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2015 | RAVN | RAVN
#Sure.
I'll answer high level, and, <UNK>, if you want to provide more color, feel free.
So, we're starting to see some of the impact in Q1 from the adjustments we made back in November and January, but those have been ---+ those will start to show up now.
The larger part of the impact is going to come as we close out our first quarter, and start to impact Q2 and Q3 and Q4.
So, that's sort of ---+ it's not all going to happen today.
But significant impacts should start to show up in April, and then be strong throughout the rest of the year.
Yes, <UNK>, this is <UNK>.
So, from a raw material standpoint, we are seeing our raw material costs decline somewhat here in the first quarter.
And we are expecting raw material costs to remain relatively stable at this level through the first half of the year.
And based on what we are seeing in the marketplace, we would expect raw material inflation to increase in the second half of the year.
Now, how does that flow through our P&L.
Obviously, as we bring on lower-cost inventories, we carry about 30 to 45 days of raw material inventories, and so it takes about a half a quarter for those to start flowing through the P&L.
And so, we're starting to see that flow through here in the first quarter.
And we saw that flow through a little bit in the fourth quarter as well.
And in tandem with that, we are really focusing in on maintaining pricing discipline.
And so, we want to make sure that we are valuing our products appropriately, and pricing them to value.
And as a value provider of films, we really are focusing in on that to recover some of the margins shortfall that we've had in the past.
Well, as you know, this is creating two impacts for us.
On the top line, we have some headwinds from a demand standpoint, as oil prices have declined.
We have seen demand for our products go down.
We sell products into the energy sector, where, if they're drilling new wells, they're going to require our products.
And so, we're seeing a decline in that, and we're expecting 20% to 25% decline in that market.
Now, offsetting that, as you point out, is the raw material benefit that we should garner as a result of that.
Most of our raw materials in the EFD division are petrochemical-based.
However, I'm not sure that's going to totally offset the top-line pressures that we're seeing in that market.
To give you a little summary statement, though: Just to be clear, we do expect to grow division operating income in films.
It is central to our strategy this year, and it is central to our expectation.
And we're going to do that through some margin expansion that'll come from the disciplined pricing, as well as the value engineering, as well as our ability to get closer to our end customers as a result of our investment in Integra.
So, just to be clear, we are expecting full-year growth from films.
It's early in the year.
And what I will tell you is that Q1 is going to be challenging for us as a Corporation.
But we are making aggressive changes that we feel are necessary to put the Company in the best shape possible to optimize our earnings for the full year.
And there's a lot of year to come.
We do have high expectations for films and aero.
We're managing ATD aggressively, and we are preparing for a difficult end-market environment through the full year.
And we'll see how it pans out.
But that's what I can tell you for now.
We are focused on returning to our long-term objective of 10% to 12% earnings growth.
Yes, Rob, we had about $300,000 of severance-related expenses in the fourth quarter related to the $7-million restructuring that we had announced in November.
Yes.
In the first quarter, related to the $13-million restructuring, we will have costs.
And that $13 million is net of those costs, and we expect those costs to be less than $0.5 million.
We continue to have high expectations for Vista, based on a lot of different factors.
One, on their historical performance ---+ has been very strong since we made the acquisition, growing 30% to 40% annually; as well as the value that the technology provides for situational surveillance.
Fourth quarter was strong.
But when ---+ first quarter is not going to be as strong.
But for the full year, we do expect to continue our historical growth rates that we've accomplished over the last two or three years for Vista.
We are selling our radar systems into lots of different applications; many find their way on to UAVs.
Others are installed in towers, and others are installed on aerostats.
So, we have a broad range of applications ---+ a broad range of geographies that our radars find their way to, and a good set of end customers.
Second inning.
So, we continue to be very bullish, and have high expectations for the Project Loon.
And Google has been a lot more ---+ they've been a lot more involved in providing insights as to their expectations for Project Loon.
And I would point you to do a search, and really look for what they are saying about Project Loon.
They are focused on commercialization efforts this year, and we are a part of that.
The balloon technology is working well ---+ meeting expectations.
The customer continues to work, with great success, on the communications aspects, as well as building the relationships with the telcos across the world.
And the business model, in particular, is looking to be very promising for them.
We are very proud of our 187-day balloon duration that they've cited recently in their publications, and that sets all kinds of records.
Remember, we started with balloon technology that lasted for one day with a 100-day target.
And now we've accomplished 187-day balloon duration.
So, look, we are excited about where this can go, long term, and this year is going to be about commercialization efforts.
We don't expect a significant ramp in terms of production units this year.
But all the momentum and all the press that they are choosing to give the project is very encouraging for us.
And our role with them is as strong as it's ever been.
Our level of collaboration and integration with their efforts is greater than it's ever been, so we continue to be bullish about this opportunity.
You bet.
Sure.
So, we've had a lot of opportunities in the past six months, as we've been active in looking at those as opportunities to grow our three divisions.
And I will say ---+ I want to clarify that ---+ our acquisition strategy starts with that of strengthening our existing divisions.
We are not looking to make a big acquisition and add a fourth division; we like the three divisions we have.
They serve great, long-term markets, and we have opportunities to strengthen both our product lines and/or our distribution channels through strategic acquisitions.
We've looked at several companies.
We've passed on some.
We made the Integra acquisition.
And we continue to have high-quality targets within our existing divisions.
It's always a delicate dance, because I can't tell you a lot of specifics.
I probably told you a lot more than we have traditionally in the past already, but we feel that there is good opportunity to put our balance sheet to work more aggressively than we have in the past.
We're not going to make a ---+ we're not going to do a [bet-the]-company type acquisition; that's not who we are.
If we do acquisitions, they'll be strategic in nature, in that they will give us opportunity to grow one of our existing divisions in a way that we wouldn't have today.
But they also need to meet a threshold now of being accretive to earnings in the first year.
$13 million to $15 million.
Correct.
That's correct.
That's correct, <UNK>.
We paid that all off in the fourth quarter, so we will have no interest expense at this point in time.
Thank you.
That's a great question.
So, I'm glad to be given the opportunity to clarify that.
We do have a portion of our engineered films business that we call the ag segment.
And let me just start by explaining what ATD does.
So, ATD is machine control, and our whole suite of precision ag products is geared towards row crop, and crop production.
We help farmers optimize crop production by increasing yields and reducing costs.
So, the crop production segment is the tough segment right now, given the corn and soybean prices.
So, pivoting over to engineered films, the ag segment within engineered films is very different.
The majority of our ag sales in films go to high-value fruit production primarily, throughout the western US and somewhat in the southeastern US.
That's the vast majority, and that market's fine.
The second portion, which is maybe less than 15% or 10%, goes to what we would call silage covers.
And silage is a feedstock used mostly in dairy, but in raising cattle, and that market is good.
And then, we also have a part of our Business that's used in ---+ a small part ---+ in covering grain piles; so, when you produce a lot of grain.
And there should be strong production; that's why the commodity prices are so low is that we keep producing record crops.
There continues to be need to cover grain, and that's a part of our engineered films division.
So, long answer ---+ we are not concerned about pressure in the ag segment in our engineered films division.
So, we do have an authorization, and we believe that our first and best use of cash would be continued, strategic acquisition.
We want to use our cash to grow the Company.
We believe in maintaining dividend distribution.
That's a part of what we are.
That's a part of the investment proposition that we offer.
But we do see that there may be opportunity to get in to the market, and use some cash for buyback.
We are authorized to do so, and will continue to look at, as a Board, what's the best use of cash.
And what's the best mix of those competing uses of cash.
<UNK>, if you want to add any color, feel free.
Yes.
I would just add to what <UNK> said is: We kind of look at share buybacks opportunistically.
We look at them over a long term.
It's a strategic mechanism for us to return capital to shareholders, and I would envision us being opportunistic at times when appropriate.
So, I'll attempt to answer that.
So, Integra Plastics ---+ we did approximately 80% with shares, 20% with cash.
We got to a place where, in working with the sellers, and considering the tax implications with both parties, and considering a range of purchase valuation, that this mix allowed us to buy the company at the best value for our shareholders.
That's exactly why we chose to structure it the way we did.
What they've done with their shares ---+ I really have no idea what they've done with their shares.
We also authorized the buyback; and as we've already talked about, that remains an opportunity for us.
<UNK>, thanks for the question.
This is <UNK>.
We don't ---+ no, we don't believe so.
We've been in consistent and ongoing contact with all of our OEM customers.
And, in the contrary, we are all in this together, in this tough ag market.
And we have long-standing relationships with all of our OEM customers, and we have 33 of them.
And we've been working with them to work our way through a really difficult market, where their machine volumes are down dramatically.
We are trying to expand our take rate of our technology, as well as the breadth of the technology that they put on the machines, but it's tough.
But our ongoing relationships are strong, and we're working together to work through this.
And I would say the same with our after-market partners.
No, that doesn't mean that at all.
We're not ---+ I don't really think of those words as one or the other.
We're looking for strategic acquisitions that are accretive in the first year.
And in particular as it relates to Integra, we do expect Integra to be accretive to earnings in the first full year.
We did expect it to be accretive in our fourth quarter that we just closed out, and it came up just a little bit short of that.
And that was based on the energy market dropoff that started in early November, and continued through the quarter.
But it's ---+ if we didn't call it strategic before, then that was a mistake.
It's always been a strategic acquisition for us.
That's why we did it.
And this is ---+ I am so pleased that we made that acquisition when you consider the energy market that we face today.
Now we are able to convert more goods, in locations where the energy market is strong.
And we have a distribution channel that's significantly more efficient, that allows us to, one, understand the nuances and the dynamics of the market differently, but two, continue to be competitive in serving those markets.
So, it is strategic.
It is intended to be accretive to earnings in this first full year, and it was not in the fourth quarter.
So, I'm not saying that we are going to have dramatic improvement in market conditions in second quarter.
I'm saying that we've made ---+ we've taken actions to put a cost structure in place that will allow us to improve our profit margins and improve our profitability on the business that we have available to us.
So, we're controlling everything that we can on this end.
We are doing everything we can to get the sales that the market will allow.
And we believe that the net result of that is going to allow us to continue to improve out of the trough that is Q1.
Yes.
I think, for the right transaction, <UNK>, we would be putting leverage on the balance sheet.
And so, we've got about $50 million in cash today, and quite a bit of room on the debt side to make acquisitions, and still not, as <UNK> said, make a huge bet, but definitely something we'd consider doing.
Well, I mean, I think in the event that we were to take on debt for a transaction, we are looking at maintaining investment-grade credit quality metrics.
So, you can apply those to our EBITDA in a pro forma situation, and come up with an estimate.
But I think we could comfortably do $100 million to $200 million, utilizing the cash we have.
Sure.
Thanks, <UNK>.
So, we do have a long relationship.
And AGCO, like a lot of the OEMs, continues to see the great value in adding more and more technology to their equipment.
And they have a broad strategy to bring in their closest partners in technology, of which they consider us one of those.
We've renewed our ongoing relationship that we've had in the past, and memorialized that with the right documents that allows both of us the confidence that we can continue to collaborate with new developments for them, in particular our latest field computer called Viper 4.
But in addition, many of the legacy products that we've enjoyed such a good relationship on over the past, it just continues to give us opportunity to work with them to refine that technology.
Under.
Due to the energy market.
So, 35% of Integra, just like 30% of ---+ 35% of engineered films ---+ was related to the energy market.
And the distribution channel that we acquired through Integra faced, obviously, the same headwinds that we faced, because it's a market-based problem.
So, we had a shortfall on the energy segment with Integra.
Sure.
I guess I would just ---+ I want to reinforce that we strongly believe that we are on the course to recovery.
We've made some tough choices, and implemented some decisions over the last 24 hours that none of us want to go through.
But as we've looked at the Business, we know that it's the prudent thing to do, and it's the right thing to do.
We're on the course to recovery.
We believe in all three of our divisions.
We're proud of the performance that aerostar and engineered films turned in last year.
Two out of three divisions met our long-term objectives for earnings growth.
ATD hit a market headwind, and we're working our way through that.
We're controlling what we can.
And we're being responsible with the Business.
And we are looking ---+ continue to look at acquisitions as a part of this course to recovery.
And we're optimizing our internal investments.
What that means is we're sharpening our focus as it relates to R&D, as well as capital expenditures.
We like each of the businesses that we have.
They serve great long-term markets.
We've got strong businesses, and we're going to continue to invest in those.
We remain true to the Raven business model: exercising fiscal prudence and honoring our purpose to solve great challenges.
And that we're optimistic that the markets we've chosen will continue to provide long-term profitable growth opportunities.
We look forward to updating you on our first quarter in May.
Thank you.
| 2015_RAVN |
2017 | FCF | FCF
#Thank you, Andrea.
As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page.
We have also included a slide presentation on our Investor Relations page with supplemental financial information that may be referenced throughout today's call.
With me in the room today are Mike <UNK>, President and CEO of First Commonwealth Financial Corporation; and Jim <UNK>, Executive Vice President and Chief Financial Officer.
After brief comments from management, we will open the phone call to your questions.
For that portion of the call, we will be joined by Brian Karrip, our Chief Credit Officer; and Mark Lopushansky, our Chief Treasury Officer.
Before we begin, I would like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its businesses, strategies and prospects.
Please refer to our forward-looking statements disclaimer on Page 2 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.
And now I would like to turn the call over to Mike <UNK>.
Okay, thanks, <UNK>.
And welcome and thank you for joining Jim and I today.
First quarter net income of $15.9 million or $0.18 earnings per share increased $3.4 million year-over-year, but decreased some $2 million from last quarter due to a few large recoveries last quarter.
A few noteworthy items include a net interest margin expanded to 3.5% following the first full quarterly benefit of the deposits associated with the 13 acquired FirstMerit branches in Canton and Massillon, Ohio.
After giving ---+ also giving us a lift was the recent Federal Reserve interest rate increase, which flowed through a predominantly variable-rate loan portfolio.
The core efficiency ratio improved to 60.49% for the quarter as expenses remained relatively well controlled.
Operating expenses were essentially flat this quarter despite absorbing a full quarter of the 13 acquired branches in Canton and Massillon.
I'm pleased with our ability to maintain expense discipline as these 2 recent acquisitions are absorbed into our operating base.
Also, the first quarter provision expense of $3.2 million saw elevated charge-offs and was partially offset by the release of reserves and other components of the ALLL model.
As a result, the allowance for credit losses decreased to $48.7 million or 1.01% of total originated loans, which excludes the loans acquired from FirstMerit that would have been marked through purchase accounting.
Although nonperforming assets increased this quarter, credit metrics such as total delinquency and the level of classified assets trended positively.
Our loans grew modestly as commercial loan growth of roughly 6% overcame some runoff in the consumer lending portfolio.
We're pleased with where our commercial loan pipeline is at today, particularly in C&I lending, while the consumer loan pipelines are showing signs of growth.
We're also pleased with the pipeline in Ohio.
We've been able to attract and retain a talented cadre of lenders in our new Ohio markets.
Also, on the lending front, in our relatively new purchase money mortgage business, we had a strong first quarter, and March set a record in mortgage applications.
We've also completed several key hires for our new SBA platform, which will largely be based in Columbus and support our existing team here in Western Pennsylvania.
We've also expanded our indirect business in Ohio as well.
Most importantly, with concerted effort, our branch consumer loan pipelines are building.
Shifting gears.
The legal close of the acquisition of DCB Financial Corporation was completed on April 3, 2017.
This marks our second completed deal in about 4 months.
We're enthused about the prospects in Delaware County.
This is one of the fastest-growing markets in the Midwest and one that our leadership team knows quite well.
Lastly, we're also pleased with the positive retention in the 13 branches we acquired from FirstMerit in early December.
We have layered in commercial lending and mortgage functions and have a good foundation for growth there.
All in all, we're pleased with the first quarter and the start to the year and really our progression over the last 3 quarters.
With that, I will now turn the call over to our CFO, Jim <UNK>.
Jim.
Thanks, Mike.
As Mike mentioned, core earnings per share, which adjust for nonrecurring merger expense, came in at $0.18 for the quarter, and core ROA was 98 basis points.
We had $652,000 in securities gains in the first quarter.
Beyond the merger expense and the securities gains, there was very little in the way of onetime events this quarter that might otherwise cloud the earnings picture.
Nevertheless, I'll spend a few moments providing you some color on the margin, fee income and expenses that you may find helpful.
As Mike noted, the net interest margin improved to 3.50% from 3.44% last quarter as the yield on average earning assets improved by 6 basis points while the cost of funds is unchanged.
However, at 3.50%, the first quarter NIM was well above the 3.35% to 3.45% guidance we provided last quarter.
This is mostly because the Fed raised rates in March earlier than we had anticipated.
The March rate increase repriced approximately 45% of our loan portfolio and will, over time, reprice approximately 64% of the portfolio.
In addition, as we have disclosed in the past, our predictive models call for an immediate deposit beta of approximately 25%, which is reflected in our NIM guidance, but so far has not been our actual experience.
The success of the branch acquisition has alleviated our near-term funding pressures, bringing our loan-to-deposit ratio below 100% such that our actual deposit beta was effectively 0 in the first quarter.
We continued to see positive deposit inflows even beyond the acquired branches deposits while, at the same time, our cost of deposits has decreased.
In addition, the commercial nature of our balance sheet provides us with a strong source of noninterest-bearing deposits, representing about 1/4 of our total funding.
I would add that the first quarter's net loan growth in the low single digits, while below our long-term guidance of mid-single-digit overall loan growth, also alleviates funding pressure in the near term while at the same time improving the asset mix in favor of higher-yielding variable-rate loans.
In light of all these factors, we are revising our NIM guidance to 3.45% to 3.55% for the next quarter and will update this guidance on future calls as appropriate.
Our NIM forecast assumes essentially 0 deposit betas for the remainder of the second quarter and a slow phase-in of deposit betas in the second half of this year.
We again saw positive replacement yields in most loan portfolios in the first quarter, marking the fourth straight quarter with aggregate positive replacement yields in the loan portfolio, making us optimistic that if this trend continues, we hope we will see more upward rather than downward pressure on the NIM going forward.
Turning to fee income.
Total noninterest income excluding the effect of the securities gains decreased by $1.5 million compared to last quarter, primarily due to the recognition in the prior quarter of a $1.3 million positive mark-to-market derivative adjustment.
Thankfully, this adjustment, which has been quite volatile in quarters past, was immaterial in the first quarter.
We experienced nice improvement in trust and card-related interchange income in the first quarter, the core swap fees were light and mortgage gain on sale was down in part because we retained a higher proportion of production of the loan portfolio.
Noninterest expense, excluding merger and acquisition-related expense, improved by $706,000 over the last quarter, but was up over last year due mostly to the operational costs of running 13 additional branches in Northern Ohio as well as amortization expense associated with the core deposit intangible created in that acquisition.
The expense improvement from last quarter was driven by lower incentive and hospitalization costs and a decrease in the cost of reserves for unfunded loan commitments.
On the subject of expenses, please keep in mind that we expect to have approximately $10 million of onetime merger expense in the second quarter.
Finally, our effective tax rate was 30.25% in the first quarter.
And with that, Mike and I will take any questions you may have.
Questions, operator.
Wanted to talk a little bit about margin.
I know you said one of the reasons it came in better than expected this quarter had to do with the March Fed funds increase.
