit, and other functionality that we talked about, which is voltage regulation, power management, receive technology and higher performance Wi-Fi and the like.
So I'm going to just broad brush it and tell you roughly equal growth within mobile coming about through filter-enabled solutions and coming about through other system-level blocks that we didn't previously address.
And to add to that, I think one of the real unique characteristics of what we do here, and we talked about in this call, is our ability to integrate.
So it isn't just taking the filter and taking the amplifier and integrating it; there's a lot of unique Skyworks DNA that develops these engines.
They're highly customizable.
Each baseband partner, each OEM we configure to their needs.
We look at their current budget, we look at what they need to do in terms of bands.
We look at the filter technology wanted to deploy, and all that comes together, and it's worked out great.
And the TC capabilities that we have today are unbelievable, they're world-class manufacturer.
In this last calendar year, we manufactured about 1.5 billion TC SAWs, all of which were consumed by our integrated systems.
So we're very bullish on that concept and we'll continue to use the best technologies to win.
I think, <UNK>, similar to what we've done in the past, we're always looking for, if you think about the power management acquisition that we did through AATI or SiGe or the Panasonic filter capability, they all do two things for us: they gave us a much bigger target and more relevance at the system-performance level for our mobile customers and they also opened up new target markets and gave us opportunities within IoT.
So we would continue to look at that, whether its cloud-based computing, whether it's machine to machine, whether it's being able to do more at the IoT sensor MCU RF module capability.
We see those as being attractive, surgical, strategic, accretive deals.
Sure.
The broad market business, it is actually quite diversified.
I would say the strongest elements are around the streaming media, the Wi-Fi integration, connected home.
We have just a large roster of design wins in that part of the space, and we're also seeing, and if you look at some of the tear downs of these boxes, we're seeing three-by-three streams, which will triple our content.
And so you get $10 to $12 per box.
We're in markets like DirecTV, Technicolor, some of the Neatgear routers.
Those are just examples, so that's a real strong area.
And there's a lot of upgrades to go here in the US and in developing markets, so we like that.
Connected, home, I mentioned, some of these appliance opportunities, customers like Nest, lots of names like that.
Automotive, relatively new.
You have not only the traditional IoT applications like Wi-Fi and Bluetooth, but you have a telematics play there.
And then the other space that has been a bit quiet but we do think will turn is (inaudible) infrastructure.
We have a great deal of content with companies like Nokia Siemens, Ericsson, Huawei, and we do see that getting a little stronger, probably back half of 2016, a little bit soft so far but it's another market where we have some solid designs.
And margins, the broad markets category is by far our highest.
Margins in those average 55% plus on the application market, but those are our highest products.
So as that percentage goes up it's always for Skyworks.
I think that's a little difficult to answer right now.
I think you should expect that the adjustment that's occurring in the late December through the March quarter and into maybe into June a little bit will then be behind us, and that's an unnatural event.
And so as I say, as we stated in the prepared comments, we think that the second half of calendar 2016 looks very strong.
And it's not wishful thinking, it's more designs that we're filling both in the mobile and on the broad market side.
That as we fulfill those orders, you'll see an uptick in revenue that's pretty substantial.
No, it's our normal approach.
I think we do an excellent job of forecasting.
It starts with our sales marketing team and how they ---+ the information they get from customers, distributors, and OEMs and we always are able to that and translate that into the right kind of revenue projection.
So it's our typical process; there wasn't any new magic involved in that.
Absolutely, our roster in China certainly includes QUALCOMM, MediaTek, quad core, opticore designs, great position there, higher-end 4G LTE, Hisilicon, which is the in-house brand with Huawei.
And then Spreadtrum as well, you're right.
TDS, CDMA, another opportunity.
So they're not the biggest driver for us, but they are important and they're very specific to the China market.
We're seeing improvement out of MediaTek, and it's a very high-end content rich engines that we enjoy.
And the Hisilicon-Huawei partnership has been quite strong, so we have got a well-diversified set of products and programs, very different for each one of those partners, but we're engaged with each of them.
Well thank you everyone for your participation and for listening, and we look forward to seeing you at upcoming conferences.
| 2016_SWKS |
2016 | NSIT | NSIT
#Thank you.
Welcome everyone and thank you for joining the Insight Enterprises conference call.
Today we will be discussing the Company's operating results for the quarter ended June 30, 2016.
I'm <UNK> <UNK>, chief financial officer of Insight.
Joining me is <UNK> <UNK>, president and chief executive officer.
If you do not have a copy of the earnings release that was posted this afternoon and filed with the Securities and Exchange Commission on form 8K, you will find it on our website at Insight.com in the investor relations section.
Today's call including the question and answer period is being webcast live and could be accessed by the investor relations page of our website at Insight.com.
An on-site copy of the conference call will be available approximately two hours after the completion of the call and will remain on our website for a limited time.
This conference call and associated webcast contain time-sensitive information that is accurate only as of today, August 3, 2016.
This call is the property of Insight Enterprises.
Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited.
On today's conference call we will refer to non-GAAP financial measures as we discuss the second quarter and year-to-date 2016 financial results.
When referring to non-GAAP measures we will refer to such measures as adjusted.
Adjusted measures discussed today will exclude the gain recorded in the second quarter of 2016 on an asset held for sale, as well as severance and restructuring expenses recorded in all periods.
You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press release issued earlier today.
Also please note that unless noted as constant currency, all amounts and growth rates are discussed in US dollar terms.
Finally, let me remind you of our forward-looking statements that will be made on today's call.
All forward-looking statements that will be made on this conference call are subject to risks and incentives that could cause our actual results to differ materially.
These risks are discussed in today's press release and in greater detail in our annual report in form 10K for the year ended December 31, 2015.
With that, I will now turn the call over to <UNK> to give an overview of our 2016 operating results.
<UNK>.
Thanks, <UNK>, and hello, everyone.
Thank you for joining us today to discuss our second quarter 2016 operating results.
In the second quarter, I'm pleased to report that our global team came together exceptionally well to deliver on our financial objectives.
Each of our operating segments drove high single-digit or better gross profit growth year over year in constant currency while continuing to control discretionary expenses, which led to strong earnings growth for the quarter.
Consolidated net sales were $1.5 billion, up 2% year-over-year and 3% in constant currency.
Solid growth in our North America business was partly offset by lower net sales recorded in EMEA and Asia-Pacific.
We continue to see traditional software licensing sales convert to cloud-based solutions which, like software maintenance sales, recorded net in our financial statements.