I guess that may have helped for a couple of few weeks, but I'm guessing you still get most of that lift as we go into the second quarter.
Would you expect a little bit of expansion quarter-over-quarter as we go forward into the second anyway.
Yes, Bob.
This is Jim.
That's exactly right.
We do expect that.
We did see a little bit of the ---+ some anticipation in the markets of the rate increase.
Starting at the beginning of March, the 1-month LIBOR rate started to increase and that's really the reference rate that drives a lot of the variable rates in our loan portfolio.
So we got the benefit of the rate increase for about 1/3 of the quarter.
But you're right, we'll see the full benefit coming out in the second quarter and that's reflected in our NIM guidance that we've given.
Great.
And then shifting gears to think about efficiency.
Sort of excluding the merger costs, which I know you highlighted for the second quarter, do you think you guys are back under 60% in the second quarter.
Or you think it takes a little bit longer to sort of get the merger cost saves to get under that target.
I think we're probably right on the bubble and pushing hard.
I think revenue will really be the key for us to drive that efficiency lower.
And we're ever mindful of costs in a normal environment, keeping our costs flat to down.
I think our pipelines are building, particularly in C&I in Ohio and that portends well for perhaps a little stronger growth in the second quarter than the first.
And we\
That portfolio has performed very well for us over the years.
We have played with the price elasticity, and we have been pretty firm in keeping our spreads up.
And consequently, our volume has run off in the last year.
Probably, Jim, $40 million to $50 million of runoff in the last year.
That portfolio for us has been ---+ has had low credit experience over the course of the last decade and we've underwritten pretty conservatively.
Jim, I think you might have the average FICO and maybe our delinquency.
Our average FICO score is 743 and you asked about delinquency, it's about ---+ in the last quarter, about 23 basis points.
So it's a good performing portfolio.
And I would just add, Mike had mentioned this, we really like the business and like the duration of the business because it's a very ---+ it's a medium-term duration business for us.
The average portfolio duration is anywhere from 2.5 to 3 years and that just sits nicely in our balance sheet.
Yes, and it's a nice cross-sell with a good dealer that you might have a real estate loan or a floor plan line of credit to add the indirect auto and do business with good people that you trust.
The tax rate guidance we've given you for the effective tax rate is right around 30% is a number that's supposed to represent the full year.
So that's ---+ and we have taken account obviously the onetime merger expense we're going to have in the second quarter in that number and that should be good.
We, just as always, appreciate your interest in our company and the opportunity to follow up with you from quarter-to-quarter.
And thank you for your input, and take care.
| 2017_FCF |
2017 | ERA | ERA
#Thank you, Shannon.
Good morning, everyone.
Thank you for joining Era's first quarter 2017 earnings call.
I'm here today with our President and CEO, Chris <UNK>; our SVP and CFO, Andy <UNK>; our SVP, commercial, Paul White; our SVP, Operations And Fleet Management, Stuart Stavley; our VP, CAO, Jennifer Whalen; and our FP&A Manager, [Seema Parikh].
If you have not already done so, you may access our most recent earnings press release and presentation slides on our website, erahelicopters.com, or the SEC website, sec.
gov.
Forward-looking statements expressed on this call are subject to a number of risks, uncertainties and other factors including those described in our most recent annual report on Form 10-K and the other filings we made with the SEC.
These risks, uncertainties and other factors could cause actual results to differ materially from those expressed in the forward-looking statements.
In addition, we will discuss certain non-GAAP financial measures such as EBITDA and adjusted EBITD<UNK>
Please refer to our earnings press release or the presentation slides for the calculation of these measures and the appropriate GAAP reconciliation.
I'd now like to turn the call over to our President and CEO.
Chris.
Thank you, <UNK>, and welcome to the call, everyone.
As always, I will begin our prepared remarks with a note on safety, which is Era's most important core value and our highest operational priority.
We are pleased to report that Era achieved our goal of 0 air accidents and 0 OSHA recordable incidents through the first 4 months of 2017.
The hard-working men and women of Era have continued to demonstrate teamwork and a commitment to excellence throughout the offshore industry downturn, and I want to thank them for their dedication and focus in achieving our key objectives.
In broader industry developments, the operational status of H225 and AS332 L2 model helicopters, continues to be a major safety-related issue impacting the offshore helicopter industry.
The Accident Investigation Board Norway released an updated preliminary report on April 28, and the investigation remains ongoing.
Since the fatal accident off the coast of Norway in April 2016, we believe H225 helicopters have only returned to service and offshore oil and gas missions in a few countries in Asia.
The civil aviation authorities in Norway and the United Kingdom, the major European markets for the H225, have not lifted the operational suspensions in those countries.
Beyond regulatory approval and the completion of the accident investigation, the other key milestones for a potential broad-based return to service of these helicopters include confidence amongst the helicopter operators and our oil and gas customers as well as support from certain industry labor unions.
As previously disclosed, Era filed a lawsuit in November 2016 seeking damages from Airbus related to our purchase of H225 helicopters.
Turning now to our Q1 2017 financial highlights.
Despite the persistence of very challenging conditions in the offshore oil and gas industry, Era continued to generate positive operating cash flow even during what is historically our weakest seasonal quarter.
We continue to prioritize the protection of our balance sheet and liquidity position, with total liquidity of almost $150 million as of March 31.
We maintain an order book that provides optionality for growth should market opportunities present themselves while limiting our noncancelable capital commitments to just $12 million in 2017 and less than $3 million in 2018.
In addition, our efforts to realize value from the sale of underutilized assets are helping us fund these capital commitments.
In the month of April, we took delivery of our third S92 helicopter for final payment of $2.8 million, and we sold 1 Bell 212 medium helicopter and a hangar in the Alaska for aggregate proceeds of $4.6 million.
I will now turn it over to our CFO, Andy <UNK>, to provide a review of our Q1 financial results.
Andy.
Thanks, Chris.
As many of you know, Q1 is historically our weakest quarter with no flightseeing activities or other seasonal work as well as poor weather conditions and fewer hours of daylight which impact our oil and gas operations.
Q1 of 2017 was no exception.
For the first quarter of 2017, we reported a net loss attributable to the company of $5.6 million or $0.27 per diluted share on operating revenues of $54.5 million compared to a net loss of $3.8 million or $0.19 per diluted share on operating revenues of $62.6 million in Q1 of 2016.
Revenues were down $8.1 million or 13%, primarily due to lower utilization in our U.<UNK> oil and gas operations, fewer search-and-rescue subscribers, and the end of certain dry-leasing contracts, partially offset by higher international oil and gas revenues in Brazil and Suriname.
Operating expenses were $37.8 million in the quarter, down $6.6 million or 15%, primarily due to lower repair and maintenance expenses, personnel costs and insurance premiums.
G&A expenses were $10.4 million in the quarter, up $1.2 million or 13%, primarily due to nonroutine legal and audit fees related to ongoing litigation and the fixed asset accounting corrections recorded in the fourth quarter of last year.
We sold no helicopters during the quarter but recorded a $0.1 million on the sale of some nonaircraft assets.
EBITDA was $7 million in the quarter compared to $12.2 million in Q1 of 2016.
Adjusted EBITDA, excluding gains on asset sales, was $6.9 million in the quarter, a 13% EBITDA margin compared to $9.3 million, a 15% margin in the prior year quarter.
Excluding the impact of the $1.2 million in nonroutine professional services fees, adjusted EBITDA margin would have been 15% in the current quarter, in line with the prior year.
Sequentially, revenues were down $1.8 million or 3% versus Q4 of 2016 due to lower utilization of light helicopters in our U.<UNK> oil and gas operations, the loss of a SAR subscriber and the end of air medical contracts.
These decreases were partially offset by higher utilization in Brazil.
Operating expenses were flat sequentially, and G&A expenses increased by $1 million or 11%, primarily due to the professional fees previously mentioned.
Moving to the balance sheet and our liquidity.
We generated $4.3 million of cash flows from operations in the quarter and used these funds to reduce the outstanding balance on our revolving credit facility.
Even with the downturn and the seasonal weakness mentioned earlier, we have continued to consistently generate positive operating cash flows.
Based on our Q1 results, our total available liquidity is $147.5 million, which includes our cash, refundable escrow deposits and additional , availability under our revolving credit facility.
We believe we have sufficient liquidity to continue to manage through the current downturn and execute our strategy.
At this time, I'll turn the call back to Chris, for further remarks.
Chris.
Thank you, Andy.
Looking forward, we believe the challenging industry conditions are likely to persist throughout 2017.
Activity levels in the U.<UNK> Gulf of Mexico remain stable but subdued.
Although there are discrete opportunities on the radar, competition remains intense with excess equipment available in the market, and there's little visibility on a near-term catalyst that would lead to a significant broad-based increase in activity.
Fortunately, we benefit from a favorable customer mix as our largest customer is a large independent oil and gas company that continues to invest in the deepwater Gulf of Mexico.
And our second largest customer is the Bureau of Safety and Environmental Enforcement, whose mandated inspection work is required regardless of the prevailing commodity price.
Internationally, we are seeing signs of positive activity trends in other areas of the Americas, though it should be noted that visibility remains limited.
We believe our expansion into Columbia and Suriname over the last couple of years as well as the integration of our business in Brazil place us in a good position to capitalize on opportunities in these markets if they materialize.
In conclusion, Era is well-positioned to withstand the pressures of a prolonged market downturn, and we have demonstrated our ability to generate positive operating cash flow even at these subdued activity levels.
This stability is largely due to our adherence to 4 key priorities throughout the downturn: maintaining the highest safety standards, maximizing the utilization of our helicopter fleet, realizing operational efficiencies and cost savings wherever possible and protecting our balance sheet and liquidity position.
With that, let's open the line for questions.
Shannon.
So the signals that we perceived vary, as you might expect, by customers depending upon their confidence and the quality of their asset portfolios.
What we've seen is that in the Gulf of Mexico, our largest customer has a first-class portfolio of assets and has continued to invest actively in the deepwater Gulf of Mexico, and they have provided public disclosures about what their expected plans are in 2017.
And we believe, given the quality of the assets that they have, both tie-back opportunities as well as exploration potential, provides us with good comfort on visibility on their activity in the Gulf of Mexico.
Other than that favorable customer mix, we believe the Gulf of Mexico remains ---+ activity remains subdued.
We do see potential increased demand for helicopters at the end of this year, getting into 2018.
But again, I want to caveat that by saying visibility remains quite limited.
If you look elsewhere in the Americas, we are encouraged in Brazil by the structural changes that have happened there with the liberalization of the ownership requirements for pre-salt reserves.
You've seen a growing influence of the international oil companies taking a more active presence in Brazil, both in some acquisitions of pre-salt ---+ existing pre-salt developments from Petrobras as well as moving forward with developments in the northern part of the country on some leases that they acquired in options a couple of years ago.
So we'd like to see the increased activity from those IOCs in Brazil, and we've also seen some positive activity trends with exploration moving forward even throughout the downturn in the Suriname Guyana basin and also, to some extent, in Colombia.
So for a good portion of our customer base, we believe that deepwater oil and gas continues to be an integral part of their long-term exploration and development plans.
Per our long-standing policy, we don't comment specifically on rates.
What we have disclosed is that if you look at the first part of 2016, that continued to be a difficult time in the industry.
And if you think about the pressures that existed at that point of time in February of 2016 with oil dropping to about $26 a barrel, customers redoubled their efforts to reduce costs wherever possible, whether that was dropping helicopters, efficiency gains on helicopters or pushing on rates.
So we saw a continued and steady decline throughout the first part of 2016 in activity levels and revenues that we were recognizing.
And then about the mid-2016, what we witnessed in the markets in which we participate was a stabilization of activity, admittedly, at subdued levels, but a stabilization.
And we've have seen for the last several months that activity has continued to bounce along the bottom.
And so we've ---+ while they're not at levels that we would necessarily like in a normal course, we have seen some stabilization.
Well, we'll continue to evaluate all opportunities on an opportunistic basis.
But we have maintained throughout the downturn, and it continues to be our priority, to protect our balance sheet and our liquidity position.
So as we continue to generate positive operating cash flow and to the extent that we realize any proceeds from the sale of assets as we announced we did in April, the priority will be to reduce our debt.
Now what we've said is there was about $1.2 million in nonroutine professional services fees related to both legal and audit fees.
<UNK>, this is Andy.
We don't have any concern at this point.
We feel very comfortable about the covenant package that we have and our ability to maintain compliance.
So no concerns there.
Sure.
As we discussed on last quarter's call, our air medical contracts in the U.<UNK> were scheduled to conclude in the first part of 2017, and we have seen those contracts wind down in year-to-date 2017.
And the managed aircraft that we had in our fleet, all related to our air medical business.
These are helicopters that were owned by the hospital systems, and we were paid to operate them for ---+ those for them.
So as those contracts have wound down, those managed helicopters have been returned to the hospital system and come out of our fleet counts.
We have followed the Chapter 11 reorganization process for the competitor you mentioned.
We have noted that they emerged from that reorganization process with what appears to be a more competitive cost structure, having eliminated a large portion of their debt load and having rejected a number of helicopter leases and returning those helicopters to the lessors.
We overlap with them in Brazil.
That's the only market in which we compete today.
And as of now, we have not seen any substantial structural shifts in the competitive dynamics in that market.
Yes.
CHC doesn't operate in the Gulf of Mexico today.
So the only area of overlap we have with CHC today is really in Brazil.
Yes.
We are aware of the tragic accidents involving the Irish Coast Guard search and rescue S92 in March of this year.
The preliminary reports, which have been issued indicate that there was no mechanical malfunction.
And therefore, as of today, there are no known considerations that would impact the global S92 fleet.
No, nothing specifically related to that incident.
As you might imagine given the situation with that particular helicopter model at this point in time, there's really very limited activity in the secondary market or really any fundamental change in demand across any end markets that we observe on the commercial front.
So I think time will tell how the accident investigation plays out, what the regulatory authorities do, what operators like ourselves decide to do in terms of confidence in the safety case, whether that's supported by the customer base and then, in certain end markets, whether the labor unions are supportive of operating the machine as well.
So it would be preliminary at this point to speculate given that the investigation remains ongoing.
We are not the only company that has filed a lawsuit, but our lawsuit solely involves Era.
There are no other parties involved with our dispute at this time.
I think it'd be preliminary for us to say at this point how the strategy or whether or not our suit is joined by others might play out over time.
So I would just say that we are aware that there are other disputes that have been filed against Airbus related to the 225, but there are no other parties involved in our dispute at this time.
So as this is an ongoing legal dispute, per our previously stated policy, we will not be making any comment upon the process or disclose information about this content, status or timing of those proceedings.
Thank you, Shannon, and thank you, everyone for joining the call.
We look forward to speaking again next quarter.
Be safe.
| 2017_ERA |
2015 | SVU | SVU
#I will let <UNK> comment after I do, if he'd like.
There was clearly work that we, in hindsight, that we could have done better.
I mentioned around the promotional adjustments, to compensate for the pharmacy gross margin.
So we probably didn't do an effective job of balancing that appropriately.
In one of the banners we're ---+ we've been adding some couponing which is actually being ---+ our customers are finding helpful.
So ---+ I don't want to go banner by banner, but there are opportunities in each of the banners that we are now doing.
And there is broadly the balance ---+ bringing the promotional balance back here in this quarter in the back half of the year that should be helpful.
I agree with <UNK>.
No matter if you are running high positive comps or low positive or negative comps, whatever.
You can always do better.
It is always a fine line, a tightrope act that you are working with when it comes to sales and margins and EBITDA.
And it is easy to look back and say, I wish we would have done this.
What has happened has happened.
We made adjustments in the advertising and marketing at all the banners that I personally feel very good about.
So you have to make those adjustments almost daily in this world.
That is what we are doing.
I just want to add, despite the second quarter performance, over the last several quarters we have done and our retail teams have done frankly, a spectacular job in bringing the retail food banners back.
They have just done, I think, overall an amazing job.
Private label penetration, as I mentioned, was up about 160 basis points.
It is at an all-time high for us.
Although we are still below where we want to be.
The store conditions by and large have never been better.
We performed both announced and unannounced visits.
We have on occasions and all of the store operations and store conditions are very good, by and large.
We are investing in the stores.
We touched another 20% of our store base this year in the fiscal year.
We had about a 25% touch point last year.
We will continue to make investments to remodels and store optimizations.
We are investing in new stores.
We have two new Hornbacher stores this year.
We will open another Cub store, as I mentioned in my prepared remarks.
We talked about testing these store-in-a-store concepts, and our digital offering is growing.
We have over 330,000 digital customers.
So there's lots of good things happening in the retail food banners.
And I don't want to ---+ all that good work should not be forgotten, given the performance in the second quarter.
The only thing I'll add to that is you have to remember too that we ---+ when we took over here, we were five to seven years or more behind the world on what needed to be done in the retail banners.
And we are still playing catch up on that.
But I feel very good about where we are at and everything that we are doing.
And I very much like the conditions that I see in the stores.
This is <UNK>.
With respect to the TSA, all the stores were covered by the TSA, I think with the exception of the 18 original Haggen stores.
By and large, it was nearly the entire chain that were covered by the TSA.
From a supply perspective, I mentioned that just a second ago, on the supply side, we were supplying the northern operations which consisted of the 46 stores.
And then, at some point, we were to convert the original 18 Haggen stores.
But due to their protection filing, that hasn't happened.
Those are great questions and questions that are asking for a forecast in the future that I'm not prepared to do.
I can tell you that what we want and are working hard with Haggen to be their supplier.
In whatever form or fashion they take, we would love to be a TSA provider to them.
But all of that work is ---+ yet to be determined.
We are actually flexing now.
You are exactly right.
It certainly has had an impact.
I would say there were two cost impacts that affected the independent business.
One was both the ramp up in Tacoma, that affiliation.
And then we also had a start up in a new distribution center in Wisconsin as well.
With respect to Tacoma, we are now trying to balance our labor investment there, given the activity with the northwest.
And so we will continue to work on that.
That is a work in process right now.
I don't have that on the top of my head.
We have competitive openings all the time.
This year there might ---+ in the second quarter, there might have been a few more that affected one of the banners.
But broadly speaking, <UNK> and I don't allow the ---+ we actually don't even allow the banners to discuss the competitive impact.
When they have a plan to deliver and they need to deliver on the plan regardless of the competitive impact.
By and large, there are always new store openings and there are some store closings.
Those are natural.
I just don't have a number.
The number you are looking for I don't have.
What I can tell you is that since the beginning of the year through year to date on our fiscal year, what we have seen is a disinflationary environment, and in some cases, particularly the very edited assortment that we carry at Save-A-Lot has gotten into the deflationary space.
Broadly speaking, it is a disinflationary environment.
It's been, year to date going ---+ disinflation is going further and further down.
In some cases, into the deflationary space.
So meat in the independent business and in Save-A-Lot, were both deflationary.
In case of the independent business, deli and dairy were deflationary.
Dairy was deflationary in Save-A-Lot as well.
The trend line has been going down and in fact has crossed over in some cases.
<UNK>, we have not seen any changes as of yet.
Hopefully we will in the future.
So far, there is no indication of that.
For the second half of the year.
Yes, what you saw in terms of the first half, Q2, I will start there.
Our corporate results did improve.