It is important to note that this shift in consumption of software products in the marketplace has no effect on our profitability.
(Inaudible) gross profit of $209 million in the second quarter increased 9% year-over-year and 11% in constant currency.
Gross margin increased 100 basis points year-over-year to 14.4%.
This increase reflects strong sales of software enterprise agreements, higher services sales, proceeds from our $2.2 million insurance settlement, and the higher mix of software maintenance and cloud sales that I just mentioned.
Consolidated selling and administrative expenses were $150 million in the second quarter, up 1% in US dollars and 3% in constant currency.
As discussed in our first quarter call, we trimmed approximally $20 million in costs for business in North America in the mid-second quarter and we have begun to see the benefits of that in the results.
Adjusted earnings from operations increased 35% year-over-year to $59 million.
On a GAAP basis, earnings from operations also increased 35%.
Adjusted diluted earnings-per-share were $0.97.
On a GAAP basis, diluted earnings-per-share were $0.96.
Our North America business performed well in the second quarter.
Net sales in North America increased 6% year-over-year to just over $1 billion.
Within these results, hardware sales grew 8%, reflecting continued strength in demand for client devices as well as server and storage solutions.
Services sales increased 11% year-over-year, reflecting the Blue Metal acquisition we completed last fall, as well as low single digit organic growth.
Software sales grew 2%.
This growth was impacted by product mix including more cloud sales, but gross profit growth on these sales well outpaced the top line growth, and is the single largest driver of gross margin improvement in the quarter.
Solid topline growth with improved gross margin performance delivered across ---+ or leaner cost structure led to adjusted earnings from operations growth of 43% in North America in the second quarter.
Demand for IT solutions in North America is stable and we believe we're gaining share in key categories.
Our team's execution in the second quarter positions us well to deliver on our 2016 operational and financial goals.
In EMEA, net sales decreased 2% year-over-year in constant currency in the second quarter.
By client group, double-digit growth in sales to service providers, otherwise known as hosters, was more than offset by lower sales to enterprise clients.
By category, hardware sales in EMEA declined 3% in constant currency, driven by lower device and service sales, primarily in the public sector.
Services sales increased 38% in constant currency due to continued focus on license consulting and cloud related services.
Finally, software sales declined 3% in constant currency due to a higher mix of software maintenance and cloud sales.
The same dynamic of more netted software sales that I mentioned in North America is also affecting topline software results in EMEA and AIPAC.
Our EMEA team drove high single digit growth and gross profit dollars and continued to control expenses which drove adjusted earnings from operations growth of 25% in the second quarter, all in constant currency.
In Asia-Pacific, we're also pleased with our second quarter operating performance.
Like in North America and EMEA, we saw a higher mix of cloud sales and software maintenance sales, which drove our reported sales down year-over-year.
However, gross profit grew 7% while operating expenses declined 3%, both in constant currency, which led to strong earnings from operations growth year-over-year in the region.
As we enter the second half of 2016, we are excited about our capabilities and proud of the unique solutions our teammates create and deliver for clients every day.
This innovation was recently organized by Microsoft at their latest worldwide partner conference when Blue Metal, an Insight company, was named Microsoft's 2016 Internet of Things worldwide partner of the year.
We are committed to investing and growing our capabilities around IOT technologies, which is a great complement to our already strong capabilities around data center software, services and cloud.
I will now hand the call back over to <UNK>, who will discuss our first half financial results.
Thank you, <UNK>.
Overall for the first six months of 2016, we were pleased with our consolidated results across the business.
Modest topline growth combined with gross margin expansion across our reduced cost structure led to double-digit earnings growth year-over-year in the first half.
Consolidated net sales of $2.6 billion in the first half are down 1% compared to the first half of last year, and in constant currency net sales are up 1%.
In North America, net sales increased 3% year-over-year in the first half of 2016 with growth reported across large enterprise, [S&B] and our public sector client groups, due to new client wins and growth with existing customers.
In EMEA, net sales year-to-date are down 6% year-over-year in constant currency as software market conditions in the UK resulted in lower hardware sales for the region and reported software cells have declined due to a higher mix of netted software sales.
In Asia-Pacific, net sales are down 5% in constant currency also due to a higher mix of netted software sales.
As <UNK> mentioned earlier, as clients consume more of their software through the cloud we will see our topline results shift to more sales reported net.
In the first half of 2016, we saw this across all three of our operating segments in addition to our typical variances in the mix of license versus maintenance sales.
We expect that this trend will continue.
I do want to point out that while this will have an impact on our reported topline results, this accounting does not affect the profitability of our software category.
Consolidated gross profit for the first six months of 2016 was $370 million, up 5% in US dollars, and up 6% in constant currency.
Gross margin expanded 70 basis points to 14.1% in the first half of this year.
About half of this increase is due to a higher mix of software sales reported net compared to the same period last year, with the balance of the increase due to generally higher selling margins in the software category, increased sales of software enterprise agreements, and a higher mix of services sales.
On the SG&A front, consolidated selling and administrative expenses were $296 million, up 3% year to date and up 4% in constant currency.
This increase was driven primarily by the addition of Blue Metal to our business late last year, including purchase by amortization, investments in headcount in North America and EMEA, and notably higher health benefit expenses in north America.
As discussed previously, we took action the second quarter of this year to reduced our costs in North America by approximately $20 million annually and expect to realize $10 million of this amount in the back half of 2016.
Moving on down to P&L, as a result of restructuring activities completed in the first half of 2016, we recorded severance and restructuring expense of $2.3 million compared to $1.1 million for the same period in 2015.
Consolidated adjusted earnings from operations were $74 million in the first two quarters of 2016, up 14% year-over-year and up 16% in constant currency.
GAAP earnings from operations increased 13% year-over-year in the first half of 2016.
Our effective tax rate year-to-date through June 30 was 37.7%, down from 38.2% last year.
Finally, our share count is down over 2 million shares since the same time last year due to shares repurchased and retired as part of our capital deployment strategy.
All of this led to diluted earnings-per-share on an adjusted basis of $1.17 compared to $0.96 earned in the first half of 2015.
GAAP diluted earnings per share in the first half were $1.13, up from $0.93 last year.
Moving on to cash flow performance, cash flow used in operations for the first half of 2016 was $5 million compared to $96 million generated in the first half of 2015.
As a reminder, this reduction was in line with our expectations due to a single significant client receivable collected in the fourth quarter of 2015, for which the related payable was paid according to its terms in the first quarter of 2016.
We invested $5 million in capital expenses in the first half of 2016, down from $6.6 million last year.
We spent $44 million to repurchase approximately 1.8 million shares of our common stock compared to $86 million during the first six months of last year.
In July, we repurchased shares using the remaining $1.5 million of the current share authorization.
All of this led to a cash balance of $175 million at the end of the second quarter, of which $154 million was resident in our foreign subsidiaries, and we had $85 million of debt outstanding under revolving credit facilities.
This compares to $176 million of cash and $51 million of debt outstanding at the end of last year's second quarter.
From a cash flow efficiency perspective, our cash conversion cycle was 15 days in the second quarter of 2016, up one day year-over-year due to the relative timing of client receipts and supplier payments in the quarter.
I will now turn the call back to <UNK>.
Thank you, <UNK>.
Moving onto our outlook for 2016, we were pleased with our team's execution in the second quarter.
I believe we are well positioned headed into the second half to continue to win in the market place and deliver on our commitments to our clients, teammates and shareholders.
Given our first half of 2016 financial performance, we are maintaining our outlook that net sales in 2016 are expected to grow in the low single digit range year-over-year, and we are increasing our adjusted diluted earnings-per-share outlook for the full year to a range of $2.37 to $2.47.
This outlook reflects an effective tax rate of approximately 37% to 38%, capital expenditures of $10 million to $15 million for the full year, this outlook excludes severance and restructuring expenses, and a gain on building sale recorded during the year.
Thank you again for joining us today.
I want to thank our teammates, clients and partners for their dedication to Insight.
That concludes my comments.
I will now open up the line for your questions.
Great question, <UNK>, and one we anticipated.
I guess what I would say starting off is that we don't give quarterly guidance.
So our internal numbers for the second quarter were higher than the street consensus for the second quarter.
Similarly, our third quarter is lower than the street consensus for the third quarter.
We gave guidance for the full year, and at the time we gave that guidance for the full year the expectation was that we would be in the middle of that range.
When you look and dissect the points in there, at the time we gave the guidance, there was a $2.2 million benefit from a legal settlement that <UNK> mentioned.
At the time we give guidance we were not aware that that was going to be actually received in the second quarter.
From an accounting perspective we can't actually record it until it is received, so that was an unexpected benefit that we had in the second quarter that would not continue.
However, the second quarter is our largest quarter in general.
It is usually our largest quarter.
Compared to last year it was a little bit light because we didn't have a great second quarter in 2015.
What drove the results in the second quarter was around software and an over performance significant with regard to software and the increased profitability that we got from software, specifically as it related to cloud [SKUs] being netted and the growth that we had in cloud SKUs.
Cloud today represents around 11% of our gross profit, and that has an impact ultimately in terms of driving to the improved performance around the cloud in this ---+ around software ---+ in this particular quarter, given it is the larger software quarter.
We are not from our perspective guiding down further remainder of the year.
We are guiding consistent with the outlook that we had at the point in time that we gave guidance.
I think we had a conversation then about the third quarter being soft.
Unfortunately, we were not clear maybe that was going to be soft from an EFO, from an earnings perspective.
I think most people interpreted our comments as a revenue comment.
It is true also from a revenue comment but very specifically on a year-over-year basis we are anticipating that the third quarter from an earnings perspective will be down at the EFO line year-over-year.
North America in Q3 of 2016 ---+
Our revenue will not be down year over year in September.
Operating profit will be down in 2015.
We had extraordinary results, if you remember, in North America last year.
Revenue grew 15% and EFO grew 30% and that is not expected to continue to repeat this quarter.
Yes, so, <UNK>, as we indicated last time it fully came in place and it came in two waves.
The largest wave of those folks just joined us a little over two weeks ago.
As we indicated, we expect that to be a second half number, so there is really no contribution in the June quarter from the teammates that we acquired there.
But we do certainly expect that contribution to start occurring in Q3 into Q4 and beyond.
Yes, we think, as we mentioned last time, that we believe that these are professionally trained salespeople that already have been in place.
We believe the GP dollars will be neutral to the SG&A costs here in the second half of the year, is what we have modeled.
We believe we will perform to that.
Yes, there's no question I think as you have seen in the channel overall there's been a good acceleration in Q2.
As you particularly mentioned, Microsoft is certainly accelerating strongly in the cloud with both their Office 365 platform and Azure.
As was mentioned, of course, that comes in as net from a sales point of view.
So it is starting to contribute meaningfully to our GP dollars.
The cloud revenue, we expect that trend would certainly continue going forward based upon the knowledge that we have.
As far as the stability of the programs that you mentioned, they're the largest software provider.
Yes, they look stable from everything that we have here, certainly for the foreseeable 12-month period.
You are implying the EFO margin from the guidance that we were giving, is that how I should interpret it.
Okay I guess the first point I would make is that the margin profile that we experienced in Q2, it's typically the highest margin profile of any one of our quarters, primarily around the impact of software that we have historically had.
Also this year in particular, the impact of the netting that we talked about, specifically as we talked about the cloud and the growth of cloud SKUs on a year-over-year basis, that trend, higher netting around cloud SKUs, etc.
, is going to continue going into Q3.
However, software as a percent of our total business in Q3 is not going to be at the same magnitudes, it won't drive the same margin impact on Q3 as it had in Q2.
We believe actually that we will see some margin expansion, gross margin and EFO margin expansion, in the second half of the year, not at the 4% range that we saw in Q2.
If you're looking for a 4% number for Q3 and Q4, that is not going to be there, but we do anticipate some margin expansion in the second half.
Not necessarily in Q3 because, as I said, we anticipate based on the outstanding Q3 that we had in North America in 2015 that we will see a little bit of degradation in our EFO in 2016 as it relates to North America.
It is really strictly the netting impact that we are seeing with the cloud.
We are again, that comes in net income versus gross.
That is accelerating.
That is the only reason.
You are seeing hardware grew pretty nicely.
I would really focus on the GP dollar portion of that because that is where it normalizes itself.
I think you are seeing that, those numbers look fine.
That is completely what it is.
In relation to your comment on Brexit, really early to tell on that.
I think certainly the quarter performed well.
It was too early to have any impact but as we go forward, I mean, the one benefit was the UK did address the government very quickly.
I think that added some level of confidence to the government, but we will start to see it play out.
The areas we will watch first will be, of course, public sector.
As you would expect that to be the most impacted if there is an impact, and that typically happens the first quarter of the calendar year, that's the biggest quarter.
But no indications of any real pause at this point in time.
Just the confidence levels are something we're watching right now.