Part of that was driven by our corporate expenses and our lower employee related costs.
We are keeping a tight control on cost.
I think that part of it, I think you're going to see us continue to keep a tight control on cost for the rest of the year.
<UNK>, I don't understand why it's so hard to figure it out.
If you are ---+ like we said we're running deflation of 4%.
Last year we were running inflation 2% to 4%.
Say it is 2%.
Whatever your comps are now, we're running at 6% worse than a year ago just on deflation.
I tell you we will welcome you here and we will walk you through it.
That is probably the best way to do it because it's really pretty easy to understand.
If you are shipping a case last year that was $10, and this year, it is $8, that is deflation.
That is where we're seeing it in meat and produce and dairy.
There has been no increase in competition.
Again, if we just had zero inflation or deflation, we would be talking a totally different story here.
This impact on our licensees is due to the deflation.
And some of the marketing that we are doing less than last year, but not a whole lot.
So we would be glad to walk you through the deflation either here or over the phone ---+
To help you understand that.
There is only one other competitor like our Save-A-Lot and that's ALDI.
And they're not a ---+ they don't give public information.
So there's really nobody to compare it to.
<UNK>, this is <UNK>.
Let me see if I can give some color.
First, on the competitive.
When we look at the competitive environment at Save-A-Lot, we track some of our competitors, in terms of pricing.
We are actually not seeing any delta between our pricing and these competitor prices.
When we look competitively speaking, we are still right where we want to be from a pricing perspective.
That is the first point.
We are not seeing a disadvantage or a change with respect to the way that we are pricing.
So second, the way to think about this edited assortment, I'll give you an example.
In dairy, there is a very edited assortment of dairy products in Save-A-Lot compared to say one of our food banners or one of our independent customers.
In the independent business or in the retail food banner, we sell cashew milk, we sell almond milk, we sell half-and-half, we sell fat-free half-and-half.
There is just a broad SKU of products available in the dairy aisle in a traditional grocery store.
At Save-A-Lot, however, we don't sell most of that.
In fact we really sell whole milk and 2% milk and occasionally some skim milk.
So the SKU difference between the two assortments is fairly dramatic.
And so when you can ---+ when you see inflation in certain product categories, in this case in milk, it is magnified at Save-A-Lot versus a traditional grocer.
And so that's I think the effects we're seeing on these commodity products on this edited assortment at Save-A-Lot.
In Save-A-Lots, we have three departments; grocery, meat, and produce.
And in your traditional groceries, you have general merchandise, bakeries, service delis, service fish, service meat.
And the more departments you have the ---+ you can offset that deflation by having these other departments, and also the extra itemization that <UNK> talked about.
Again, we have three departments; grocery, meat and produce.
And the deflation is in some very large categories.
In the protein category is meat and then dairy.
It has a heck of a lot bigger impact on us than anybody else.
That is a good question, <UNK>.
Let me make this comment about that with respect to Save-A-Lot.
We are positive comps in our corporate stores.
And so what that indicates to me is that despite the deflation that we are experiencing into and out of our distribution centers, the teams in the corporate stores are pulling levers all around the store environment, to drive what is in fact, a positive IB.
And they are doing it in a way that doesn't disadvantage them, relative to the competitive set.
So what they are doing is I think very effective.
On the other side, we are seeing licensed purchases down.
It is in part the deflation.
So the $1 per case concept units are up.
So one hypothesis is that the licensed businesses are buying less and not as effective at managing through the deflationary environment as say the corporate stores.
You got to remember too in the licensees, what we record as sales, is their purchases.
And on our retail banners, we record the retail sales at the retail stores.
So it is two very different things.
I don't have that fact at my fingertips.
<UNK> will get back to you on that.
You bet, <UNK>.
This is <UNK>, <UNK>, good morning.
I don't know when they will end.
Frankly, we are doing what we can to mitigate that particular issue.
Beyond that, what we are asking the teams to do is despite the fact that they have this issue, they need to figure out tactics that can offset some of that headwind.
Whether they can offset all of that or not, remains to be seen.
I mentioned a couple of them like adherence of our patients to their script that can drive increased script volume or more immunizations.
We need to do that.
And we put those tactics in place and challenged the teams to deliver on those.
No.
Other than what we had originally planned.
We had developed a plan at the beginning of the year with respect to the promotional cadence.
Given then the pressure from the pharmacy gross margin issue.
We made those tweaks, particularly in the second quarter, but a little bit in the first quarter as well.
So we got the balance ---+ we were not as effective on balancing all of that.
And so we will make adjustments there and look toward the second half.
I didn't understand the question.
Not really.
No.
There's been no noticeable shift in any of the banners that have raised to either <UNK> or I or Mark Van Buskirk our President.
So I think the answer is no.
I would agree with that.
Nothing out of the ordinary.
| 2015_SVU |
2017 | ENSG | ENSG
#Thank you, Terrence, and welcome, everyone.
We filed our earnings press release earlier this morning and can be found on the Investor Relations section of our website at www.ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, May 26, 2017. Before we begin, I have a few housekeeping matters. First, any forward-looking statements made today are based on management's current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Ensign and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances or for any other reason. In addition, The Ensign Group Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly-owned given subsidiaries, collectively referred to as the Service Center, provide centralized accounting, payroll, human resources, information technology, legal, risk management and other centralized services to the other operating subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly-owned captive insurance subsidiary, which we refer to as the Captive, provides some claims-made coverage to our operating subsidiaries for general and professional liability as well as for certain workers' compensation insurance liabilities. The words Ensign, company, we, our and us refer to The Ensign Group Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center and our wholly-owned captive insurance subsidiary, are operated by separate, wholly-owned independent companies that have their own management, employees and assets. References herein to the consolidated company, its assets and activities, as well as of the term ---+ use of the terms we, us, our and similar terms, are not meant to imply, nor should it be construed, as meaning that The Ensign Group Inc. has direct operating assets, employees or revenue or that any of their subsidiaries are operated by The Ensign Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available on our Form 10-Q. And with that I'll turn the call over to <UNK> <UNK>, our President and CEO. <UNK>.
Thanks, <UNK>.
Good morning, everyone.
Thanks for joining us today.
We're pleased to report that we completed a solid quarter and that we're beginning to see an upward trend in our same-store, transitioning and newly acquired skilled nursing operations.
We're encouraged by the improvement in occupancy and skilled mix we experienced in several key markets, including Utah and Texas, even though we believe we're in the very early stages of returning to the performance we expect.
With many of the challenges from 2016 behind us, we expect our newly acquired and transitioning operations, including the Legend portfolio, to continue the momentum created during the quarter and that each will make a meaningful contribution to our results in the latter half of 2017 and beyond.
We also expect to see sequential improvements in each quarter during 2017 as the ramp of organic growth we experienced this quarter continues throughout the year.
We're also very encouraged by the continued success of our new ventures.
Our home health, hospice, assisted living and other new business leaders have helped us to enhance our post-acute care services and have strengthened the organization both clinically and financially.
As you can tell, we believe strongly in our outstanding leaders.
We're grateful for the personal commitment and the personal risk these leaders take as they strive to make their organizations the best providers in the markets they serve, thereby extending Ensign's growing influence in the health care world.
It's through them and our other local leaders that we continue to realize our mission of bringing a new level of quality and dignity to the post-acute care industry, doing it one operation at a time.
Our performance is due to the superior competency, continuous management and hard work of our incredible local leaders and their teams.
Our relentless effort to implement Ensign's bottom-up first who, then what, leadership paradigm in all of our new operations is the key to achieving what we set out to become.
We will continue to recruit, train and support the best local leaders in the business, and we're confident that they will continue to deliver industry-leading performance and returns, both clinical and financial for our patients, our communities and our shareholders.
Earnings for the quarter were up over 13.3% at an adjusted $0.34 per fully diluted share, right on track with our annual guidance of $1.46 to $1.53 per adjusted diluted share for 2017.
Revenues were a record $441.7 million, an increase of 15.3% over the prior quarter and in line with our annual guidance of $1.76 billion to $1.8 billion.
We're reaffirming both our EPS and revenue guidance for the year today.
More importantly and certainly as part of a clear cause-and-effect relationship, we continue to achieve outstanding clinical performance as an organization in the quarter.
It's been truly gratifying to see the continued focus on quality across the organization resulting in positive market responses in occupancies, skilled mix growth, star ratings and state survey results.
With the focus on strengthening outcomes, lowering readmission rates and extending our capabilities to care for more complex patients across the post-acute continuum, we've continued to invest in the best care pathways and new clinical programs in post-acute care.
As a result, we're seeing significant improvements in key indicators related to outcomes and satisfaction, which helps drive occupancy and skilled mix.
We're pleased to report that despite the recent changes in the CMS star rating system that have made it more difficult to achieve 4- and 5-star ratings, the number of operations carrying that designation improved dramatically during the quarter.
In fact, 8 more of our skilled nursing operations achieved 4- and 5-star ratings during the quarter.
And with those additions, 94 of our skilled nursing operations carry that designation at quarter-end.
We continue to work very hard to improve the clinical performance of our newer operations, most of which were 1- and 2-star operations at the time that we acquired them.
We again paid a cash dividend of $0.0425 per share during the quarter, which was an increase of 6.3% over the prior year.
This is the 14th consecutive year we have increased our dividend.
We also continue to remain vigilant and responsive as changes occur around us.
In the meantime, we remain financially sound with one of the lowest debt ratios and strongest balance sheets in the industry, a solid cash position and very manageable real estate-related costs.
We remain committed to keeping our cash flow strong and our debt relatively low, and we continue to commit capital to our ongoing acquisition and renovation programs as we look to the future.
And with that, I'll ask <UNK> to give us an update on our recent investment activity and growth.
<UNK>.
Thank you, <UNK>.
During the quarter, we announced the acquisition of the operations and real estate of Parklane West Healthcare Center, a 124-bed skilled nursing and 9-unit assisted living facility in San Antonio, Texas.
This operation, which is subject to a 40-year long-term ground lease, represents an ideal turnaround opportunity because it combines outstanding physical facilities with a solid core of providers that truly care about the residents and their families.
Our Keystone team is planning on offering a wide selection of high-quality post-acute and assisted living services to residents of the 400-unit independent living operation already located on the campus and to the health community at large.
On March 1, 2017, a subsidiary of Cornerstone Healthcare, Inc.
, Ensign's home health and hospice portfolio company, acquired Hospice of the Pines, a provider serving Prescott, Sedona, Cottonwood, Dewey and other communities across Yavapai County in Arizona.
Hospice of the Pines continues the growth of our Cornerstone operations across Arizona, offers the opportunity to provide an outstanding continuum of care with our existing nursing and assisted living operations in Prescott, and reflects Cornerstone's commitments to meeting the expanding need for hospice service in strategic locations.
With this acquisition, Cornerstone subsidiaries now operate 20 hospice operations, 17 home health operations and 3 home care operations in 9 western states.
On March 17, 2017, we acquired Desert View Senior Living, a 100-unit assisted living and memory care facility in Las Vegas, Nevada.
This asset, which is subject to a long-term lease, was in a very tough situation when we acquired it, and we were able to work very closely with the owner of the property to quickly enter the building and to begin stabilizing the operations.
This operation has a very nice physical plant and it's an excellent complement to our existing assisted living operation in Las Vegas and demonstrates our unique ability to step into challenging circumstances on very short notice.
Our team of local leaders are amongst the most experienced operators in the senior living industry, and much like our skilled nursing operators, have demonstrated over and over again that they know how to transition poor-performing assisted living operations under difficult circumstances.
The response from the community so far has been amazing, and in a matter of a few weeks, they've improved census by 10%.
On April 1, 2017, we acquired Rehabilitation Center of Des Moines, a 74-bed skilled nursing operation in Des Moines, Iowa.
The facility is also subject to a long-term lease and is our sixth operation in the state of Iowa.
We are especially pleased to be joining Des Moines' vibrant and well-regarded health care community for the first time as we seek to become the operation of choice in the largest metropolitan market in Iowa.
This morning, we acquired Meadow View Nursing and Rehabilitation, a 112-bed skilled nursing facility in Nampa, Idaho; and Utah Valley Healthcare and Rehabilitation, a 99-bed skilled nursing facility in Provo.
Both operations will strengthen our existing operations in those markets and will add to our ownership of real estate.
Also during the quarter, we began operating 2 newly constructed skilled nursing facilities, both of which were under development at the time of the Legend acquisition which closed last year and was part of that Legend acquisition.
We currently sublease these facilities from Legend and expect that both will be purchased by National Health Care Investors, Inc.
, or NHI, approximately 1 year following the completion of construction, and they will be added to our master lease with NHI at that time.
These 2 operations are the last of the newly constructed Legend buildings that we have committed to operating.
We also announced during the quarter that we entered into definitive agreements to simultaneously sell and lease 2 skilled nursing facilities and 1 assisted living community to Mainstreet Health Investments, Inc.
, or MHI, which is a publicly traded health care REIT in Canada.
Upon closing the transaction, we will lease the properties from NHI under a triple-net master lease with an initial 20-year term and CPI-based annual escalators.
The properties are located within high-density neighborhoods of the Los Angeles and Phoenix Metro markets and have been owned and operated by our affiliates for many years.
Our real estate ownership gives us significant flexibility with respect to many of our operations.
Because of almost all the real estate assets we acquire are underperforming at the time we acquire them, each owned asset provides us with a significant opportunity to create value and to use that value to help maintain a healthy balance sheet and to prepare for future growth opportunities.
This transaction is one of many ways we have to capture some of the value we've created in our real estate assets while simultaneously strengthening our already healthy balance sheet and ensuring that we will continue serving each of these communities for decades to come.
As with the spin-off transaction that we completed in June 2014, we took a very conservative approach to both the sale price and the lease structure with an anticipated lease to EBITDAR ratio that will exceed 2x as of the commencement date.
The proposed transaction is subject to certain closing conditions, and it is anticipated that it will close before the end of the second quarter.
Simultaneously, MHI has also agreed to release us of our ---+ well, release our operating subsidiaries from their lease obligations on 3 transitional care facilities in Kansas and Texas that are currently under development.
Upon closing the transaction, the number of health care resorts that will be operated by an Ensign subsidiary and that were developed by Mainstreet property group will include 5 in Texas or ---+ I'm sorry, 5 in Kansas, 1 in Texas and 1 in Colorado.
With the completion of the last 2 Legend new builds and the terminations of the only remaining Mainstreet developments, we will be left with one more outstanding commitment to operate a new development.
This project is located in Utah and is separate and apart from the Mainstreet developments or the Legend new builds.
We expect the construction to be completed in the second or early third quarter of 2017.
While we are very excited about each of the health care resorts, the Legend new builds and our other newly constructed properties, we do not anticipate any more new developments during the year or in 2018.
Finally, we also disclosed that we incurred some expenses related to certain facility closures.
In each case, the physical plants had gotten to a point that they required significant capital expenditures to keep the operations going.
We determined that rather than incurring those expenses, that it was better to exit the operations and to reserve many of those beds and to reuse them at our other locations.
The state allows us some leeway in making a final decision on what to do with beds held in reserve, and we are in the early stages of that process.
As of today, we now own the real estate of 53 of the 215 health care facilities within the portfolio with 20 hospice agencies, 17 home health agencies and 3 home care businesses in 14 states.
As we mentioned last quarter, we are making progress on taking some of our own assets to HUD for financing.
As with any HUD financing, the process is long and complex, but we expect to complete this HUD-based mortgage transaction during the third quarter.
This will allow us to pay down most of our revolving line of credit and to establish long-term, fixed financing at very favorable rates.
As we do so, we add to our liquidity and our ability to acquire well-performing and struggling skilled nursing operations, assisted living operations and startup or early-stage hospice and home health agencies.
We are evaluating a collection of several smaller attractive acquisition opportunities and believe that more favorable pricing is on the horizon.
As we've seen many times before, potential changes to reimbursement have and continue to generate a lot of buying opportunities at very attractive prices.
We expect to acquire some of those operations later in the second quarter and in the third quarter.
And we continue to be very picky buyers and will remain true to our locally driven approach to each and every acquisition.
And with that, I'll hand it back to <UNK>.
Thanks, <UNK>.
Before <UNK> discusses the financials, I'd be remiss if I didn't take a moment to explain more about how our frontline leaders and their teams produce these record results in such a difficult operating environment.
As I've often noted, even more than our strong balance sheet and solid operating history, it's the strength of our talented leaders at the local level which makes such results possible quarter after quarter.
These leaders, who immerse themselves in their individual markets and push daily to make their operation the operation of choice in the market they serve, makes Ensign unique.
As you know, the Ensign operating model affords these impressive local leaders the latitude they need to be nimble and respond to the demands of their unique markets.
Ensign simultaneously supports them with a world-class systems, technologies and specialists.
While we certainly share best practices across the organization and monitor both financial and clinical performance in these distinct operations, we do not attempt to impose a single set of top-down, one-size-fits-all operating methodologies across each market.
The discipline inherent in this model continues to produce superior operating results in spite of general market conditions.
The remarkable results produced by these leaders build up over time as they and their operations mature and grow to excel in their markets.
We firmly believe that financial performance follows clinical quality, and each of the following examples illustrates that point.
In Brookfield Healthcare Center, located in Downey, California, is an example of the improvement we have seen amongst one of our same-store operations.
Under the leadership of CEO David Howell and Director of Nursing [Analou Delos Santos], Brookfield continues to achieve outstanding clinical and financial performance despite the fact that there are other facilities in this market that have better locations and newer physical plants.
In response to the demands in the local health care community, Brookfield developed a cutting-edge stroke and diabetes rehabilitation program.
They've also managed to maintain a CMS 5-star rating for the fifth year in a row, even when the CMS standards have become more and more difficult.
As a result of their efforts, Brookfield increased its EBIT by 149% with a 68% increase in Medicare census over the prior year quarter.
Brookfield was also regionally chosen to participate in a national quality pilot program due to its consistent clinical outcomes, low readmission rates and length of stay and high patient safety satisfaction.
Chandler Post Acute and Rehabilitation located in Chandler, Arizona, is an excellent example of the improvements we're seeing in our transitioning bucket under the leadership of Executive Director Chandler Monks and Director of Nursing [Jamie Jurdy], this operation has improved in almost every metric.
As a result of their relentless focus on quality measures and 2 strong surveys, Chandler Post Acute has improved from a CMS 1-star facility at the time we acquired it to 3 stars in just a short period of time.
By systematically controlling ancillary costs, eliminating nurse registry staffing and improving culture, this operation has improved occupancy by 270 basis points and skilled census by 14 percentage points, resulting in an increase in EBIT of 208% over the last quarter.
We're also encouraged by the progress we're making in many of our newly acquired operations, including in the Legend portfolio.
For example, Legend Oaks Healthcare and Rehab, located in West Houston, has seen remarkable growth over its first 3 quarters under the leadership of CEO [Trevor Cardon] and COO [Elizabeth Gutierrez].
They've consistently delivered high-quality outcomes transitioning patients back to home quickly and safely without the unnecessary bounce back to the acute setting.
With exceptional physical occupational and speech therapy services, along with expert clinical care, Legend Oaks has garnered the trust of the market, which is shown in their remarkable growth in occupancy.
Over their first 3 sequential quarters, overall occupancy has grown to 94%, an improvement of 340 basis points.