<UNK>, I would just add to that on an actual dollar basis, the British pound is down quarter end to quarter end 13% or 15% year-over-year.
It is now at $1.32 versus $1.43 or $1.44 that it was this time last year.
As we do that conversion, that will have a little bit of an impact also on the revenue line.
No, that is actual dollars.
| 2016_NSIT |
2016 | VICR | VICR
#That was ---+ yes.
<UNK> will give you that.
I believe they were both down.
Yes, they were both down.
I can give you the total BBU number.
(inaudible) that both bookings and revenues for BBU were down, but let me give you a little bit more color regarding what's impacting that.
So, as suggested in prepared remarks, the defense market, particularly the US defense market, remains unhealthy with programs getting delayed.
I think of particular significance, what we've seen within the last few quarters has impacted BBU bookings and shipments and revenues, has been (inaudible) with respect to some other programs, of particular significance as noted in the prepared remarks, applications involving some railway type of hardware, particularly in Asia.
Now this detection is that this business, particularly the last one, which is in effect in the short-term, more predictable in terms of visibility, should start coming back over the next quarter or two.
There were some temporary gates that should reopen; that's what we are told.
So we don't see in the decline of recent quarters in BBU bookings and shipments a significant trend, and part of the reason why I can say that with confidence is that we track, as you might imagine, very closely new product registrations and when it comes to our classic bricks, the activity in terms of new registration has actually been very healthy, and that's indicative of future demand for those products, including new applications.
So at 10,000 feet, we see our classic Brick business being subject to fluctuations as it has in the past, and from time to time, the fluctuations are down, they are up.
That business isn't going to go anywhere up or down as you average through a number of quarters.
The growth is going to come from the new products, the ones we've been primarily focused on and we've been talking about.
And that growth is obviously going to start impacting the overall growth rate more and more as the fraction of revenues that are derived from the new products gets to be a larger percentage of the total.
So up to recently, fortunately there's been a small percentage.
It has itself been subject to ups and downs because the customer base has been relatively limited.
As we all know, there had been accelerations and then decelerations going from VR 12 to VR 12.5 and then to VR 13.
But now that we have grown the customer base, diversified into other types of applications, and guiding the new products business to be a larger percentage of the whole, we should begin to see the benefits of both that business we have a more statistically, more predictably, as well as over time leaving the classic legacy Brick business behind to be less significant while it is enjoying its old age.
Yes, we think we've seen, at least in the short-term, the bottom of it.
We see it coming back over the next couple of quarters, at least based on the visibility we have.
Should the difference market get healthier, there could be more significant pickup.
Now, in defense applications, we also have a lot and a growing presence with our new products, and obviously in the longer term those are going to be picking up where bricks get eventually left behind.
But we don't see cannibalizing our own Brick business anytime soon.
It has been very resilient for 30, nearly 40 years, and for everything from ---+ based on everything we can see, it's expected to continue to be resilient at least for the next 10 years.
Yes, yes.
Again, this is still reflective of some of the vagaries of how these orders are placed; they are not perfectly matched within a quarter.
Generally speaking, they should be rising in the same proportion.
They don't always do that.
And I think, again, as we progress to a more statistical VI Chip business for our power components and the power component business in general and the power system business based on the new generation of products, these numbers are going to, from quarter to quarter, come out to be more consistent and less bumpy.
Well, that's the case with Picor products.
I think with VI Chip there's been a grassroot growth in a variety of applications, defense applications, industrial and other kinds of applications.
And so the VI Chip business has been growing over the last year, even in those quarters, in those timeframes in which the (inaudible) demand was suppressed.
That's the best visibility we have at this point.
Well, we expect to see VR 13 to be a significant contributor.
We also expect other initiatives, and we have several in different end markets to become more significant as we get towards the latter half of next year.
There's a lot of missionary work that we've been doing on a number of fronts with new products, and these investments, these long-term investments, will start paying off in terms of bookings and revenues over the next few years.
So I don't want to pin the revenue growth for 2017 down at this point in time.
There's a lot of things that could happen next year.
I think there is another key milestone that we have been talking about in terms of our 3 by 5 initiative and point of inception that will in our minds mark a [phase sensation], if you will, in the state of the Company from what it has been to what it is going to be in terms of revenue run rate breaking ---+ approaching and breaking through the $300 million level.
We see that coming at the end in the fourth quarter of next year.
That's where we see that in terms of bookings rate coming about.
I don't think we provide a detailed breakdown.
(multiple speakers) We just provide the trends as discussed earlier.
For obvious reasons, we don't want to really expose the specifics of these various contributions.
Beyond the kinds of things we have discussed with a growing rate of acceptance of VI Chip, Picor products, they are beginning to represent the more substantial percentage of the whole.
And there was a point in time in which, as we had discussed, there was of some concern because of the fact that, once upon a time, in particular with VI Chip, we were not enjoying margins that were [representative of] what should be achievable.
But we have been making good progress with that, so we now feel quite good about the change in mix and the new products that we've invested so much in developing, in effect, taking over the bigger share of the total revenue as we get in 2017 and more so in 2018.
But beyond those general commentaries, we're going to keep the percentages from getting too detailed.
Those are segment data that's aggregated.
So I don't have those numbers in front of me.
I think the information that's provided in the Q obviously will continue to be provided in the Q.
Yes, it won't be long.
Yes, that is happening, and we are gearing up for the action on that.
So that's an example of our providing a front end VIA solution in a computing application.
It's not [official] point-of-load type of device that we've talked as much about.
It's a front end converter, and it's remarkable because of the fact it's in the new VIA package.
By the way, we've invested as part of the capital equipment deployment has been going on, we've invested in VIA manufacturing line in preparation for customers' uptake of VIA products.
So it's a good development because we see millions of dollars worth of revenues next year from that particular opportunity and growing its current revenues for VIA products.
As time goes on, it is more of the VIA products getting introduced, and there is going to be an accelerating pace of activity with respect to VIA products.
So we are also essentially investing in capacity with respect to point-of-load solutions.
We are investing in capacity with respect to chip packages and in particular the kinds of Chip VTMs, Chip PRMs, Chip MCMs for power package that were briefly discussed earlier in the call.
So this capacity expansion is taking place, again in anticipation of requirements for all these products.
But, going back to the VIA products, we are doing well.
In particular, so-called VCM VIAs, which were introduced after the VCM chips were themselves introduced, they are getting good traction with customers that value the fact that the VIA package offers a turnkey solution that provides not just the real power conversion function, but everything that needs to go around it in order for the customer to, in fact, plug and play in this particular case a front end converter that includes filtering, the rush protection, the (technical difficulty), secondary side communication, all of the bells and whistles that enable a very fast time to market, highly predictable deployment of a front-end building block.