Additionally, because they have developed a tremendous reputation for short-term rehab outcomes, lower lengths of stay and a very low hospital readmission rate, they've seen their skilled census grow by 44% from our first quarter following acquisition to our most recent quarter, resulting in skilled mix revenue at 55%.
Because of their disciplined growth, they've also seen remarkable EBITDAR expansion of 92% since acquisition, all while improving clinical results and patient outcomes.
There are many, many other stories like these across the organization.
We'd also like to remind you that we have 99 recently acquired and transitioning operations as of May 1, which is the largest number of operations in those buckets in the organization's history.
These opportunities, together with the momentum we've seen, will result in much better performance, we believe, in the coming quarters.
With that, I'll turn this time over to <UNK> to provide more detail on our financial performance and our guidance, and then we'll open it up to questions after a few last comments.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
Before I go into the numbers, I wanted to clarify a few points on our quarterly results and disclosures in the press release filed earlier today.
In an effort to provide additional insight in the progress we have started to make in our skilled nursing segment, we have added additional disclosures with respect to our first quarter 2017 as compared to the fourth quarter 2016.
These sequential results can be found in the financial tables filed together with our press release.
While we do not undertake to provide sequential quarter disclosures in every quarter, we believe that this disclosure will demonstrate the improving trends we are seeing in several areas.
I also wanted to point out that our GAAP results for the quarter were significantly impacted by certain unique expenses that were incurred during the quarter, including the losses related to certain facility closures and a wage-and-hour class action settlement.
Our press release, [though], today contains a detailed summary of these adjustments.
Detailed financials for the quarter are contained in our 10-Q and press release.
Highlights for the quarter ended March 31, 2017, as compared to December 31, 2016, included: Same-store skilled revenue mix grew by 5.1% to $120.9 million, and same-store skilled mix as a percentage of revenue grew by 154 basis points to 52%.
Same-store managed care revenue grew by 11% to $42.1 million, driven by census growth of 11.8%.
Transitioning skilled mix revenue grew by 6.4% to $43.8 million as a result of the growth in our skilled revenue mix of 97 basis points to 57%.
And transitioning managed care census grew by 10.3% and transitioning Medicare census grew by 10.9%.
For the quarter ended March 31, 2017, consolidated GAAP net income was $2.8 million and consolidated adjusted net income was $17.9 million, an increase of 14.7% from the fourth quarter.
GAAP diluted earnings per share were $0.05 and diluted adjusted earnings per share were $0.34.
In addition, Bridgestone Healthcare, Inc.
, our assisted living and independent living subsidiary, grew its segment revenue by $2.2 million or 7.2%, segment income by $1.2 million or 36.2% and EBITDA by $1.74 million or 40.2%, all over the prior year quarter.
Cornerstone Healthcare, Inc.
, our home health and hospice subsidiary grew its net income by 35.2% to $4.3 million and revenue by 20.5% to $32.1 million, all over the prior year quarter.
Other key metrics include cash and cash equivalents of $31.5 million as of March 31 and $193 million of availability on our $300 million revolving line of credit as of the quarter-end.
As <UNK> mentioned, we are reaffirming our guidance for 2017.
We are projecting revenues of $1.76 billion to $1.8 billion and adjusted earnings of $1.46 to $1.53 per diluted share.
The 2017 guidance is based on: Diluted weighted average common shares outstanding of [53.7 million], the exclusion of acquisition-related cost and amortization costs related to patient-based intangibles, the exclusion of losses associated with the development of new operations and startup losses which are not yet stabilized, the exclusion of legal and charges associated with the class-action lawsuit, the exclusion of costs associated with the closed operations, the inclusion and anticipated Medicare and Medicaid reimbursement rate increases net of provider tax, a tax rate of 35.5%, the exclusion of stock-based compensation and the inclusion of acquisitions closed and anticipated to be closed in the first half of 2017.
Additionally, other factors contribute to our asymmetrical quarters, including: Variation in reimbursement systems, delays and changes in state budget, the seasonality in occupancy and scope mix, the influence of the general economy on our census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals and other factors.
As we indicated last quarter, we want to remind you that we anticipate the momentum to build over time and that we do not anticipate that our performance will be split evenly between each quarter.
As we've said before, we expect to return to our typical pattern of stronger performance in the later half of '17.
And with that, I'll turn it back over to <UNK>.
<UNK>.
Thanks, <UNK>.
Before we turn the call over to Terrence for questions, we want respond to some recent news from CMS that some of you may have read about last week.
We typically don't like to comment too much on the many iterations of what CMS puts out there.
We're really focused on driving clinical outcomes, but we feel that there is some misinformation out there that deserves a few moments.
Last Thursday, CMS issued its proposed annual update regulation, establishing a net market basket increase of 1% for fiscal year 2018, which starts on October 1 of this year.
The update is a result of last year's permanent doc fix, which required all post-acute care providers to receive the maximum market basket update of 1% in fiscal year 2018 to offset part of the cost of the bill.
The fiscal year 2018 update would have otherwise been a net increase of 2.3%, but this was expected.
Included in this announcement, a proposal to revise and rebase the market basket base year from federal fiscal year 2010 to 2014, this is consistent with historical practice, of note, CMS has taken a more granular approach to developing the cost category weights for the 2014 base SNF market basket.
With that, we expect to see the typical back-and-forth on each cost category, which could actually benefit us in some areas, including therapy rates.
Additionally, CMS released a separate release in the form of an advanced notice of proposed rulemaking, or pre-rule, which asks for comments and feedback on potential revisions to the SNF payment system.
The pre-rule is based on research conducted under SNF payment models research project.
This is essentially just a preview of the research conducted and what a new reimbursement system could look like.
As with any pre-rule, CMS may or may not take action on the proposal discussed in the pre-rule, and we fully expect a very robust comment process on this particular CMS pre-rule.
We certainly do not expect the pre-rule to be implemented before 2019 at the soonest and definitely not in its current form.
Historical experience, experience is important, is that these pre-rules always look very different upon implementation as compared to the original language, and we expect this one to go through many, many, many iterations before it is finalized.
Our industry experts and network of health care associations have been and will continue to be very involved in commenting, shaping and possibly coming up with an entirely different approach to the changes proposed by this pre-rule.
The pre-rule would move the industry from RUGs calculation based on services delivered to one based on patient characteristics.
Accordingly, the focus of payment would be based on resident characteristics and care needs.
As a result of the change in focus, this pre-rule states that CMS would also expect a significant reduction in regulatory burdens or costs.
In this regard, the pre-rule highlights potential changes to MDS assessment and therapy delivery that could actually lower the cost of services.
Any changes to the reimbursement system would come with enough lead time that would allow each local operation to take steps to mitigate any financial impact of a final rule, if it is actually finalized.
As Ensign has demonstrated over and over again throughout our history, our unique, facility-centric operating model has allowed us to make significant progress in managing through many varieties of reimbursement changes while planning for others that may come.
As we've said before, we are actually encouraged by the path that CMS is driving towards alignment with excellent patient-centric care.
To the extent the payment system incentivizes clinical performance, we welcome it.
In fact, over the last 18 to 24 months, we have benefited from various value-based payment models, including BPCI, capitated rate models with our managed care providers, quality base state Medicaid incentive programs and similar value-based programs.
It makes sense that CMS is driving this direction, and we're excited to help shape a new model that encourages and compensates higher quality standards.
But they are not the first to do so.
Despite the efforts, some have made to calculate the financial impact ---+ despite the efforts some have made to calculate the financial impact of this pre-rule on our results, we believe that it's way too early to know what the impact of this pre-rule could be, and attempting to calculate those changes based on simulation modeling and projected resonant classification not only would be misleading, but would also ignore the significant reduction in regulatory burden mentioned in the pre-rule, as well as the many, many levers we would have at our disposal to impact those results.
In fact, we viewed the CMS as nothing but positive.
We apologize for taking so much time today to discuss this, but we felt it was important to give our perspective.
We also feel that it's important to remind ourselves and you that we are firmly committed to taking the long view in the decision-making processes that affect this company.
Our operational philosophy emphasizes sustainable results and is in the best interests of our patients, our company and our shareholders.
We want to again thank you for joining us today and express our appreciation to our shareholders for their confidence and support.
We're also appreciative to our colleagues in the field and the Service Center for making us better every day.
Terrence, I'll turn the time over to you for Q&A, if you would instruct the audience on how to proceed.
Good.
Yes.
So there's a couple, both in Texas.
And essentially as I said, they are ---+ were facilities that were having some significant physical challenges and the CapEx investment that they would require just didn't make sense.
And so the plan there is to reserve the beds in 1 case so that we can move them to a facility in the same community, actually, to use some of those beds to add to the existing facility.
But this ---+ these are decisions not driven by anything other than the physical plan.
And <UNK>, just so you know, in one place, we knew this was going to be a challenge at some point in time.
And it got to a point where we realized, look, we either are going to have to put millions into this facility that still might have problems after we put it in or we can just use the beds somewhere else and probably more wisely deploy capital.
Then we already have a facility not too far away in this town, and so we thought that we would find a better site and use those beds elsewhere versus really wasting CapEx money in this particular case.
It's hard for us to do this because that team is important to us.
We were able to take some of them and move them elsewhere, but it just didn't make any sense for them or for us.
No, not all of them.
Some of them, which means we'd have to ---+ we'd probably have to do something else with the rest of the beds.
But a big portion of them, we can move over to the other facility as we add to it.
But some of them, we'll have to deploy elsewhere, not in that particular town.
Yes, <UNK>, just for your ---+ the state does give you several years to kind of hold those beds and evaluate exactly what you're going to do with them, so we do have some time to look through that and decide what the best use of those beds would be.
And I should also add because we didn't.
In that particular case, <UNK>, the real estate-related cost was very small.
This was not a high-priced facility or one that we spent a lot of money on.
Yes, I think it's all of those levers and more.
I mean again, we ---+ I'm probably tired of talking about this, but it's important that you know this.
I think we probably had so many things going at once that it was very difficult to continue to do the things that we've done so well across time.
And we feel like we finally wrapped our arms around those things towards the end of last year and we're able to begin to do the things that we've done for essentially decades, I guess ---+ for 18 years.
And so we're pulling those levers again and we're doing much better in the Legend portfolio.
We're doing much better in many of the new acquisitions that we took between '15 and '16, and as those do better, they become sources of help instead of sources of dilution.
And the momentum has swung and we're pretty excited about what we're seeing in most of those markets.
Do you have a couple of hours.
I mean, that is a large discussion.
I wish it were some secret sauce or some small lever that we pulled or some great speech somebody gave, but it isn't like that.
There were just a lot of different things that were done.
And most of it was returning to the fundamentals we know so well.
But having sufficient resources in performing, it's a momentum thing.
As we start to do well in certain facilities and in certain areas, we just ---+ look, some of these things were new to us.
Opening up new buildings was new to us.
Taking on a large portfolio was new to us.
And it saddens me that the conclusion is that we can't do that.
It's just that we need to learn how to do it.
And it's not something we're going to do.
We still love the small portfolios, we still love the turnarounds, but I want to remind people that we did take a 9-facility deal 2.5 years ago in Southern California that's performed beautifully.
Nobody's heard anything about it because it's been doing great.
And so there were just some mistakes that we made as an organization.
I talked about the decline that had occurred prior to taking that over, that probably should have been different decisions made on my part in delaying that transaction.
But it's exciting to see how everybody's rallied and what's happened with discipline on costs and occupancy and skilled mix and just the overall culture in these areas.
Yes, so what that is, remember, it's not ---+ in fact it's the only bucket that's not apples-to-apples.
And so when you're looking at the recently acquired, you really can't compare the numbers, and that's why we have that symbol, the not meaningful symbol, on there because it really happens to be (inaudible) facilities, entering that and bringing those numbers down because it's not a comparable number quarter-over-quarter.
So some of the ---+ for instance, some of the acquisitions that <UNK> mentioned, we took on the ---+ some of those were as low as 35% occupancy.
And so when you add a couple of operations ---+ actually 2 of them were under 45% occupancy.
So when you add a couple of those into that mix and then a few others that are much lower than our average in the newer acquisition bucket, it's going to alter that number significantly.
So it isn't ---+ I don't know ---+ we don't know how to change that because you'd have to have all kinds of categories, you'd have to have the less than recently acquired but recently acquired and the brand-new acquisitions.
And it's just ---+ it's a difficult number to track, but obviously, it all normalizes out as it moves into the transitioning bucket.
Yes, I'd love to say it's been fully implemented.
It's been partially implemented.
We're still ---+ that's exciting.
I mean, the exciting thing is we made movement without the full implementation of it.
But it's still happening.
I'm afraid I'm going to be called the boy who cried wolf at some point, but it is happening.
We had many discussions with them in other states about Utah.
And also, we have some folks in Utah that have great relationship with the 2 key areas, one in particular is the dominant player.
But the good news is we move by a significant amount without full implementation.
So when that is fully implemented, we hope any day, that we're going to see some massive movement, we think, in Utah.
Yes, like we talked about in the last call, it is a continuous process.
So every quarter, more and more of the locations start to turn on as fully collectible.
And then as we get the managed care providers on board, as well after we get the state and feds on board, then those collections start to turn on and get better and better.
And so we're making continued progress every single quarter.
You'll also see that accelerate as we slow in opening up new builds.
That's a significant drag on our cash flow.
And so as that slows, as <UNK> said, our cash position will improve as well.
Because you just ---+ you don't do well out of the gate in these new builds.
Terrence, we appreciate your help with the call.
And thanks to everyone who took the time to join us.
I know it's kind of awkward to do on Monday morning and the way we did this, but we appreciate you accommodating us.
It was important that we get this information into your hands.
So have a great, great rest of the week.
| 2017_ENSG |
2016 | SAM | SAM
#Thanks, everybody.
We look forward to talking to you at the end of the next quarter.
| 2016_SAM |
2015 | IDXX | IDXX
#My comments were focused on the first generation of products.
I think it is just a calibration, as we look at all the factors involved.
The competitive products are out there.
They were out there in the first quarter.
That affected the first generation of products, so I think it's just basic, we want to make sure that we calibrated it correctly, as best we could, using our judgment.
That was a cumulative ---+ just to give you a ballpark understanding, but it was cumulative over the first five years.
Obviously, we are going to sell it beyond the five years.
It has a consumables stream.
We think virtually every practice is a candidate to buy this analyzer, because virtually every practice does a manual urine sediment review, as part of a work up.
But it is a cumulative number.
I think we are always fine tuning our pricing strategy.
One of the things we have is a program called SNAP up to savings, has worked for us historically.
We are always fine tuning that.
But I think the trends that we saw in Q1 where we had very good volume, very good volume gains, at really not any in the 4Dx, not a lot of pricing gains, but good volume would be the expectation we have, generally speaking for the balance of the year.
We really haven't given a guidance for 2016, but I will mention is we do have superior products, and this is the first quarter within our new sales model, and so we're really ramping up our relationships.
And in the case of infectious disease, which of course the majority of rapid assays are infectious disease, our professional service veterinarians are important.
And our marketing strategies to this broad base of customers, both not just field but of course, phone based, and other marketing strategies.
We think we have correctly calibrated the reset here for the introduction of new competition.
Obviously, what is really driving growth in IDEXX is the continued innovation across the diagnostic portfolio.
And we think ---+ again, these products in many case were launched over 20 years ago, but we think it is really the innovations that are going to be driving our growth going forward.
We are finding our strategies to keep the entire customer relationship in all the product lines, and certainly when we are calling on customers ---+ when we call on customers, we do a very good job of talking about the level of differentiation.
It's just that we just can't always get to all customers with our direct field organization, early on, with the new competitive interests.
I want to thank everybody for being on the call, and I really also will take this time to congratulate the IDEXX organization.
This was a major transformation that we undertook in 2015 with our US direct strategy, our international operations just had an extraordinary performance.
I think it sets us up well for the year globally.
Certainly our product and innovation teams.
As I mentioned, our innovation is in high gear, with a variety of product launches that start from next week and extend over the course of the year, are balanced towards the first part of this upcoming 12 months, and then the urinalysis analyzer, the whole new analyzer.
So we've got the field organization to sell the products, and our innovation is on track.
With those closing comments, I will conclude the call, and thank you, everybody.
| 2015_IDXX |
2017 | FLS | FLS
#It's a really good question because you think in terms of technology within our manufacturing capability.
For those of you who joined us in Raleigh a couple years ago, you saw some sophisticated computerized machinery and why is that important.
Well, one, because if you think about the precision around the process conditions and the engineering drawings and the castings, much higher level of precision, less scrap, more efficiency, better tolerances.
I think the other thing is, if you look at the labor associated with that, the labor force is changing.
We still have some, fewer than we did before, but we have some old vertical and horizontal lathes in our plant and that is an art and the individual has been doing it for 30 or 40 years and the chance for error is higher.
So, yes, in our facilities that we've been standing up, we have much more efficient computerized machinery that's doing a lot of the manufacturing for us.
If you are talking about technology within our product, absolutely and we always maintain the product matters because that's where the process conditions are determined.
That's where the algorithms are created from.
That's where you can put the sensors in.
It is really the intelligence of the operation that passes along to a DCS, a system.
So on both ends, technology has been very important and it will help us both in manufacturing and in selling our products.
The last extension is just using technology in terms of computers to sell to customers.
Increasingly, now, especially on the run rate business, customers want to be able to go online, configure the product, order it and our commercial organization and sales organization have been working very hard.
The big beneficiary when we get in that place is going to be IPD.
Yes, to my comment earlier, I don't want to give any quarterly guidance and we talked earlier in terms of what exit margins could be.
I will go back to, in the IPD business, we still think that that is a business that should be at 14% to 15% levels.
How and when we get there, obviously if the market were to ramp up quickly over the next quarter, that's going to help you, but in terms of operationally, we have certainly turned the corner, but not completely in terms of improving the business and bringing it back to the levels it should, keeping in mind that two of our most profitable largest revenue plants were impacted, as <UNK> described.
So I think around expectations, it's getting those processes in place, but let's pull the market aside at this point in time continuing to improve that, winning back our customers, which will help top line absent a market, driving more efficiency.
When a plant gets choked, it can become ---+ it impacts margins dramatically.
So I think I just want to give you some context and ---+ but I will take a step back moment ---+ the person who is doing this has done this before and with great success and that's <UNK> <UNK>.
Not really.
If you look at some of the equipment that we operate, it's fairly sophisticated.
I don't know what competitor you are referring to, but, no, we haven't seen it.
| 2017_FLS |
2016 | ABM | ABM
#Sure, <UNK>.
You're absolutely right, roughly $0.06 is included in our adjusted EPS, and that relates predominantly to an early adoption of an accounting standard related to stock-based compensation.
The majority of the other discretes, the largest being the passage of position that we had mentioned earlier at the end of last year is in IIC, and that was roughly $0.32.
Yes, absolutely.
So it's not a one-time item, but it's hard to quantify whether it will be positive or negative.
It's really dependent on the existing grants and the share price, that's a variable, but it is part of our normal operations, and we'll be providing guidance at year end related to what we expect that impact to be for next fiscal year.
No.
Again, we break it up into two buckets, consistent with prior years, prior periods.
So it was all prior year, the adjustment that you're referring to.
In the current year, as I mentioned in my prepared remarks, we are seeing some good indications that some of the initiatives that we started late last year are starting to provide some benefits, and we are, as you know, we are accruing at a much higher rate year-over-year.
So we are charging the business what we feel like is the right long term appropriate rate.
But that being said, we are seeing some benefits, but it's too early for us to move away from the higher accrual rate.
So ultimately, we feel like the current charge to the business is the appropriate charge, and we are still dealing with the prior period adverse development.
What I would say, <UNK>, too, just to chime in on that, I think what we are enthusiastic about is, there is stuff that we can control this year, because we have a good amount of control on what happens in the year, and the culture is changing and really being fortified internally around the safety programs.
We're seeing a decrease of frequencies across the board.
So much of this, for the long term, is about a cultural shift, and it's really taking hold here.
So again, enthusiastic about where we are, and where we're headed.
I think it's still early on in our 2020 Vision program, right.
We did get 30 basis points of benefit this quarter from having one less day, but these reinvestments are so important, <UNK>, because they're going to be the foundation for the future.
We set up our organizational design, and it's pretty ---+ I would say it's a quicker route to take cost out than it is to build cost in, because you're building a new structure.
One thing I would point out is we are developing a new talent organization, that's going to be focused on how we onboard the right people, how we do development training for people in the field, how we do performance management.
And that's a group right now, we just hired the head of that group, literally over the last couple of weeks.
So there's two people in the group, that could be as many as 10 people.
So I don't want to trade away short-term by not filling those positions.
So those are going to be again fundamental to the long-term success of ABM, and were' going to make those investments.
It's hard to predict the timing, but so it's early on in this.
And I think, <UNK>, from what we projected as the 100 basis points, we broke it out into components.
We said the org design was going to be roughly 40 to 50 basis points.
We said procurement is going to be roughly 10 to 15 basis points, and then the rest is going to come from account planning and the vertical acceleration.
I think what we're seeing is on the org design, we are trending at the upper end of our original 40 to 50, and maybe slightly exceeding that.
So I think it points to, we're headed in the right direction, but it's too early to tell whether the 100 basis points becomes 110 or more, or whether the 100 basis point is on track.
But we are trending a little bit higher on the org design.
This is <UNK>.
We look at our cash flow on an annual basis, and there's always going to be timing elements.
If you look at it from a year-to-date perspective, with the increase in severance payments, the increase in costs related to 2020 Vision, we are right on track with where we were last year.
So I wouldn't take this quarter as an indication of anything fundamentally changed in our cash flow outlook.
It's just a matter of timing.
I would look at it on an annual trailing 12.
It's hard to go down to that level of granularity, but what I can tell you is that TAG continues to be a focus in the organization.
I think, back to <UNK>'s point, culturally, the organization is starting to embrace the margin story, and TAG is one of the easiest drivers for that margin story, specifically in janitorial, and to a lesser extent in our facility services business.
So it continues to be a great story from a TAG perspective, and it continues to be a focus area for the firm.
I think when you think about TAG revenue, you can think that it has a margin profile, that's 2X our base contracts.
So as the margin story resonates in the firm, you will see that there will be a focus towards TAG, just because it's high value capture for the team.
So it all comes down to contract mix and blend and market segmentation, and again, we have the right trajectory into the higher margin.
That's going to be part of our account management process that we are initiating in our center of excellence.
So as we start standing up these industry groups and look at business by vertical, we will start creating detailed account plans for the future.
And there are some that will end up tailing off.
There are some that we'll actually put a plan together, to say ---+ it's not the kind of thing where something is not performing at the right level so you just send a cancellation notice, you actually put a plan together to accelerate margin.
And if you can't do that, that's when you make those tougher decisions.
But for us, if we have lower performing accounts that we can't put together a robust acceleration plan around, you will see us exiting those accounts.
It will typically, we're going to look at it from a renewal cycle.
So this is a very dynamic piece of our business, and as those accounts come up for renewal, to <UNK>'s point, either we're going to be able to put a plan in place to bring the margin up through TAG or through other operational levers, or we're going to bid the account at an appropriate margin, and if we lose it, then we're okay with that.
I think it's a combination actually of everything you said.
What we will be doing is, I can give you a good example of something that happened this quarter.
We were pursuing a very large contract with JPMorgan Chase and JLL, who is their managing agent, and it was for the commercial cleaning portfolio in the Northeast.
While price was very important to JPMorgan and JLL, workplace was as important to them, quality of sustainability, quality of our training, of safety, and we had as much conversation with them on that as we did on price.
And we ended up winning the entire portfolio, as I mentioned in my script.
We won the entire portfolio of business.
At the same time, we had a similar size opportunity with another institution which wouldn't be appropriate for me to name, but it was a similar opportunity, almost exact in scale and size, and their key driver was price alone.
And all the conversations were around price.
And they wanted to work with us, because they liked our organization and had a good history, but it was only a price conversation.
And we just couldn't get there.
We didn't see a trajectory to raise margins over time, we just said to ourselves, we're going to end up not making our client happy, and we weren't going to achieve our goals, and we actually passed on that opportunity.
It was something very new culturally for ABM to walk away from a large-scale revenue opportunity, because it didn't have the right margin profile, and it ultimately wasn't going to satisfy the client.
So I can tell you both of those assignments culminated at the same time at the firm, and there was as much excitement internally for us not pursuing that low margin price opportunity, as there was for us winning this large-scale high profile account.
I think it's mostly, in that case, it's us forcing the issue, in the example that I gave you.
But for us, it's going to be about our approach to market, and as I said, in our center of excellence, we have this account management work stream.
So what that's going to mean is that when we look at an assignment, especially a larger assignment, what we are going to be saying is okay, on this base assignment, what's the margin profile today, and where can it go.
But more importantly, what are the services that we can tie in from an IFS standpoint, right.
Integrated facilities standpoint.
What are the services that we can leverage.
And if you think about our education vertical.
We have been, and this is a really important point, prior to 2020 Vision, we had four different regions of the firm, each with about $60 million in education in a $1 billion portfolio that they were managing.
So it didn't really grab the attention that it should have.
Now, we have a $250 million education vertical, that we are looking at holistically in terms of IFS, and how we can bring the resources of ABM to bear, match that with our ABES technical services group that does a significant amount of business in education, and never really married it up with ABM internally.
So now you have a head of ABM education for facility services, partnering with an education person in our ABES technical services group, that does a 35% gross margin, and they are figuring out how to pull through the ABES technical services into education.
So in the future, when ABM looks at an account and potentially an education account, we're going to say, well we can capture the janitorial award here at a 7% EBITDA margin, but we're looking at their facilities, and we are seeing that the equipment, the mechanical equipment is aged, there is a great opportunity here to pull through our ABES technical services business.
So if we can execute, we're going to be able to pull that in and move the whole account up to maybe a 13% blend.
That's the kinds of conversations that are starting to happen at ABM, that never happened before.
And that's where the excitement is.
What I would say is, I think that for us presents an opportunity.
We have a person and a team in our center of excellence just working on parking innovation, and where the market is going, what are the latest trends.
And if you think about firms in the parking space, there's very few that have our scale, that have our balance sheet, to terms of investment in technology and innovation.
So I think for us, we look at change in the parking industry as a key way for us to accelerate, because when we are dealing with a small local company in a particular market, that doesn't have the ability to invest in innovation and technology, we think that's going to be a great opportunity for us in the future.
Parking, from an experience standpoint, what we're trying to do for the individual parking, if you look at our parking business and you map it, the majority of the parking business is going to be mapped to our aviation industry group or vertical, a good portion that's going to mapped to our healthcare group or vertical.
And then there's going to be a component that's going to be in B&I.
So when you look at those three segments and what we call the patient or passenger experience, we are working on the integration of parking as an end-to-end solution, so that when someone parks their car at an airport, we then can shuttle them to the front gate, we can do the wheelchair, we can do the baggage handling, we are cleaning the terminal.
So it's an integrated story, versus historically being run as a service line, which really was purely a price-driven model.
I think if you think about the future of ABM, going forward, there's going to be less conversation about janitorial or parking, because if you were to ask me in 2017 when you ask me a question about parking, I am probably going to say, which industry group are you talking about, aviation, healthcare, business and industry.
It's going to be less of a holistic business, and more focused practice area as part of an experience in that industry group.
Sure.
It's funny.
I hadn't thought about janitorial growth and pressures in the same sentence right now, because we are pleased with our organic growth.
We're having 2.2% organic growth, and our growth is seasonal.
So it happens around this time anyway.
So to be 2% organic growth, for us, wasn't a pressure story, it was a positive story.
Because you have to remember the backdrop of everything we are doing is around organizational transformation.
So you have this huge dynamic in the firm, where people are changing jobs, they are shifting clients around, and focusing on keeping the transformation together.
So to do that, and then to grow the business organically, is a home run, and last time this year, when we were looking forward to where we would be now, we have put some pretty aggressive targets in place, and the fact that we are meeting them and growing, we're pretty excited.
And we think that trajectory is going to continue.
We don't see any reason to think that it's going to slow down.
And again, especially as we start moving into this industry group format, and people in these industry groups are focusing on end to end ---+ the story, when we talk about janitorial, we're going to be talking about it by segment.
So we are encouraged.
Sure.
The majority of the savings at the end of Q4 should be at a run rate as we outlined initially.
So the organizational and procurement savings should be a full run rate by the end of FY17, which should be a dollar-for-dollar point-for-point contribution throughout the year.
As it relates to the account planning and vertical acceleration, as we initially indicated, that's a second-half FY17 story.
But overall, we're going to end the year at roughly 4.1%, 4.2% EBITDA margins, and we should end next fiscal year at 4.7% roughly EBITDA margin.
So we are well on our way with what we outlined as part of 2020, slightly ahead on the org, too early to tell on the other components, but based on the work we are doing in phase two, the account planning, labor management, and some of the COE, what's coming out of the COE, we're feeling pretty confident that we're on the right trajectory.
And I want to reiterate what we said earlier, is not necessarily a quarter-by-quarter story, it's a trailing 12 month story.
Because again, these transformations can be bumpy, in terms of timing of investments and when you deploy.
But in terms of where we are heading, and I guess I will always come back to the culture and the organization.
We're really encouraged.
Sure.
Let me break out all the components to our guidance beat.
We had roughly from 2020, if you think about it, we had roughly $6 million in the first half, first two quarters.
We recognized approximately $7 million in Q3, and we expect roughly $9 million more in Q4, which gets us to the $22 million upper end of the range.
And as I mentioned earlier, we've outlined 40 to 50 basis points roughly for org and we are heading towards the higher end of that range.
On timing, we recognized roughly $0.05 in the first half.
It's really hard to pinpoint timing, just given the dynamic nature of when we're going to make investments and how, but roughly $0.04 to $0.06 in the second half, so overall $0.09 to $0.11 on a full year basis is related to timing.
And the rest is the tax, which is $0.06.
I think overall from the org, when you outline the process, you have an estimate of what you expect to save for the org.
There are some things that we didn't necessarily factor one for one.
One being the share-based compensation expense associated with individuals, that may have been impacted through their redesign.
So that's, I would say, a new finding, but we are also benefiting from just overall lower T&E with those individuals that are no longer with the organization.
Those are things that are going to ebb and flow over time, but overall from an organization standpoint, we are a little bit higher than what we expected and outlined, and it was a very robust process, a long term process.
It was not just a percentage across the board.
We are designing to the organization of the future, and that's why some of the investments we haven't made are critical.
And then on the procurement side, early phases, we've hired a head of procurement.
He has put in place policies and practices.
His next phase is really going to be on the compliance of those policies and practices, so it's a sustainable savings going forward.
And we are well on our way, on the run rate that we've outlined on that front.
And on the other, outlined for 2020, currently in process, and we expect that to begin to accelerate in 2017.
So I think it's too early on for us to sketch out where we can be three or four years from now, but I can tell you, just the fact, if you think about it, that we are focusing as one unit and one enterprise going after the market, with some basic standard operating procedures that we never have, is just going to be huge for us.
And then pulling through our ABES technical services, we hired a gentleman named Dave Carpenter who was formerly of Aramark, where he ran their education business and the healthcare business, really, really tremendously experienced gentleman, and understands what is possible.
He is encouraged.
He came on board with us because he sees what the future can be in education, what the trajectory can be.
But it's less of probably a 2017 story than a 2018 story, as we start pulling the groups together.
I could just give you one example with Department of Education in New York City here.
It was a $20 million account that was already on our radar, because it wasn't performing well, and we were trying to put together an action plan as to how you can raise margin.
We didn't think it was going to pan out, and fortunately for us from a timing standpoint, they made the decision to go in-house.
So it was fortuitous event.
So even before we could take action, to start cleaning up and getting our focus right on education, we had this forced event, which was again, fortuitous.
Again, when we look at year-over-year comparisons, it will look like the education vertical is shrinking, but the quality of the education vertical is going to be stronger.
So, I am really enthusiastic about what this could be.
We are a $250 million vertical in a sea of some larger competitors that all have a billion in front of their number.
$1 billion, $2 billion in that market.
So I think we have great trajectory, and the right team to go after it.
Sure.
And I want to frame out what TAG revenue is and how you should think about it.
TAG revenue is not passive, right.
It is something that you go after.
It is something that you're soliciting.
So picture an office building, where we have a project manager there who is interacting with the client who would happen to be the building manager.
And this is where you're going around and creatively looking for ways to hopefully add value to the building, but also help us create revenue and margin story.
So you maybe, so there's different ---+ there's levers to pull but you had to actively go after it.
That's the buzz that's happening in the organization now.
We have our portfolio managers talking to our project managers in the field, and having them have these really deep conversations with the clients about how we can add to that TAG revenue.
So it's not something that just happens because the economy is good or what have you, you have to solicit it.
And so we're seeing that happen, and I think that's the key driver, because our managers know that there is a much higher margin capture in that area.
So that's been the key driver of this, it's been us actively pursuing TAG revenue.
When you look at the industry group itself, I think for the most part, we have our senior management in place.
We are looking to build our sales infrastructure.
We have a good one now, but that's going to be an area that you're going to see some build.
And then on the support services side, I mentioned some HR hires, we are also putting together a shared service center in Houston that's going to be the center of all of our financial transactions.
So we have some work to do in terms of hiring on the support side, as well, but I think in terms of our client-facing portfolio management and project managers, I think we're probably 90% of the way there.
Yes.
Well, I think so.
And I think it's going to come in that center of excellence that I'm talking about earlier in my script.
In terms of labor, let's take labor management.
We are a labor company.
At the end of the day, we have 100,000 workers in there, that are performing their tasks out in the field.
And right now, our approach has been pretty siloed.
There are things that we do in Chicago, that we are not doing in New York.
Things we do in New York, we're not doing in LA, and vice versa.
And we haven't codified best practices, and I believe that when we go through this consistent excellence, center of excellence process that we have going on right now, in labor management, and account management, in our approach to how we're going to manage a client account, I think there is just great promise over the long term.
We have brought some people into the organization that worked at other companies that put together standard operating procedures, and actually went through a program of what we're doing now, of again codifying best practices.
And they have talked to us about the trajectory they have seen internally.
As you know, we've been working with Boston Consulting Group that does this across hundreds and hundreds of organizations in the service business.
So I think we are enthusiastic about what this can lead to in the long term, but it's just hard, <UNK>, right now to say what this can do next quarter or even the next six months.
It's more about what is this going to be able to do for us in the coming years.
It's a great, great story.
I think we got through the biggest hurdle in terms of people knowing they have a seat at the organization.
We've done the exits already.
So all the tension that was built up in the organization prior to us making those announcements two or three months ago has been alleviated, because people know they have a role, they know they have a seat, and so that anxiety is past.
So now it's all about transitioning accounts, and we are probably 75% through the process at least, in terms of transitioning accounts.
In terms of actually putting together actual plans for each account, we are even farther ahead.
So I can tell you, and this is probably more anecdotal, but I can only think of probably even less than a handful of accounts where our team has come back and said, we're not exactly ready yet because it may be more than the client is ready to handle, because we just put this one person on the account.
To take them off right now is not great timing.
But I am telling you, less than a handful.
So for the most part, our clients have been really receptive.
They know us well.
And I said this before, this is not the first time we have transitioned managers from one account to another.
We always did that on a regular basis too, to refresh accounts.
So it's not like someone has been on an account as a project manager for seven years, and now all of a sudden we're taking them off and there's this dramatic shift.
So I will always say that there is caution, I will always say that there is risk, but I think so much of it, <UNK>, has been mitigated by the fact that people know that they have a seat, and they are working productively.
And frankly, in an organization that is accelerating, right.
If you think about what's happening here with our results, what's happening with our stock price.
It's a great atmosphere at the firm here, and to know that you are part of this has been palpable.
I just want to thank everybody for joining in.
I hope everyone had a good summer.
We are off to the fall, and good things ahead.
And we will keep you posted on phase two and everything we get accomplished over the next few months until our next call.
So thanks for the time, and for sticking with us.
We're excited about where we are going.
Thank you.
| 2016_ABM |
2017 | ASNA | ASNA
#Thanks, <UNK>.
Good afternoon, everyone, and thank you for joining us.
Our third quarter adjusted earnings per share for the quarter were $0.05, within the revised guidance range we provided several weeks ago.
This performance reflects an extremely competitive market environment, characterized by persistent store traffic decline and intense promotional activity.
We expect these factors will remain major headwinds for the foreseeable future and reflect an accelerated shift of consumer demand toward e-commerce.
Responding to this shift requires fundamental changes in the retail operating models, and we have made significant progress towards transforming our business to compete in this new environment.
Make no mistake, we were very disappointed with our performance for the quarter, and we must accelerate our transformation and improve execution across our portfolio.
Today, I want to focus on the aggressive actions we are taking to navigate current market conditions.
Our transformation work is proceeding simultaneously on 2 tracks: an accelerated and relentless attack on structural cost and an elevation of our platform capabilities to unlock top line performance.
I'd like to start by talking about our accelerated cost-reduction initiatives.
We recently increased the cost takeout target of our Change for Growth transformation program to a range of $250 million to $300 million by fiscal 2019.
This is as much as double our previously announced $150 million target and reflects our determination to increase the intensity and scope of our program activity.
A major driver of the increased cost-savings commitment is our fleet optimization program, which has already begun.
As you know, we have been developing this program for several quarters.
And over this period, we have performed a comprehensive analysis of our fleet, customer behavior and sales transfer rates.
We are aggressively going after the 60% of our fleet with lease terms that mature by July of 2019, and are confident that the strategy shared today will create a leaner, more profitable ascena.
Over the next 2 years, we expect to close or achieve substantial rent reductions in more than 650 stores, which represents almost 25% of the total store population with lease term maturity between 2017 and July of 2019.
We've identified more than 250 locations that will be permanently closed through July 2019.
An additional 400 or so more stores will be closed if specific rate concessions are not obtained through landlord negotiations over the same period.
We expect our fleet optimization program will be earnings accretive and will deliver working capital benefits.
The other drivers of our increased cost-savings commitment are primarily related to efficiency opportunities across both front end, and back-office functions and deeper reductions in non-merchandising procurement spending.
I want to be very clear here.
The $250 million to $300 million cost takeout target is not where this process ends.
We are embedding new behaviors in our organization to continually seek incremental opportunities to become more and more efficient while maintaining sight of our overarching objective: To drive profitable growth from a compelling portfolio of leading brands, supported by a highly competitive set of platform capabilities.