So I think there's good news on the VIA front to match expectations.
It's not going to turn into $100 million business overnight.
We see based on the registered wins and design activity, we see an escalation with millions of dollars going to tens of millions of dollars over the next year to three years.
It is, it is.
I think there are several programs involved with one customer.
The first program, these programs are phased ---+ this is the first program that goes into production early next year, and there are other programs with the same customers that are going to fall on the heels of the first.
So we view VIA products as power system products, and we generally approach our business in terms of point-of-load and power system products.
So the point-of-load solutions are what we call power component solutions.
They tend to be relatively small modular building blocks that get deployed, typically next to processor, ASICs or other kinds of point-of-load hardware.
Whereas VIAs and new kinds of bricks that we are going to be introducing with chips within them tend to be removed from the point-of-load that they provide power to the point-of-load, but they process it from a source which can be the DC bus or a single-phase or three-phase power source.
And those kinds of products are power systems products that ---+ going back to the heart of your question ---+ are in some respects more like the classic bricks.
Now there was a point in time in which the classic bricks in distributed power played the role of a point-of-load device.
But a lot has happened since then, power system architectures are evolved and evolved again, and at this point in time, the right partitioning is of a different kind.
Brick-like products are really more front-end type of devices, and VIA is a perfect example that we're going to have some new products that are going to be referred to as super bricks; those are beginning to come out for some customers and some engagements starting in Q1.
Those kinds of solutions are going to be front-end power system type of building blocks that complement the point-of-load solutions.
And, again, our strategy is to give customers greater flexibility, greater architectural flexibility of our system flexibility to implement the best solutions with a faster time to market, with a high degree of predictability, great cost effectiveness, if you will, soup to nuts.
In this particular analogy, the soup is the front-end VIA-like product, and the nuts are the point-of-load power components.
So we are going to be evolving the way in which we track these things and manage them and make the most out of them.
We very much believe in a divide and conquer strategy.
It brings about focus, it brings about accountability, it brings about greater level of performance, and we are adapting to the future requirements to project to our customers the best solutions, both at the point-of-load and in the front end that leads to the point-of-load.
And in concert with that vision, we are going through some internal refocusing to again provide the best in terms of the divide and conquer strategy.
Let's maybe leave that for the next call.
I think we are getting close to the end of this one, and I don't have specific data in front of me.
Let's make a note of it, and I can address it the next time around.
I think in general terms I can tell you, as suggested in the prepared remarks, that this is a market we're focused on, and we have some significant engagements.
One of the products that has opened the way to those kinds of applications have been PFM-like products and other kinds of products that we have been introducing over the last few years.
You're welcome.
Maybe if there is another short question, we'll take it.
Otherwise ---+
Very well.
Thank you very much.
We will talk to you in three months.
| 2016_VICR |
2015 | WFC | WFC
#It was ---+ we had a $127 million gain in the first quarter and a $193 million loss in the second quarter.
And again, I just want to describe that as the accounting treatment for the hedging program that we have there.
But ---+ so think of this ---+ the delta between Q1 and Q2 as what creates the more outsized number.
No, normal would be around zero.
You would expect it to be zero over its life.
Sometimes it's a little positive, sometimes it's a little negative.
And it's driven by swap rates and currency movements in the currencies where we issue.
What we repriced in wholesale is deposits, and for a variety of customers, the ones who seem to have acted most strongly in the deposit area were FIs, which for all the reasons you can imagine, have relatively low value liquidity deposits.
And so, we have been paying less for those deposits, or in some cases, and in some jurisdictions, have been charging a little bit for those deposits, and that's what we were referring to.
Yes, you know, it's not as a result of Wells Fargo's specific pricing strategies.
It's just the chips falling where they did in terms of flows, volumes and other activity in the business.
And as you know, in our trading business, we have what you are thinking of which is market-making and customer accommodation activity.
But we also have the impact of our own deferred comp program, etc.
, which makes that line a little bit noisy.
But it's not as a result of any conscious business decision to price things differently, to do any more of this or less of that, it's just where the quarter fell.
I wouldn't say that pricing is getting any better.
You would think that pricing might be getting better in areas where other banks are pulling back from providing financing or liquidity to customers, which is part of the discussion around how some of the bigger trading oriented banks have been providing repo, providing securities finance, etc.
, and have limited their appetites.
But prices haven't gone up that much.
I think capacity has come out and people have had to figure out how to deal with that.
So at the moment, it's still very ---+ it's as competitive as it ever was, and the pricing reflects that, but not because of conscious strategies.
That's a good question.
We don't model loan growth necessarily as a reflection of prior quarter GDP, but it's an interesting relationship.
I think our point is that the areas where we've been experiencing organic loan growth all are still very active.
We're still very competitive.
We're getting more than our fair share in most of those categories.
We've got further to run in card I would say than other people because we are starting from a smaller base.
And then in some of our material businesses we've got customers who have been holding back on their borrowing capacity.
So in the corporate ---+ but in the commercial space in particular where we are a very big player, our customers are still very cash heavy, which is reflected in our deposits, and have maintained very low leverage profile.
So that if they got a little bit more enthusiasm around M&A, around organic growth or building a new plant, etc.
, expanding their businesses, they have lots of debt capacity to do that.
We would expect to see some of that in line utilization or demand for funded assets.
But, the real take away is that we're very well-positioned in all of our key lending markets and competing well today.
And in those areas where there might be incremental drivers of demand and we hope to benefit from it when it happens.
And then, of course, we're working on a few strategic or inorganic activities as well.
We didn't.
We indicated the size of operating losses in total.
The amount of the change ---+ and the amount of the change is reflected ---+ reflects increased litigation accruals, but we don't split that out from our other operating losses.
It's for a variety of matters, most of which you would already be familiar with.
Yes, that's ---+ as <UNK> was mentioning earlier, we are trying to repurpose our expense dollars to their highest value area.
And so, there's a collection of programs and ways of doing business, of thinking about how we spend our resources that are designed to do just that.
So it's an internal ---+ it's a relatively formal program and it's around some operational improvements, it's around some of our staff functional alignment, some of our technology spend, etc.
, and it really is designed to make sure that where we're spending money ---+ and of course we spend a lot of it, that we are ---+ we're putting it in the most impactful places.
Well, dollars are fungible, but the way we are thinking about it is we're directing those dollars toward places that are going to make a difference for customers, which would drive revenue, and you could see bottom-line improvement as a result of that.