As a result of this $300 million multiyear technology and investment ---+ and infrastructure investment cycle, we have developed a highly efficient supply chain and foundational omni-channel platform that will enable us to respond to fundamental changes in consumer behavior that are disrupting our industry.
The unprecedented store traffic declines in the retail apparel sector are currently masking what we see as an ongoing opportunity to create value through our powerful brands.
At the enterprise level we are working aggressively to accelerate our product development cycle and to elevate our digital capabilities through implementation of new customer experience management tools.
In addition to our platform-level capability work, each segment is developing discrete initiatives designed to enhance performance at a more granular level.
Some specific examples include: We're excited about clienteling projects now being tested at Ann Taylor and Lane Bryant.
LOFT will launch a plus-size assortment in fiscal 2018, and Justice has recently rolled out plus sizes for their girls.
We are expanding our Cacique Intimates brands across our Plus segment and exploring potential synergies as we evaluate Intimates opportunities at maurices.
We are continuing our smart store implementation at dressbarn and expect to fully realize the benefit of rationalized choice counts and increased fashion depth as we approach the end of July.
We're also evaluating opportunities to capitalize on the strength of the Justice brand, which is the second most relevant brand for the tween girl behind Disney.
On this front, we continue to grow our international franchise business and explore potential licensing partnerships.
Our combination of talented teams, leading-edge omni-channel platform capabilities and portfolio of iconic brands is unique in our industry.
We're confident that our brand initiatives, enterprise transformation work and capital structure will enable us to navigate this period of disruption and emerge as a well-positioned, agile competitor.
We will continue to evaluate all of our capital allocation options, including potential share and debt repurchases as well as portfolio options that could simultaneously represent opportunity to both strengthen our balance sheet and create meaningful value for our shareholders.
Before I hand it over to <UNK>, I wanted to highlight our ongoing commitment to strong corporate governance.
Earlier today, following an extensive search process, Marc Lasry and Stacey Rauch were appointed as new independent directors to our Board effectively immediately.
For those of you don't know Marc, he's a member of ascena's board from 2004 to 2006.
He is the CEO of Avenue Capital Group and brings tremendous depth and experience with capital allocation strategies.
Stacey is Director Emeritus of McKinsey and Company, where she was senior partner for 12 years and leader of McKinsey's North American retail practice for many years.
She's currently non-executive chairman of Fiesta Restaurant Group and non-executive director of Land Securities, PLC.
We're thrilled to have Marc and Stacey join our board, and their addition underscores our commitment to successfully position ascena for growth in our highly competitive marketplace.
With that, I'll hand it over to <UNK>, our COO, to provide an update on key enterprise-level work streams, including our Change for Growth transformation program.
<UNK>.
Thank you, <UNK>, and good afternoon, everyone.
Before I jump into our operational performance, I want to highlight that my comments on this call will reference non-GAAP results, which excludes certain items that affect year-on-year comparability.
One such item for the third quarter was $1.3 billion noncash impairment charge related to enterprise goodwill and trade names.
This charge represents a significant change in the market environment we've seen over the past couple of years.
I will note that it has no impact on our operations, ability to service debt, compliance with financial covenants or underlying liquidity.
As <UNK> referenced earlier, third quarter adjusted earnings of $0.05 per share were in line with the revised outlook we provided last month.
Our performance relative to our initial expectations was primarily the result of a roughly 10-point store traffic decline for all segments, except our Kids Fashion segment.
While store traffic was slightly positive at Justice, promotions were significantly elevated as we were forced to clear 2 key fashion launches that failed to resonate with the customer.
Comp sales were down 8% across our portfolio, representing a deceleration of the business on a 2-year stack base from the trend coming out of holiday.
Gross margin rate, while down 30 basis points to last year, was supported by freight-related deal synergies, the cost of goods sold initiative at our Premium Fashion segment and improved economics related to our new Value Fashion segment credit card program.
Our segments were able to effectively use promotional levers to maintain appropriate inventory levels despite softer-than-expected overall demand.
We continue to deliver significant reductions and structural costs from our transformation initiatives, along with committed synergies related to the ANN acquisition.
Non-GAAP operating expense was down more than $40 million in the quarter or 4.8%, with the largest reductions coming from home office expense, which was down approximately 15% for the quarter as a result of our transformation work.
More detail on both our transformation savings target and our ANN deal synergies and cost savings is provided on Slide 11 of our supplemental earnings package.
The revised full year fiscal 2017 outlook that we shared on May 17 reflects an assumption that our 8% third quarter comp decline will continue through the fourth quarter, with full year fiscal 2017 non-GAAP earnings per share expected between $0.10 and $0.15.
For the fourth quarter, we expect net sales in the range of $1.575 billion and $1.625 billion; gross margin rates in the range 56.5% to 57%; operating income in the range of $0 million to $15 million; and earnings per share in the range of negative $0.06 to negative $0.01.
Regarding fourth quarter performance to date.
Comp sales are up modestly versus our third quarter trend, while demand continues to be inconsistent.
As a result, we are maintaining our negative 8% comp outlook for the quarter.
For more detail on our fourth quarter and full year fiscal 2017 guide, please reference Page 9 of our supplemental slide package.
Turning to our balance sheet.
We ended the third quarter with $300 million in cash and cash equivalents.
Of this amount, $251 million is outside the U.S. We ended the quarter with total debt of $1.67 billion, which represents the remaining balance on our $1.8 billion term loan and a draw of approximately $70 million on our $600 million asset-based revolver.
Between revolver availability and on-hand cash, we currently have approximately $750 million in liquidity and $68.5 million of the $90 million scheduled fiscal 2018 term loan amortization has been prepaid with our next required payment not due until May of 2018.
While we remain focused on deleveraging our balance sheet, we are comfortable with our capital structure.
Net debt to trailing 12-month EBITDA is reasonable at 2.5x, and our trailing 12-month EBITDA provides approximately 6.3x interest coverage.
Our segment teams have controlled inventory well despite the challenging top line trends.
Total inventory cost was $714 million at the close of the third quarter, down 3% to last year.
Adjusting for intercompany differences from the prior year that are reflected in the reported segment inventory balances, quarter-end inventory was down mid- to high single digits across our Premium, Value and Plus segments, while the increase at our Kids segment was related to earlier receipt flow this year to support the floorset timing shift what that was in week 1 of May this year versus week 3 in the year-ago period.
Please reference Slide 5 in our supplemental slide package for additional segment-level inventory detail.
Capital expenditures for the third quarter were $52 million, and we continue to expect full year fiscal 2017 CapEx in the range of $235 million to $260 million.
We plan to continue to reduce CapEx levels as we move into fiscal 2018, with reductions in store capital outlays partially offset by increased investments in our e-comm channel.
I'll close by commenting that the third quarter reminded us again of the changing nature of our competitive space and the need for us to operate in a more agile, efficient manner.
We recognize the severity of the challenge in front of us and are committed to navigating current market conditions by leveraging the strength of our operating platform and accelerating our enterprise transformation work to position the company as an aggressive omni-channel competitor.
Thank you for your attention.
That concludes our prepared remarks, and we'll now open it up for questions.
<UNK>, it's Robb.
I'll start and then we'll kick things around here.
Regarding the working capital benefit, there's some supplemental material out there.
But at the end of the day, as <UNK> alluded to, we're going to be closing 268 of these program stores and potentially up to 667 of these stores.
The 268 store closure would represent the best-case scenario for us where we've achieved $50 million in EBITDA benefit from negotiated occupancy rate settlements.
That situation would give us a lower balance working capital benefit of about $15 million, 1 5.
If we don't get participation from our landlords, this is the highly unlikely scenario, but if we don't get any participation from our landlords, we will close all 667 of these stores and we would see a working capital benefit of about $55 million.
So that information is laid out in the pack.
We certainly don't expect to be at full achievement or 0 achievement.
We expect to be somewhere in the middle there, but at least gives you sense of the working capital dimensions.
Regarding the sales transfer, as we've highlighted here, we are starting this journey off being very mindful of free cash flow.
We have a lot of analytics that suggest that the rate of sales transfer could be in the 15% to 30% range.
We are using lower-bound estimates for the initial assessment here to make sure that we learn before we start closing profitable stores.
If we find out that sales transfer rates are at 30% north of that, if we can put it some of these benefit from some of these CEM tools and get really efficient to transferring sales, this gets very interesting in terms of what the number of closures could be.
In today's environment, not likely to walk away from a store that's kicking out $200,000 in free cash.
In the future, if a store is able to transfer 30%, 35% higher, things get very interesting in terms of how profitable we can be with a significantly smaller fleet.
So hopefully, some color for you there.
I'll kick over to <UNK> for additional comments.
Okay.
So on the last point, <UNK>, I think as we look forward to the journey to positive comps, one thing I want to make sure everybody's clear, we are not assuming that traffic is suddenly, obviously, going to turn positive.
I think we have a long-term secular decline in traffic.
I think all of us gets the ShopperTrak numbers every week and I don't see that flattening out or reversing, suddenly become positive.
So we really have to own it ourselves.
So let me go through a few things that I think are important.
First, when we look at our comps, it includes our online comps.
So we blend them together.
And our online business is growing nicely.
Unfortunately, not enough to offset the declines at the brick-and-mortar level, but that's the continuation, as <UNK> talked about, with the move to our platform, we see opportunities to further enhance the growth at all of our brands.
Second, when you think about going into the store, it's what's new in the store, why would I want to go in it.
So first and foremost, we are a fashion retailer and we need to drive fashion at all of our brands.
In the last year or so, we've brought on 3 new merchants, a Chief Merchandising Officer, and we actually are in the search for one more.
So we believe in bringing the best talent we can.
We think it all starts with fashion, and we're pretty pleased with the direction we're going at all of our brands for fall.
Next, we need to create special experiences at the store to give her a reason to come in.
So it could range from a bra-fitting event at Cacique within our Lane Bryant stores or perhaps a fashion show at our Justice stores.
And so we're experimenting with all different types of programs, including a personal selling appointment as well.
Also, at the store level, we have loyalty programs that ---+ some are in place and some are being enhanced, that we think will help create greater share of wallet with our customers.
Within our omnichannel platform, we have 3 different programs that I think will enhance our store traffic and volume.
One is buy online, pickup in store.
So it takes a customer that's shopping online comes into the store and saves on any shipping cost.
But also when she comes into the store, typically, she'll buy something else and she converts at a similar level to a customer coming in.
And it's very convenient for her to exchange or what have you.
Another program we have is order in store.
So if she has the confidence and even if she can't find what she wants for the size or the color that she can get it through this order-in-store system.
I think that's another reason for her to feel confident to coming into the stores.
And so these types of omnichannel capabilities are going to continue to be enhanced, and we have a goal of trying to make her shopping experience as seamless and frictionless as possible.
Another point, store closings.
We believe that, on average, we're going to have about a 30% retention rate from a closed store, which means that we think we'll transfer 30% either online or to other stores, and we're working on programs to further enhance that number.
Great.
And if anybody has any other thoughts on that, let us know.
And Ed, the ---+ regarding the benefit we talked about.
So the reduction that we ---+ the perfect world is that we get $50 million in negotiated occupancy reductions and we get everything we want from all of our landlord partners.
Obviously, we're going to push as hard as we can to get there.
In the event that we can't get there, as we close more and more stores, we're going to have more benefit from what we're calling EBITDA transfer as we transfer sales from closed stores to remaining network stores which become more profitable.
So again, there's some supplemental material out there which show you that we intend to get $50 million.
In the event that the occupancy reductions are short, we're going to go make it up, again, outside these program stores.
So I think <UNK> always tells me there's no acceptable rent.
And I think that while we're focused hard on these program stores, we're going to also look at the remainder of the fleet.
And as you all know, we've got a lot of stores.
There's a lot of opportunity on every store that's out there that's got a relatively short-term lease duration, we're going after all of it.
So again, anything that's short on occupancy reduction, we're going to go ---+ really work hard to make up on the sales transfer side.
And again, our intent is to go as deep as we can, and these are numbers that we feel confident we're going to get.
There's hope that there's more.
But again, there's a lot of work to be done here, and <UNK>'s got a team set up to go work that.
Yes, you're thinking about it right in terms of the cumulative store base and in terms of what top line volume it has.
And yes, we're using right now, from a financial standpoint, assuming a 10% lower balance transfer.
To <UNK>'s point earlier, we have models from Accenture's, and then internally we're suggesting that number's as high as 30%.
Again, we're going to be very cautious on that until we can read these.
And as you might imagine, when we close a store, we're not going to immediately see the transfer.
We're not going to be able to say if we see it for a month, 2 months, if that's going to stick for 12 months, right, we have to make really informed decisions here in terms of getting a couple quarters to read what the transfer rate is and doesn't hold.
And refresh me memory on the last question, I'm sorry.
Sorry.
So we are focused right now on driving cash flow, Ed.
And so to the extent that something makes sense where we can get out of it without a cash draw, we\
I think maurices has had some challenges in the smaller markets.
There were some possible commodity issues that we saw, energy, et cetera, and we saw some challenges at our colleagues that are also in these markets, like Stage Stores and Buckle.
And one of our smaller local competitors, Vanity, actually went bankrupt.
Another small-market player, rue21, has also gone bankrupt.
So there were certainly challenges in these smaller markets.
I think that some of it may be, as I say, cyclically tied to the commodity business.
But I think of there is also a shift, these customers that may be 10 years ago didn't have access to fashion now do through e-commerce, and that may be one of the contributing factors.
I think another factor simply is, for both Lane Bryant and maurices, we had a few fashion misses, and that's natural in our business.
And perhaps, we had more than our fair share as we look at what we're doing for fall, as I mentioned earlier.
We've got a terrific new merchant on apparel at Lane Bryant that we're very excited about and think that our fall line looks great.
And at maurices, the same thing.
We're very, very pleased with what we're seeing in the initial reads for fall.
So they both had a difficult season, difficult year, but we're optimistic that things will turn out for the fall.
To add just a couple of things on that from a store traffic standpoint, those were the brands that the 2 most challenging store traffic for the quarter.
One other point of note, we talked to you several quarters ago about opening price point strategies, both maurices and Lane Bryant rolled out opening price point strategies this spring.
Those strategies were tested.
We expected them to hit.
Unfortunately, we realized as we put those price points out that we did not get the unit velocity acceleration that we were expecting.
So as you might imagine, lowering the initial ticket price, which we thought was the right thing for the customer, we didn't get the unit velocity.
We had to take promos and markdowns off of a lower ticket price.
So there was an ASP, average selling price, pressure for the quarter for both of those brands.
We are unwinding that.
So for fall season, that pricing pressure should not be there.
And to <UNK>'s point earlier, both brands are working on trying ---+ every brand in the sector is working on trying to drive traffic and some of the things we talked about clienteling and really engaging with the customer on a one-on-one basis at the store level.
That's the unlock that everyone's looking for.
This is <UNK> on for <UNK>.
Robb, I guess, just as we're thinking about the longer-term CapEx run rate of $200 million and $250 million, just as you're implementing the store closure program, could we think that maybe that could tick down even further just as you emphasize the cash flow.
And then secondly, understanding it's a bit too early to guide fiscal '18, but at your Analyst Day previously, you talked about the $580 million to $670 million EBITDA target in '18, assuming the flat to down 2 to 6 comps.
I guess, just keeping in mind the update to the Change for Growth and some of these investments that you're making in clienteling, omnichannel, et cetera, how can we think about net expense savings maybe hitting the P&L next year, just given the traffic volatility in line with some of these investments.
Sure, <UNK>.
So regarding the capital budget, as I mentioned in the prepared remarks, we are dialing back our store capital as is and distorting investment to e-commerce, and then I'll let <UNK> talk a little bit about that in a moment.
So yes, I think that as we take stores out, if we take out 667 stores, if we take out more right at the store channel with more channels than we expect always, you would obviously expect store capital to come down even further.
We are tightening back significantly on new stores.
There's still opportunities for new stores out there in small markets and in some urban areas I think.
But outside of very, very select opportunities, where we may have year-on-year cash payback and a 1- or 2-year out where there's almost no risk, those are coming down and therefore capital is coming down on the store side.
Again, we are being very aggressive on the e-comm side, I'll let <UNK> talk about it in a moment.
But we are very focused on making sure we have a best-in-class omnichannel platform and really competitive on that front.
Regarding fiscal '18, I ---+ we've talked before about there is limited visibility out there, and our fourth quarter guide is based on what we know from Q3.
We've learned before by getting out in front and assuming things, and right now you should expect us to say very short on forward visibility until we have a strong point of view.
Very, very focused on rebuilding credibility in our guide.
And again, you should expect us to be really thoughtful about that going forward.
So do you want ---+ any comments on the e-comm (inaudible).
I think what I would say is generally, we're seeing the same sort of trends that we saw in Q3.
Again, the comment I made about things being inconsistent.
We had a little bit of a stronger period the beginning of May.
Memorial Day was a bit more challenging.
Again, some of it is northeast and weather, and there were many pieces out written about how traffic was challenging that week across the sector.
So I think that I would tell you that we're generally seeing the same sort of trends that we saw in the third quarter.
Just really a slight modest improvement, but nothing that I would articulate as any significant change we've been looking at.
In terms ---+ now we ---+ from the standpoint of the specific brands, nothing I'd call out at this point.
Most of my questions have been asked and answered, I just have one question.
Stated in the press release that portfolio options that could simultaneously represent opportunities to strengthen the balance sheet and create meaningful value for shareholders, could that be interpreted as anything beyond the scope of what's been spoken already about on the call.
Steve, I'm not sure what you mean by spoken about in the call.
We made the comment in the prepared remarks, but let me just make sure I articulate clearly what we mean there.
We have a portfolio of brands.
So we've got 7 brands ---+ 8 if you think about Lou & Grey, which is really in the incubator, and each of those have their strengths and their challenges.
And we've got to evaluate them individually when it comes to, for example, on cap allocation, et cetera.
So as we think about our future, if we have an opportunity to create value by selling one of those brands, we've got to consider it.
And over the years, we've gotten interest in various of our brands, so these are some ---+ these are steps that we have to take to make sure that we're managing our portfolio as best we can.
Great.
Thank you, everyone, for your interest in ascena.
Everyone, have a great summer, and we'll talk you again in September.
Take care.
| 2017_ASNA |
2016 | DBD | DBD
#Yes, to answer the latter question first, if you look at the year-over-year change, you have got the inventory increase as a big portion of it and there still is some pent up cash flow sitting in the AR balance that is primarily tied to North America.
So, those are the two big pieces that are driving a little bit of the higher use year on year, it's the inventory and the AR from what we have seen there.
With regards to the third quarter, adjusting for the items that we talked about, we are looking in a positive area of improvement quarter on quarter.
Clearly we are going to be driving that as hard as we can to maximize the performance as we go forward.
I think that is a great question, <UNK>.
As you know, the Brexit decision was a few days prior to the end of the quarter.
So the quarter is clearly not impacted by any of this.
So far we don't see any impact.
Our solution portfolio, as much as sometimes we regret it, it is not an impulse buy decision type of thing.
And whenever a market gets under additional pressures, as I pointed out earlier in Canada, then people look for new ways to improve the bottom line, to improve their services and to even offload some of the activities that they have.
So, we see Europe as a fertile hunting ground going forward.
And it might indicate a little shift from the product to the services side, but that is still too early to call.
But from a level of interest it is all very, very active.
Now you have got to be country specific.
Canada, the regionals are very active, so we see that and it shows up in our order book.
In the US it is still more tilted towards the large accounts, but we see interest starting to take up on the regional front.
And you can see it with the software wins that the regionals that the credit unions are really taking a look at how can we provide new services to the community.
And I am extremely encouraged with the multivendor software deals that we were able to place this quarter.
And many of them were actually with credit unions.
So, relatively small institutions who want to make sure that they include innovative technology into their offerings going forward.
I would agree with you that we are a lot closer to it than we were a few years back.
When it is really going to happen, the jury is out.
The rate discussion will have some impact on it.
As you know we are on the opposite side of the rate discussion for our customers.
If interest rates go up our customers have a wider spread.
That is usually a good thing when it comes to additional investments.
So, whether it is a year out, whether it is 18 months out, whether it is 24 months out I think it is a little too early to call.
But I agree with your underlying thesis that we are approaching a point in time where a regional upgrade cycle ought to come back into the picture.
I assume you are talking China.
<UNK>, I have long given up to predict cycles of government agencies when certain things will get approved.
The big milestone in China was the MOFCOM approval that is in the rearview mirror.
But also, as you very well know, market prices in China have gotten extremely competitive.
So we want to make sure, together with our friends at Inspur, that the JV has a very positive launch.
So we are working very hard in ways to reduce the cost of our product and our solutions, which includes relocating the factory from Shanghai to one of the new government-related zones.
And there are local approvals required, and we're just going to work our way through them.
I would hope we will get them done sooner rather than later, but that is not for us to influence.
Yes, as we outlined, we are looking at from an EBITDA and EPS standpoint for the second half basically a 30/70 split between Q3 and Q4 as the project activity starts to ramp up.
I think two other key items to note that we have talked about historically, obviously you get a little bit of the lull in Europe in the summertime, so that typically impacts the third-quarter performance.
And we have also already highlighted multiple times here the impact that China is having.
So clearly the overall performance in Asia when you look year on year is going to be down.
And if you look at where the current performance is at, that is a little more of an indication of what you would expect for Asia in Q3 as well.
So those are two areas that will be a bit of a lull in the third quarter.
<UNK>, as you very well know, I am not at liberty to publicly talk about any of the Wincor activity.
That is going to be an area that we will give more clarity on after we have consolidated companies.
Well, look, our industry is not going to change just because we will combine with Wincor.
Nevertheless, there is a benefit in a larger number.
And usually when you take a look at North America and Europe and if you were to draw the curves, they don't swing in unison.
Usually they kind of offset each other, so that will help.
What will definitely help is if you keep in mind that we will be roughly $3 billion in services.
So you have got the amount of recurring revenue is going to go up.
The currency hedging between dollars and euro you would assume is probably going to balance itself out a little bit more, because everything that you do especially in the service-side kind of hedges itself.
So I would expect it to be a little less volatile on the numbers, but the market is what the market is.
No.
The bug and the kinks in the system, we worked through those in Q1.
As I noted, we really peaked on catching up on the service billings in that March/April timeframe.
And now it is just a matter of just working through the collections process.
Obviously, when you have aged invoices and you have the size of the backlog that we built up in those, it takes a little more time to work through with our customers.
We have been doing that.
We are not seeing higher write-off activity or bad debt.
And it just takes a little bit more to work through those with our customers, which is what we have been doing and seeing the progress.
Yes, let me start off, and I will let <UNK> talk about the timing of the close here.
Specific to the hedging strategy when we entered into the agreements back in 2015, we hedged a very large portion of the overall transaction, not understanding the full amount that we were going to have in terms of fares tendered, and having a basic understanding but not a full understanding of the full euro exposure.
So at that point, we entered into a hedging strategy that was essentially hedging 100% of the overall tender offer.
As we moved forward and we saw the results of the tender offer, we saw where that euro was at, we were able to update and move forward with our hedging strategy.
We locked in a gain.
And that gain, year to date or life to date, on that original contract, we have outlined.
So we ran that piece, and then we entered into a forward contract to then lock in any remaining exposures that we have.
So if you look at the net $15 million that we have talked about, you will have the gain that we have locked in and then you'll have the cost of the forward contract and the movement that you will have in the ultimate euro that will lock in the ultimate purchase price of the overall transaction that we have.
And from a timing point of view, <UNK>, we are pretty optimistic that we will stick to the timeline that we have outlined from the very beginning.
We are down to one country approval, which is a condition for the close, which is Poland.
The good news is we had to go through 11 countries; 10 out of the 11 we have got now in the rearview mirror.
And in not a single one of them did we get any onerous or painful stipulations from the regulatory authorities.
But these countries go through their own processes and it is a process, whether it is for a small number or whether it is for a big number, you have just got to work your way through.
We are pretty sure that Poland is not going to be any different than the previous 10, so we don't expect any major hiccups.
And as soon as we have got the Polish clearance, we will then take the next step and go to closing.
Yes, the gain was realized; that was approximately $50 million.
So that is locked in.
So if you look at it from an overall cash flow, that is a realized gain.
Then you have the mark-to-market impact on the current forward.
That is not realized.
Obviously, that is going to move up until the point that we then finalize that forward contract at the closing of the deal.
So that benefit would run through the overall cash flow, not operating but the overall cash flow of the Company.
Yes, you have multiple pieces moving there, so you have the gain portion coming through and then you have the mark-to-market impact.
A portion of that gain was also, from an income statement standpoint, was recognized as it was re-measured at the end of 2015.
So you have a portion of the gain that was in 2016, and you have a portion of it that was in 2015 that gets to the full contract-to-date amount that was ultimately recognized.
Well, if you take a look at service there is always three elements to service: there is break-fix, there is the managed services, and then there is the installation fees.
So I would expect break-fix and managed services to continue on the trajectory that they are on, which is steadily improving.
And needless to say, the more product we install, you would also see an uptick on the installation side of the services house.
And as you also know, every hour that we can bill a service technician translates into margin ---+ being margin accretive.
So higher utilization is usually a good thing for a service workforce.
So we are very encouraged on the services front.
But the important thing is we are very encouraged ---+ and that is what you see in the first half ---+ that the recurring monthly revenue is trending up.
It is consistently trending up and that is a clear result of the managed services and the multivendor services contract strategy that we have embraced, the wins that we had last year and, of course, the wins that we are getting this year.
Yes, I mean as you bring forward in the third quarter, for example, you have a little bit of that higher hardware revenue.
You would have a little bit of a dilution impact on the overall total gross margins.
But our continued performance in the service ---+ and improvements in the service margins helped to offset some of that.
And a lot of that comes down just to the mix of revenue we have as well.
As North America and Latin America, we run a little bit higher volumes there, helps out.
More Asia, obviously that's single-digit type of margins and it moves a bit.
No.
A lot of the reinvestment we have were foundational items that we have talked about, our IT systems, and also updating and moving to a new hardware line which we hadn't upgraded in a long time.
A lot of that work has largely gone forward.
We have those solutions out in the market.
So we are not trying to be penny wise, pound foolish here, and hurting the long-term business.
We are really taking out some of the investments that were foundational items that we did before, and we are trying to be very measured as we look at the combination in front of us as well.
Let me just add to that.
For the last two years, we have been talking about a turtle curve on the reinvestments.
We had to do some stuff that were neglected for a long period of time.
We invested the money.
I am actually very encouraged to see that ---+ it is always easy to throttle forward on the spend side.
I am very encouraged to see that the throttling back part of it is working just as well as the throttling forward.
And the organization truly understood the concept that we have put forward, and I am very proud of the team that we were able to accomplish this just as we had predicted.
We are out there selling.
I mean we are having tons ---+ we are having tons of conversations.
It is not a question of visibility.
We have got a lot of visibility.
It is a question of timing.
Any time you have a large project, I cannot even begin to tell you how many times in my sales career I thought I'm close to closing a deal, and then it took another eight weeks to get it into the end zone.
You just never know.
Some of these things get done faster than you anticipate and some of them might run into a pothole, and it takes a little longer.
That is the only piece that you cannot predict.
The activity level overall, if I take a look where branch transformation was two years ago and where branch transformation is today, it is just night and day.
<UNK>, that is a great question.
So let me take it in three steps here.
Primarily, a China issue for China.
But you are absolutely correct, there is the usual spheres where the Chinese companies go into, usually somewhere in Asia.
You also will start seeing them show up probably in Africa.
But the biggest differentiator is when you ask yourself, "well, why arethey not in Europe or why they are not in the US" It is just service.
And if you think this thing through, when you automate a branch, when all your cash, when all your mundane functionality, when all your customer interaction on the usual day-to-day stuff sits on a machine, the very last thing that you can afford is this machine to be down.
And we both have seen the movie on the telecom side; usually far Eastern players woefully underappreciate the importance of service and quite honestly, in many cases, also the importance of software, which is why we did the transaction with Wincor because we are saying bolstering our service business.
We are going to be the largest service provider in our industry in a few weeks here.
That makes a very important differentiating factor and it gives us a very defendable position going forward.
Okay, I want to thank everybody for joining us on today's second-quarter earnings call.
If you have follow-up questions, please reach out to us at investor relations.
| 2016_DBD |
2015 | R | R
#<UNK>, what we do is, again we are targeting large fleets and we'll negotiate with the given customer a labor rate and a parts rate and the labor rate is based on geography.
And once that's established we open up literally the entire network.
Now some of our shops are more prepared than others and that's exactly what we've been working on.
And then it gets down to working the change management if you will on a decentralized basis, where you get fleets comfortable with using our shops versus the vendors that they were using historically.
We liken it to what we did with national rental several years ago, where we would sign a national rental agreement and then you need to literally sell locally those customers to utilize your rental capability, even though you have a national headquarters negotiated agreement, you've got to drive demand locally and that's literally how it works with on-demand.
We find a national headquarters-driven agreement and then we need to get folks comfortable with our maintenance on a local basis, and that's exactly what we are doing.
You read our playbook.
We do just that.
We take units coming off the lease and we won't out service them; we'll put them in the rental fleet if they've got more life.
We will delay the out servicing of units, which we're very cautious of, because we've got demand, obviously, in the used vehicle side, and at the lower-end of the inventory target range that we've got.
But that's exactly what we do.
To increase units available for rental we'll do a lease to rental, so units coming off lease we'll put them in the rental fleet and we'll delay the out servicing of older pieces of equipment in the rental fleet.
<UNK> that's in the math already.
Used vehicle point of view, we've already factored that in.
Thanks <UNK>.
Well, in terms of where they get booked there is some that gets book in DTS and supply chain and it gets eliminated total.
But it all runs through FMS.
And in terms of what happened in the quarter, I'll just elaborate a little bit on that, is that there was a big drop in fuel pricing.
When there's a significant drop that quickly, usually wholesale prices drop quicker than retail.
We do have some of our customers that are on more of a market-based price, think about our rental customers and things like that, and we got a benefit, a one-time benefit I would say because of that rapid drop.
But we don't expect that to recur.
And typically when it goes the other way, retail moves up more quickly in line with wholesale.
I wouldn't say it's very meaningful.
It certainly had some benefit because of the disruption.
When things get a little hairier in our Business it usually gives an opportunity to show what we can do, and this was one of those cases.
No.
I wouldn't say it was a meaningful number and I'd say we really expect that to be primarily behind us going forward.
You have the right idea.
It's really increased demand, not only from on-demand but also from our new lease customers also have been driving that.
In terms of cross-selling opportunities, <UNK> do you want to go through some of the ---+.
As you have customers coming in for our maintenance, Matt, we also could sell them fuel, for example, and then as they get comfortable with the quality of our maintenance, they get to know us.
Then we look at contract maintenance and even selling up the full service lease, where maybe they weren't interested in it before.
It really is an opportunity for us to open up the door to that 90% of the market that doesn't outsource today and sell them on our variety of services.
Let me just give you an idea of where we're at and then I'll pass it over to <UNK> <UNK>.
One of the exciting drivers for growth in Dedicated for us has been the opportunity to upsell customers who are in full-serve lease to Dedicated.
We saw great activity in 2013, we saw, we had another great year actually beat 2013 in 2014 in terms of the amount of these collaboration type sales or upselling.
So we think there's still more opportunity to do even more.
And <UNK>'s team, along with <UNK>'s team are working collaboratively to find where we can help customers by having them outsource more of this activity, which in this case would include the driver to Ryder.
So we think we're still probably early in the process of continuing to grow that business.
It's not going to happen overnight.
It's going to be a multi-year effort, but I think now <UNK>'s team working with <UNK>' have got a lot of opportunity to continue to build on that.
So <UNK>.
<UNK>, this is <UNK>.
Just a few things to add there.
One of the things we continue to see is the macro trends out there in the industry are really helping us.
So if you look at the paying points around drivers, you look at the paying points around capacity, as well as safety performance for some of our prospects that continues to drive higher levels of sales activity for us.
So the pipeline has grown and continues to grow, but going back to what <UNK> said around collaboration, we do continue to see good momentum.
We've seen two consecutive years of increase growth from collaboration sales.
We expect that to continue in 2015, and as we gain momentum we'll see that continue to accelerate.
We've talked about one-third of our growth coming from private fleet conversions, I would tell you that a good chunk of that is really as a result of our TCO model or TCO tool.
Because what it does is it allows our salesperson to have a discussion around the facts with a customer that's an ownership, as opposed to an emotional discussion of what they think it should be versus what it is.
So there's a lot more of a fact-based discussion around what the ownership costs are versus what Ryder could potentially do the activity for.
And we're finding that we typically can find ways to bring value cost savings to customers early on, in addition to the incremental service.
So I would say that we are still early in the process in terms of continuing to leverage that tool, but we have seen meaningful benefits from it, certainly in 2014.
And I would tell you that a good portion of that growth business that's coming from ownership is as a result of the TCO tool.
So <UNK>, do you want to add to that.
I'd just add to your comments here, <UNK>.
That we found with our customers that as the acquisition price and the maintenance costs have increased for the new technology vehicle, this is becoming a more significant part of the cost base that our customers are seeing.
So you've got the finance departments and CFOs that are seeing this and are concerned about it.
And so when we come in and typically, historically had a sale to the transportation department of the Company, now we're elevating the discussion with the TCO tool to the CFO and the finance group, and as a result the dialogue is different than we've had in the past.
It's a richer discussion around the total cost of the vehicle.
We're seeing a lot of opportunities from ownership customers that we didn't see before.
Thanks <UNK>
Remember one-third of it is customers that are new to outsourcing and the rest of the two-thirds I would tell you, the larger percentage is with new customers.
On a net basis, our existing customer base, I would tell you is beginning to grow a little bit, but still not a meaningful part of the growth.
Because we're looking at 2.5% to 3% GDP growth.
I wouldn't expect there to be growth in the existing customers' fleets.
We've always said we're probably, along with the OEMs, we're looking at 3% to maybe 4% GDP growth before you would see something like that.
So I would say the majority of it is customers new to outsourcing and then new customers that we're winning from competition.
I'd say it's really across the board because remember, this campaign is an awareness campaign.
It's to help the market understand all the different services that Ryder offers.
If you look at total number of leads, the majority of them ---+ the larger percentage are going to go to FMS, but that's where the larger customer base in the market is.
It really is helping all three segments and helping to explain all the services that Ryder can offer and all the ways that we can help companies with their fleet management and supply chain activities.
So I would say it's really having an impact, from a lead standpoint it's having an impact across all three.
Thank you
That number fluctuates, but I will let <UNK> give you the stats of where we are at now.
<UNK>, if we look at what we call lease support and then we call it pure rental for customers, it's not related to lease support.
For first quarter 41% was for lease support and 59% was for the pure rental customers.
And we are seeing growth in both, so we are seeing demand for pure rental and for lease support and obviously the lease support is being driven by the lease fleet count that we discussed earlier.
But again 41%, 59% respectively.
It's in that target, that 40% to 60% range.
It could go to 30% or it could go the other way depending on how much demand we have from our lease customers.
Look at it from the standpoint of the first call, if you will, is with lease customers that we have a lease agreement and their using rental vehicles to support that.
The pure rental market is a very big market and we use that really, not only to grow as the market grows, but also to fill-in when vehicles are available from a lease customer.
Are you talking about on the rental fleet or lease fleet.
That could be a lot.
It could be mix.
If you look at our rate FX as another piece, our rate per vehicle and rental we know was up 5%.
That's just what we're charging per vehicle per day.
And then in terms of what else could be affecting it, it could be mix.
You could have more light duty or trailers versus trucks in any one period.
You could have some of that.
But other than that it's not something that we are honed in on or worried about.
Correct.
Rate per vehicle, per day in rental.
So if you think about what's the cost to rent a truck for a day, it is up 4%.
<UNK>, we're in the pilot phase still if you will on this, so we have a handful of customers, we're now 30 or 40 customers that we are dealing with.
This is one of the earlier customers and there's just been a volume drop off as they've done different things with different parts of their fleet.
It's not really something of much concern.
Our focus is really going after all the additional customers that we have added and bringing more of their vehicles into our facilities, and this customer over time could bring those vehicles back also.
Thank you.
Okay, thanks everyone for being on the call.
We're right near the top of the hour.
Hopefully you got a good flavor of where things are at.
It's a great quarter and things are looking pretty favorable for us at this point, so we're excited about the balance of the year.
Anyway hopefully see you in the next few months and have a safe day.
Bye-bye.
| 2015_R |
2018 | SKYW | SKYW
#Thanks, everyone, for joining us on the call today.
As the operator indicated, this is Rob <UNK>, SkyWest's Chief Financial Officer.
On the call with me today are Chip <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Chief Commercial Officer; <UNK> <UNK>, Chief Accounting Officer; Mike Thompson, SkyWest Airlines' Chief Operating Officer; and Terry Vais, ExpressJet Airlines' Chief Operating Officer.
I'd like to start today by asking <UNK> to read the safe harbor.
Then I will turn the time over to Chip for some comments.
Following Chip, I will take us through the financial results.
Then <UNK> will discuss the fleet and related flying arrangements.
Following <UNK>, we will have the customary Q&A session with our sell-side analysts.
<UNK>.
Thank you, Rob and <UNK>.
The first quarter is generally a challenging one, particularly in terms of weather, but both of our airlines delivered well during the quarter.
Our fleet and business plan continued to move forward, and we accepted a number of new E175 aircraft, including the first of our E175 special configuration aircraft for our Delta operation.
I want to thank our more than 17,000 professionals for their ongoing commitment to delivering an exceptional product during the quarter.
We operated, during the quarter, approximately 250,000 flights with strong operating reliability.
SkyWest Airlines delivered 99.8% adjusted completion factor, and ExpressJet, despite being affected by severe weather in their East Coast operations, delivered an impressive 99.9% completion when adjusted for that weather.
Looking forward to the remainder of the year, we continue to see very strong demand for both our 50-seat and dual-class products.
We anticipate an additional 34 E175s on property by year-end and expect these aircraft will continue to create solid growth and cash flow in 2018 and beyond.
Specific to our ExpressJet business, I want to remind you as we'd mentioned in our previous guidance, we do not expect that any to break even this year.