But as I mentioned in response to an earlier question, it's not really designed to drive us down in the efficiency ratio, or to drive total dollars of expense down, all things being equal.
It's designed to make sure that we are spending the money that we are spending in the most impactful place.
Well, it's going to depend on what happens with deposits versus loan and other earning asset growth primarily.
So if we continue along the path that we are on right now, then you would think that it would probably stay in or about this range.
There is not much else ---+ deposit pricing is quite efficient here at 8 basis points.
So as we get more invested, as we add more loans and we ---+ if we convert cash to higher-yielding assets, then that should be an improvement.
Over the course ---+ if you fast forwarded a few years, we'll probably be layering in more senior unsecured in connection with TLAC, that will probably have a negative impact, although relatively modest in the overall scheme of things.
We still expect net interest income in 2015 to be higher than 2014, which is, frankly, the most important thing, all things being equal, and that's what we're driving toward.
Yes, let me just go back to the expensing just one more time so we're all on the same page.
There is talk on this call, and of course, we listen to what the chairwoman of the Fed has to say about rates.
But when we plan internally here, we don't consider rate increases as part of the ongoing justification for an investment in anything.
So in other words, we don't ---+ you would not hear language like I want to make this investment because when rates turn around and go back up, then this justifies ---+ this investment will be justified.
We don't know what's going to happen to rates.
And if rates do increase, either long-term or the short end or both, that's a benefit to us.
But for the last five, six years, you could've said the same thing, and it didn't happen.
So that's why there is a continual consideration here and pushing ourselves and our thinking to eliminate work that's no longer beneficial, taking out processes that don't add value and investing in places and things that do add value.
And make us more competitive, more nimble, more relative to the constituents that we serve.
Sure, so there's a handful of things.
It's the mix of the assets that we're adding to that portfolio from one period to the next, which reflects customer activity, customer demand, both in terms of what's rolling on and what's rolling off.
Also, you're seeing in that calculation, the impact of having swapped portions of that portfolio from floating to [fixed] because that impacts the yield.
And we've done that partially as the recognition that we think we're going to be in a lower long-term rate environment for a longer period of time than we might have previously thought.
So that impact is ---+ runs through there as well.
Still asset sensitive, but not waiting forever for rates to begin to move in that portfolio.
So on the first question ---+ remind me of the first question again.
Yes, it was predominantly all E&P.
The services credits have ---+ first of all, they don't go through the exact same ---+ there is no borrowing base redetermination to occur in services companies; it's more like any other corporate in terms of how they are reviewed.
But the impact has not been felt there in quite the same way as it has with E&P companies.
And then back to the shared national credit review.
It really ---+ in terms of the negative outcomes or the suggested downgrades, it really was primarily an energy set of conclusions this time around.
Yes, well, we've been ---+ as we've talked about, ahead of this end of draw expectation for some time now because it was pretty easy to schedule.
And we're going into a couple of years when those 10-year draw periods will be coming to a close from the heaviest periods of issuance right at the ---+ prior to the turn of the cycle.
And, frankly, I would say we are experiencing a better outcome than we originally imagined, in part because of our ---+ the focus that we've had, the team that we've had facing ---+ the proactive work that we're emphasizing, trying to get people re-fied into something that is suitable or more tolerable for them to repay.
So, things are going well.
And losses in that portfolio this quarter are in the 56 or 57 basis point range, so ---+
Very tolerable.
I don't ---+ on this call, our real estate group certainly knows, because that's how ---+ that's been managed so they'll know what they have left and what is gone already.
But what I'm focusing on when I say that there is a plan underway that's being executed that's working, of course, for the ones that are still there and then have it re-fied out.
So when we use the term duration, we're using it in that context but not to define a duration of the balance sheet, but really to think about using those tools, the investment portfolio and loan portfolios, to impact our overall asset or liability sensitivity.
And so the net conclusion of that is that, not terribly unlike where we were at our last Investor Day, we find ourselves still asset sensitive.
We mentioned a year ago May that we thought that we were ---+ we had probably 10 to 30 basis points worth of net sensitivity ---+ net benefit from a 100 basis point instantaneous parallel movement in rates, a very stylized example.
And where last we're less asset sensitive ---+ if we were at the mean then we're at the lower of that range today, we believe.
It's probably a conservative estimate.
That's how we generally calculate things.
But by adding securities, by swapping floating rates to fixed, and other actions that have occurred in the growth of the business, we've made ourselves a little bit less asset sensitive because of the belief that we could be in a lower rate environment for a longer period of time.
And we're earning today rather than maintaining all of that sensitivity for the future.
We still have plenty of it and we'll develop more of it as time passes, but that's how I would answer that question.
I would expect that we would continue to be adding securities to our securities portfolio, for sure.
There's nothing that I would point to.
We ---+ the production occurred the way we would have expected it to.
We ended with a relatively long ---+ relatively large pipeline as well.
So nothing different there.
Yes, it's tough to be that precise about it, although I'm sure there are people in Wells Fargo Home Mortgage who are thinking about it as granularly as the question that you are asking.
Certainly, in the first quarter, as rates rallied hard and that pipeline really, really grew, applications came in at an increased pace.
The capacity constraints to deal with that both at Wells Fargo and in the industry are supportive of higher margins, as people use their scarce capacity as beneficially as they can.
So you'd expect, if that's a high point, for things to slip a little bit from there.
In terms of where they've gotten to and where they are now, we expect them to continue to be in that range.
The full range, frankly, is a pretty attractive place to be operating.
And as long as we can stay higher in the range like we have, we will be thrilled for that to happen.
There's also, from one quarter to the next, a mix between what's happening in retail versus what's happening through others is going to influence our gain on sale and that might look different from one originator to another.
I think that's an important consideration.
But I mean, frankly, I would look at it quarter to quarter and then seasonally adjust it to think about what the steady-state is.
But the last thing I'd say is that we're ---+ again, we're pretty happy with where things have remained, given how competitive that market is, given how much capacity there is and we're happy to be operating here.
Yes, I think, just to support <UNK>'s comment, I remember when gain on sales years ago were 40, 50, 60 basis points.
So the pricing discipline, even with the capacity and the size of the market is a ---+ I think a good thing for Americans, good thing for borrowers, good thing for the originators because we're getting paid for the work that we're doing, the value add.
So ---+ what's been happening for a while.
We're talking about it a little bit more now and maybe it was a little bit starker in this quarter because deposit growth slowed also say you sell cash balances go down while both securities and loans went up.
But as you suggest, regardless of what's happening with short-term rates and over what period of time that normalization of policy occurs, it's our expectation that the longer end of the curve, that we're going to be lower for longer than we would have thought six months ago, a year ago or a couple of years ago.
And how we are managing the balance sheet is a reflection of that.
Well, in the last 6 to 12 months, I would say what's happened with rates around the world has been a big reminder that a 2.5% US tenure is a really attractive asset and could be for a really long time.
So that's why I say regardless of what's happening with Fed funds, we are preparing ourselves for a long march at the longer end of the curve.
And if we're wrong, we have to be prepared for that in terms of what it means to capital, etc.
, and we certainly are, and we sensitized that drastically to make sure that we've protected our balance sheet.
But in the meantime, we're getting our assets more productively deployed.
I'd point out, there's still $250 billion worth of cash in the bank, so there's plenty of short-term liquidity and dry powder for what happens if we are wrong and there are more attractive entry points on the way back up, if that were to occur, but it's a good question.
Always.
Hi, <UNK>.
Yes, about 25% of our production are jumbos and that includes, of course, many of our most valuable customers in terms of the breadth of the total relationship.
We carry them on our balance sheet, as you know.
And I think the total category right now for jumbos on our books is about $120 billion, $125 billion of the call it $1.7 trillion overall.
So, in terms of staffing, I'm sure it's true that we're probably a little bit heavy in some areas around loss mitigation and working NPA's and foreclosed assets through the system, versus where we might be in a completely normalized point in the cycle just because they're still elevated, so there's probably opportunity there over some period of time.
From a policy normalcy point of view, there are still other things happening, whether it's agency reform.
The relationship between the FHA and the industry is still not completely settled and that has to happen for people to feel good about things.
There's still no meaningful secondary market for nonconforming loans and there was a good one for prime, jumbo loans that existed pre-crisis, and so at some point that probably has to reemerge and that hasn't happened yet.
But we're just as committed to the business.
It's a very important part of the relationship between us and our customers because buying and financing a home is one of the most significant things our customers will ever do.
We enjoy our status as the largest mortgage servicer in the land and our status as the largest mortgage originator as well.
So we're working hard to try and shape good outcomes in those areas that are still unsettled and we're making the most of it during the period that we are in.
And, <UNK>, it's an insightful question because I think part of the distinguishing features of big scale players in this business whether your successful or not is how quickly you can scale up when business opportunities present themselves and how quickly you can scale down.
And we think we're pretty good at that, among other things, and some are surprised the mortgage market has not come back stronger, but we went through a pretty deep downturn.
This was the asset class that had the problem in 2008 and 2009, and it steadily ---+ it's improving and healing, but it's going to take time.
And so, like <UNK> said, we really like this business for a whole host of reasons.
Well, the Pick-a-Pay was probably the most problematic of that portfolio.
That came over let's say in the $120 billion range ---+ $120 billion or so; is $54 billion, give or take now.
And the average loan to value on that is in the [$60 billion's].
So ---+ and if you look at ---+ if you look at the overall servicing portfolio we have, it's 94%, 95% current.
And so we've ---+ still issues going through there, there are some judicial foreclosure states that we're still having to work through, but for the most part, it's performed above our expectations, especially with respect to the Wachovia part.
And we are ---+ I think were in the later innings of working on this.
And as <UNK> mentioned, there are some opportunities to take some costs out.
The cost of servicing a current loan versus one that's delinquent is such a big difference.
So when people look at these portfolios, you really have to look at the past dues because it really ---+ and the ones in foreclosure because that really skews the costs on those.
I know that this is clear in the materials, <UNK>, but we're ---+ our nonstrategic or wind down portfolio is ticking down at $2 billion to $3 billion per quarter and there's $50 billion-odd of it left.
So the tail of it will be here for a while.
Thank you.
Well, this concludes our call.
Thank you again for spending time with us.
It's always enjoyable for us to represent our 265,000 team members and the work that they do every quarter.
And <UNK> and I and <UNK> will see you next quarter.
Thank you very much.
| 2015_WFC |
2017 | SWM | SWM
#Thank you, Frederic.
I'll now review our financial results, starting with segment performance.
In the first quarter, AMS net sales increased 41% to $100 million.
Organic sales grew 3%, and the Conwed acquisition drove the remainder of the growth.
GAAP operating profit was $8.9 million or 8.9% of sales.
Adjusted operating profit was $17.2 million or 17.2% of sales, up 470 basis points.
The margin expansion was largely driven by organic sales growth and favorable mix as mentioned.
Both the strength of surface protection products and exiting low-margin industrial sales provided mixed benefits versus Q1 of last year.
The addition of Conwed's high-margin operations also provided a solid lift to prior year's adjusted segment operating margin of 12.5%.
As did the realization of approximately $0.5 million of early-stage synergies.
The Engineered Papers segment's net sales were down 7%, driven mostly by volumes as well as pricing concessions and decreased royalties.
The adjusted operating margin was 20.6%, down 470 basis points due primarily to the previously discussed impact of lower LIP and RTL volumes and the associated impact on overhead absorption compared to last year as well as the manufacturing inefficiencies.
We expect EP segment adjusted operating margins to improve from the first quarter level and finish the year in the low 20% range.
Corporate unallocated expenses were up slightly to $9 million.
CEO transition expenses resulted in approximately $1 million incremental costs and offset declines in other areas.
On a consolidated basis, net sales increased 9% but decreased 4%, excluding Conwed.
Adjusted operating profits were nearly $36 million, down $1 million from the year-ago quarter.
The adjusted operating margin was 15.3%, down 170 basis points.
Currency movements were not impactful to consolidated sales and operating profits.
Regarding items excluded from adjusted operating profit, AMS segment noncash purchase accounting expenses more than doubled to nearly $8 million.
This increase was due to the added intangible asset amortization and onetime inventory step-up charges related to the Conwed acquisition.
In Engineered Papers, restructuring expenses decreased to $0.5 million from nearly $1 million a year ago.
Shifting to consolidated earnings.
First quarter 2017 GAAP EPS was $0.45, down from $0.69 in the prior year.
Adjusted EPS was $0.66, down from $0.80 in the prior and excludes restructuring and impairment charges and purchase accounting expenses.
As mentioned, a notable year-over-year comparison factor was a $0.04 gain in Q1 of 2016 from the sale of water rights, whereas, we had no comparable items this year.
In addition, we experienced an increase in our quarterly effective tax rate to 34.3%, driven by a higher proportion of earnings generated in the U.S., lower foreign tax credits, an increase in tax rates in certain geographies, and some discrete items.
As disclosed last quarter, the previously low tax rate for our LIP printing facility in Poland increased significantly due to a change in tax regulations.
After the discrete items, the first quarter 2017 effective tax rate would have been 32%.
The impact of currency translation was negative $0.01 to both GAAP and adjusted EPS in the first quarter.
While first quarter earnings were lower versus last year, we note that first quarter adjusted EPS of $0.66 was basically in line with our expectations.
In the context of our full year adjusted EPS guidance of $3.15, this would imply the combined EPS for the remaining 3 quarters would be stable compared with last year's result.
Over the course of the year, we expect continued organic sales growth and margin expansion in AMS, continued Conwed integration and synergy realization, LIP comparisons to become more favorable, continued RTL declines, and a pickup in paper segment margins compared to the first quarter.
First quarter 2017 free cash flow was essentially neutral.
Historically, first quarter is a seasonally low cash-flow period.
Compounding the seasonal factors was anticipated higher investments in growth-related CapEx.
We called out we began upgrading the paper line in 2016 to produce new specialty filtration paper, and we're pleased to report the project is now largely complete.
This project contributed to total capital spending of about $12 million this quarter versus only $5 million last year.
We expect stronger free cash flow through the remainder of the year.
From a leverage perspective, per the terms of our credit facility, we were at 3.2x net debt to adjusted EBITDA at the end of the first quarter, up from 2x at the year-end 2016, driven by the increase in debt with the closing of the Conwed acquisition in January.
As communicated at the time we announced the Conwed acquisition, we expect to return to the mid-2x range by the end of 2018.
Now back to <UNK>.
Thank you, <UNK>.
Joining SWM at this juncture is such a unique opportunity with exciting developments across both of our businesses.
This is also an ideal time for transition giving the clear execution plan for the next 12 to 18 months.
With our operating priorities in place, I look forward to spending the next several months assessing our global capabilities, meeting our employees and learning more about our customers, products and operations across both segments.
Despite the significant changes at SWM with the creation of the AMS growth platform, the story is far from complete.
Integration and execution on the tangible opportunities within reach today is clearly the immediate focus.
However, our sights remain on continued evolution of the business to drive sustainable long-term growth.
Yes, Dan.
What we mentioned previously is that we see ourselves in a position to exit 2018 in the mid-2x net EBITDA range, and so we very much see ourselves tracking to that early days.
By end of 2018.
No, I'd be happy to.
And first of all, thank you for the kind words.
I look forward to working closely with you as well.
I'll try to give you a brief background.
So I'm an engineer by training, and I've had numerous technical and business leadership roles throughout my career.
I've led global businesses that have manufactured products for use in paper manufacturing, nonwoven manufacturing, polyurethanes, and so I've had previous experience in those markets as well as experience in the oil and gas industries.
I've also spent about half my career living overseas both in Europe and Asia.
So I have on-the-ground experience growing businesses in international geographies, which will represent good growth opportunities for us.
And then finally, I've had executive positions involving leadership in both strategy development, mergers and acquisitions, and I've led successful acquisitions and integration activities all around the world.
So when I step back, I think my background will greatly complement the already-strong leadership we have here at SWM.
And I'm really looking forward to the opportunity to make a contribution to work with the team to grow the company going forward.
| 2017_SWM |
2016 | DPLO | DPLO
#Outside of the acquisition, it is absolutely, it is still the implied guidance for the full year.
It's actually not much more complicated than that, <UNK>.
In fact, in the last couple of years the impact on Diplomat has been the highest in those quarters.
Thanks.
We do see some significant opportunities.
I would say that both Diplomat physicians and particularly patients are in a win-win opportunity now, because existing drugs, like Imbruvica, and like so many of the other drugs we've talked about out there, are getting continued indications, and some of the newer drugs that are already blockbuster, there are drugs that $1 billion and $2 billion blockbusters today that by 2020 are expected to be $3 billion and $4 billion blockbusters, because they're going to get broader indications for larger patient populations.
Conversely, some of the brand-new drugs that are coming to market are going to stand on their own for patients.
Remember, I talked about first-in-class drugs, but there were 21 drugs in that list that were orphan therapies, and many times in an orphan therapy, it is also first in class, and sometimes it's the only available treatment.
So, I think that you're going to see the best of all worlds.
New drugs coming to market are going to replace some of the older drugs, and some of the older drugs that are already on the market are going to receive additional indications.
There's times that's going to be a crossover, like we talked about with Revlimid and Ninlaro where you're going to see more than one direction that a doctor will have a chance to treat a therapy.
And that's a win for patients, because we're seeing some dramatic improved results when we can tackle a drug ---+ a disease from more than one direction.
Yes.
Hi, <UNK>.
We've certainly quantified the impact on revenue, and kind of a percentage contribution.
So, it contributed 6% of our revenue in the quarter, or 10% year over year.
On the gross profit line, it's really about the same, about 10% gross profit year over year, and obviously, it all drops down to EBITDA, so a little higher there.
So, just to clarify why it changed and why it was a benefit to the quarter, I hate to get too technical on something tax-related, but we have always had cash tax benefits from anyone who exercises in the money stock options.
Those have never shown up on the income statement.
There is an accounting guidance change happening in the first quarter of 2016.
So, we now actually see the benefit in the effective tax rate, and that's essentially what took us down from maybe your expectations to 36%, and that is reflected in the guidance.
Sorry, just to be crystal clear, <UNK>, we didn't update any guidance for rest of the year, which means we expect that same 40% rest of year.
The 36% was a very specific impact of option redemptions in the quarter.
To the extent they happen in the future, they would bring down our effective tax rate in the quarter they take place.
But we do not expect them within the guidance.
Yes, it's something we've broken out specifically in the past, <UNK>.
I can tell you, though, if you look at versus a year ago, it's obviously helped by both the BioRx and Burman's acquisitions, and of course as you pointed out, hurt by the exiting of the compounding business.
We haven't necessarily quantified the impact of all those things.
I think one thing ---+ go ahead.
Yes, as it shouldn't surprise you, their revenue per prescription's going to be higher than the Diplomat average.
Very consistent on a like book of business, however, so their oncology prescriptions would yield very similar revenue prescriptions as ours.
But as you know, our average oncology prescription is somewhere in the $10,000 range versus our average Company, which is somewhere in the $4,000 range.
Sure.
Thank you.
| 2016_DPLO |
Subsets and Splits