However, they are making strong progress, and as this quarter's operational performance shows, they are more focused than ever with a smaller footprint.
This progress sets them up well for 2019 improvement.
We also continue working through opportunities in some of our legacy contracts and financing of aircraft, which Rob and <UNK> will provide more color on in just a minute.
This is a critical part of our evolution as we focus on reducing terror risk and improving economics.
From a big-picture perspective, both within our organization and across the industry, we continue to see solid opportunity and demand.
As we've discussed previously, 2018 is another busy year in our fleet transition that should set us up well for a very strong 2019 and beyond.
We're looking ahead to a busy summer and remain focused on our disciplined execution of our strategic business objectives.
Again, I want to thank our 17,000 aviation professionals for their outstanding work during the quarter.
Rob.
Today, we reported net income of $54 million or $1.3 per share for the first quarter of 2018, up from net income of $35 million or $0.65 earnings per share from the first quarter of 2017.
Pretax income of $67 million during Q1 was up 28% from $52 million in Q1 2017.
Revenue was $783 million in Q1 2018, up $36 million from Q1 2017.
This increase in revenue included the net impact of adding 19 new E175 aircraft since Q1 2017, partially offset by the removal of 71 unprofitable or less profitable aircraft over the same period, including 46 50-seat aircraft.
Our total fuel costs per gallon averaged $2.40 during the first quarter, up from $2.01 per gallon in Q1 2017.
The line item in our P&L for aircraft fuel was $9 million higher pretax than a year ago, reflecting both the higher rate and higher volume under our prorate business model.
Just a reminder that over 90% of our model is not subject to fuel risk.
Similar to Q1 last year, where we had a tax provision about 4 points lower than the annual rate because of new accounting rules around equity compensation, this quarter's 19% effective tax rate was also several points lower than what we would expect for the rest of the year.
The lower provision in Q1 was primarily driven, both last year and this year, by the fact that we had certain equity grants (inaudible) during the first quarter.
We would expect this pattern and trend to continue as our board typically only issues new grants once a year, during the first quarter.
The timing and amount of future-related tax impact on our provision will vary based on restricted share vesting, stock price performance, stock option exercises and other factors.
We continue to expect our tax rate to be approximately 25% for the remaining 3 quarters of the year.
The full year should still be in the 24% to 25% neighborhood as we estimated last quarter.
This quarter, we recorded a net gain of $3 million in other income that was a mark-to-market gain on an investment net of other items.
Let me say a couple things about our balance sheet, an important point of differentiation in our model.
We ended the quarter with cash of $646 million, down from $685 million last quarter, and up from $586 million last year at this time.
We issued $160 million in long-term debt during Q1 2018, financing 5 new E175s and acquiring 9 used aircraft off of lease.
Total debt as of March 31, 2018, was $2.8 billion, up slightly from last quarter.
SkyWest used $38 million in cash toward equity for new planes and planes acquired off lease, $30 million in other CapEx, along with $10 million in cash for share repurchases.
Non-aircraft acquisition capital spending in 2018 should continue to run in the $20 million to $30 million per quarter range.
With the remaining 34 E175s expected to be delivered this year, we plan to invest $120 million of our own capital and raise approximately $675 million in new term debt by the end of the year for these planes.
We expect that by the end of 2018, our debt will be approximately $3.2 billion, up only $400 million from where we are now because of the $275 million in normal principal payments embedded in our fully amortizing term debt over the next 3 quarters.
Assuming an end of 2018 peak in debt and no additional new orders for airplanes, we expect that in 2019 and 2020, we will continue to pay down debt in excess of $300 million per year.
We would expect cash at the end of 2018 to be up from where are now, including our plan to invest $120 million of this year's free cash flow in equity toward another 34 new airplanes by the end of the year.
We will continue to explore accretive opportunities to deploy the free cash flow we are generating.
As I referenced earlier, during Q1, we repurchased another $10 million in stock under our 3-year $100 million repurchase program authorized by the board last year.
We now have $70 million in authorization remaining under this program and expect to fully utilize it.
2018 is expected to be another busy year for us with many fleet movements as <UNK> will discuss in a moment.
Let me finish today with a little commentary on capital allocation.
Earlier, I made a reference to a small transaction where we had the opportunity this quarter to acquire 9 aircraft off of lease, negotiating our way out of an unattractive, inflexible lease structure and reducing our financing tail risk.
The $20 million in equity capital that we deployed in that transaction will drive a $0.07 annual EPS benefit to 2019 and beyond and represents a 25% pretax return on capital.
This is just another example of the type of opportunities we are exploring to drive value creation through accretive financial engineering and risk reduction within our legacy fleet.
Because of all the ins and outs around the fleet in 2018, last quarter, we made the comment that we would expect our earnings per share to come in under $4.50 for 2018.
Including our actual GAAP results in Q1, we would update last quarter's comments by adding another $0.25 to that number.
<UNK>.
Okay, operator, we're now ready for Q&<UNK>
Savi, it's Chip.
Let me just make a couple of quick observations about pilot supply.
I think as we usually update relative to our current position with pilots, I can tell you that right now, we're still in a very good position.
Going into the summer, we feel very comfortable being able to fly with what we have forecasted and being able to meet our partners' needs.
The ever-changing pilot supply model, we do see some things that are happening within the pipeline.
I believe the longer that we continue to go down the pathway of dealing with this struggle, the pipeline gradually continues to grow.
It's not necessarily growing as fast as it would have ---+ probably should, but we're ---+ we spend a lot of time and energy and effort with the ---+ with schools in the front end of our pipeline of both of the ---+ both carriers to make sure that we got a good strong recruiting footprint, and we're still ---+ we still continue to be optimistic about that.
ExpressJet does have a pathway with United relative to the 50-seat flying that they do, and it's been something that I think has been able to provide some good clarity for those pilots as they progress throughout their career.
And in relation to this being an opportunity to do some additional things in the future, I think that it's safe to say that this is a dynamic enough situation that we do have a lot of conversation with our partners, all centered around making sure that we can provide further needs in a number of different ways.
This is just one of those ways we continue to have a conversation with.
So look we're optimistic.
We're not oblivious that it can continue to be an issue, but we spend a significant amount of time and effort making sure that we can honor the good commitments that we have with our major carriers.
It's just a small investment that had a mark-to-market on it during the quarter net of a couple other items and outline item, but it's $3 million net.
It's just an equity investment that we had.
Yes, so for 2018, we've had a good conversation about ExpressJet several quarters in a row.
We continue to transition that fleet.
The main goal is to make sure that we have a transition to where it is long-term sustainable.
So in my script, I said that it's going to not be breakeven this year.
So it's still going to lose a bit of money this year.
And that's embedded within our forecast, but it's actually a significant transition this year, particularly with us.
We're pulling out all of the Delta flying and transitioning it to primarily United and American in 1 year.
It's been ---+ it is taking a lot of costs and the main reason why we're saying what we are about losing money.
So our #1 priority in this transition is to make sure that there is no service interruption with our partners, so we can say we have ---+ pulling the fleet down that much, we have plenty of professionals, maintenance and pilots and flight attendants throughout that transition to make sure that it's a good strong solid operation during the summer and throughout the rest of the year for our partners.
But it does set us well to turn the other way hopefully in 2019.
No, I think that's a pretty fair assessment, and you can imagine a lot of the investments we've made over the past couple of years to get it to that point, but <UNK>, you're pretty on track.
That's a pretty fair assessment to be set up to be in the black next year.
<UNK>, it\
Yes, I'll give you just some very high levels about ---+ I know there is a lot of dialogue about fuel today.
I can tell you in all of the sensitivity analysis that we've evaluated given yields, capacity and fuel, none of those 3 factors, at least as we view it, are causing us to change any direction our strategy in the near or long term.
It's hard to speculate what's going to happen with fuel.
Certainly, Rob indicated on his script that we're like ---+ 90% of our entire business model is totally immune from fuel.
But prorate side of our business, we're still comfortable with what we're seeing in speculation out there in fuel prices and continue to execute as planned.
Yes, it was 9 aircraft that had been under sort of a long-term leverage lease-type structure, but we're not big fans of ---+ now those sort of lease structures tend to be sort of detrimental to our partners' strategy as we're executing this model.
So we're exploring any and all opportunities to go back and cure some of those inflexible lease structures, and we had a small transaction this quarter where we were able to deploy $20 million in equity capital in an accretive way and took away the tail risk for 9 additional airplanes and gave ourselves more flexibility.
And we'll continue to look at incremental opportunities to do that across our legacy fleet.
Well, I think that it's ---+ it all is going to come down to economics.
We're going to be smart about the way that we do this.
Obviously, we're only going to deploy capital against opportunities like this to the extent that we can do it in an accretive way.
But stay tuned.
I mean, we're hopeful that there will be more to come.
Yes, Steve, it's Chip, Let me just ---+ I'll kind of give you a barometer of what we see for demand out there.
I fundamentally believe that, as we've mentioned earlier with respect to scope, we're engineering kind of our business model to be able to continue to be sustainable and successful without scope.
With that, people can be concerned about scope.
But if there is no scope, there is still certainly demand for the regional model.
And so at a very high level, Steve, I would reiterate that the demand for the regional model, just a pure economics, that's out there relative to what we do for major carriers is a very, very good model today.
From our perspective, we look at it in terms of what's sustainable from growth, and we are taking a lot of new aircraft this year, in '18, at SkyWest Airlines.
And to the extent that it's probably the maximum that we can take and be able to do it in a good orderly manner, and so from ---+ on a future perspective, fundamentally look at their scope relief.
There is ---+ certainly the economics of these aircraft are very, very good if we get scope relief.
If not, then we can certainly backfill more with 50-seat.
So the more likely scenario for us, if there is not scope relief, we could do a lot with 50-seat aircraft to the extent that we have a very large fleet of them, and we can continue to invest capital in them to be an extremely good product for what our business model is.
So look in general terms, it's hard to predict the details of where it's going to go.
It's mostly our job to continue to put ourselves in a position with outstanding operating performance, good aircraft financing, disciplined cost approach that meets the demanding needs of our partner.
We've seen recently that good things happen as long as we're focused on those 3 or 4 elements.
Yes, yes, so let me give a little bit more color.
I probably should have done that on the previous question.
I mean, I think, from our perspective, where we are with pilots today, we're seeing consistent attrition, across our platform that's pretty much the same as it's been over the last couple of years.
Our hiring is as strong as it's been in the last couple of years, and we're spending ---+ just as a matter of diligence, we do have a good healthy respect for what the retirements of the major carriers still are.
So we do fundamentally believe that we can continue to work to make the pre-regional aircraft pipeline bigger through the schools and the operators that are producing pilots for us.
That's an imperative investment for us to continue to make.
But as it relates to now, through the near term, and our commitments with our partners, I don't want to call it status quo, but we do feel as comfortable as we ever have given the commitments that we've got to fly.
And that being said, it's also, like I said before, it's a very strong year for additional 175 growth at SkyWest, which we've got put a lot of ---+ a lot more numbers to that.
So look everything is working today.
We've got great cultures at both of our enterprises that are able to recruit with credibility, and we're optimistic, but we're also extremely diligent on the front end of the pipeline as well.
Thanks, Jamie.
Again, thanks for joining us on the call today.
I think in summary, we continue to remain focused on our strategic objectives by maintaining strong mainline partnerships, delivering good, solid operating reliability and continue to attract the best aviation professionals that are out there.
We continue ---+ as we continue executing our business plan, we believe that there is a very strong demand for our product going forward, and look forward to meeting the demands and needs of our customers and partners.
So with that, we look forward to talking to you next quarter.
| 2018_SKYW |
2018 | TDY | TDY
#Ladies and gentlemen, thank you for standing by.
Welcome to the fourth quarter earnings call.
(Operator Instructions) Also, as a reminder, today's teleconference is being recorded.
At this time, we'll turn the conference over to your host, Mr.
<UNK> <UNK>.
Please go ahead, sir.
Thank you, Tony.
Good morning, everyone.
This is <UNK> <UNK>, Senior Vice President, Strategy and M&A at Teledyne.
I would like to welcome everyone to Teledyne's Fourth Quarter and Full Year 2017 Earnings Release Conference Call.
We released our earnings earlier this morning before the market opened.
Joining me today are Teledyne's Chairman, President and CEO, <UNK> <UNK>; Chief Operating Officer, Al Pichelli; Senior Vice President and CFO, Sue <UNK>; and SVP, General Counsel, Chief Compliance Officer and Secretary, Melanie Cibik.
After remarks by <UNK> and Sue, we will ask for your questions.
However, of course, before we get started, our attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats, as noted in the earnings release and our periodic SEC filings.
And yes, actual results may differ materially.
In order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay, both via webcast and dial-in will be available for approximately 1 month.
Here's <UNK>.
Thank you very much, Sue.
We like now to take your questions.
Operator, if you're ready to proceed with the questions and answers, please go ahead.
Sure.
The ---+ there are 2 parts to that.
One is our Marine businesses and the other is our environmental and electronic test and measurement businesses.
In the Marine businesses, our margins declined somewhat, primarily because we are still continuing to consolidate some of our operations.
As an example, we're relocating a operation from the United Kingdom to Florida.
And whereas a consequence of that and some charges that we took, our margins declined to 8.3%.
That's in the Marine businesses.
On the flip side, the rest of Instrumentation has really good margins.
Environmental has margins of 19.8%, and test and measurement margins were up 75 basis points to 14.8%.
So it's the combination of the 2 that lowered the overall margins to 12.3%.
But I think, going forward, with the marine charges behind us, the marine margins, hopefully, will increase to double-digit again.
Yes.
There are 2 things, Greg that we should be cognizant of.
The first is, what the guidance is for future charges in pension benefits.
What's happened is that, first, our legacy pension program is very healthy.
It's at a 100% overfunded, and it's been close to new hires for over 14 years.
Nevertheless, there are some new accounting guidance that has been issued that requires, in 2018, we split pension expense into 2 components.
One, service cost is now going to move above the operating income, which will lower operating margin.
Other income components will be below the operating line.
EPS won't change compared to our current financial statement.
But this change in pension accounting will cause about 45 basis points contraction in the margin, going forward and of course, we would respect the prior periods for comparability, okay.
Having said that, I expect that our overall margin for next year will ---+ if we were to keep the current accounting system for pension, would improve about 45 to 50 basis points as it's done in the current and prior years.
However, because of the change I just noted, and there's some effect from stock options.
Because we didn't issue any stock options in 2015, now we have 3 years of stock options hitting our earnings.
All in all, I think we will give back the margin improvement and end up next year in the new accounting system with about a 13% margin versus 12.9% this year, recognizing that we're taking a 45 basis point contraction from just a pension accounting (inaudible), but we restated 2017 for comparison.
That's the broader margin, going forward.
Did you have any other questions on margins that I can help with.
It was approximately about $1.5 million.
Maybe a little more.
I think we're seeing CapEx growth among our customers that is projecting CapEx growth.
We have generally been very cautious with our capital.
Except this year, we have 2 or 3 projects that are very important for us to invest in, in capital investments.
The first one is, our MEMS foundry in Canada ---+ in Vermont, Canada, is under capacity constraints right now.
We have so much work that we're not able to put ---+ meet all of our customer needs.
So we're going to invest somewhere between $10 million and $15 million more next year and expand that facility by another, at least, 10,000 square feet.
Second, in our X-ray businesses, in our detector businesses, which are for medical and dental applications, in our CMOS X-ray, we are, again, capacity limited.
We do most of that work in Canada, near Toronto.
We also have another operation in the Netherlands.
We're going to take over part of a former Phillips clean room facility to also start making detectors in Europe to expand our capacity to meet needs.
And then lastly, we bought e2v, it has been ---+ some of the operations there have been starved for capital investments.
And we'd be making some serious capital investments to upgrade our facility, especially in [Charlesbourg], where we make a lot of our products.
So for us, there'd be the normal CapEx expenditures, which are approximately $50 million to $65 million, with these additions, we think that our CapEx, we move another $20 million to about $80 million.
No.
This year's organic growth 2017 or '18, which one are you asking.
2018.
Yes, you're right.
I'm estimating currently, we are estimating currently, about 3%.
Partially, it's because we don't expect Marine to grow much, we think 2019 would be the year it will grow, based on everything that we see.
The other side is that in environmental and test and measurements, we're expecting about 3%.
DALSA should do better than that.
Our Digital Imaging, over 4%.
So overall, we think 3% organic growth, add another 3% acquisition impact.
Total, right now, at this moment, we're looking at about 6%.
I am not ---+ I'm still fairly positive about Digital Imaging.
Our book-to-bill at the end of the year is about 1.16 for all of 2017, when we ended the year.
So that bodes well going forward.
We think that the only problem with that business is that some of it is very short-cycle businesses.
It could be better, but I'm being conservative, okay.
I'm positive about it, because we have a lot of new products that are ---+ we've introduced and are doing very well in the market.
The U.S.-based Digital Imaging market is estimated right now to grow about 14%.
We ---+ overall, I would say, I'm positive about Digital Imaging, both because we're introducing new products, but we also have some new products in the infrared domain.
And then finally, as you know, we do have a part of Digital Imaging that is here in Thousand Oaks area, in Camarillo, where we do government infrared imaging business.
We're getting traction, really good traction, in some classified programs.
We don't show all the margin improvements there, because as you know our research lab, which is located here, which we acquired in 2016, we've ---+ we reinvest all the income in that business to develop new products, and we've done that since 2006.
So all in all, we think Digital Imaging will do well.
But where we think there's going to be some tough comps, as you put it, it means in the other areas, especially in the A&D section ---+ segment in avionics because of record work that we have in aftermarket products.
So Digital Imaging, I'm very positive about, maybe a little conservative.
I'll try.
I think for the company, it's closer to 1 for the quarter.
Going back to Digital Imaging, for the quarter alone, is about 1.12 in the Instruments area, overall, it's about 0.9 with Environmental and T&M being closer to 1, Marine being below that.
AD&E, which is our Aerospace and Defense Electronics, is a little over 1.
And Engineered Systems will be ---+ right now is below 1, but for the whole year, it's 1.04.
As you know, that's a lumpy government business.
So you got to take a longer term view of that.
So overall, for the quarter, we're close to 1.
If you look at overall.
If you look at whole year, we're about 5% up, so it's 1.01.
5.
I am sorry 1.05.
<UNK>, first question.
Aerospace and Defense, and I hear you say that you're a little bit more cautious on that segment, offsetting the optimism in Digital Imaging.
Yes, a little bit.
There's 2 parts to that, <UNK>.
One part has to do with avionics, which is our data acquisition and communication systems that go on commercial aircraft and some defense aircraft.
We are a little cautious in that domain, because we have such a great year this year, especially in the aftermarket.
The flip side, we are more positive about our microwave products in the defense portion, partially because investments, even with the sequestration or continuing resolution, I should say, the electronic warfare budgets are moving up because of the problems that we have with our adversary.
So we expect an uptick in the rest of our Defense ---+ Electronics businesses.
So combining the 2 together, we think it's going to be ---+ if up, relatively modestly up.
I should also note that in Defense Electronics, we do have some serious opportunities for growth next year, which are not defense related.
This have to do with our products that are going into the new satellite systems, like, in OneWeb.
There, we have ---+ we ship the channelizers, which, essentially, permit the signal to be divided in 16-or-so channels.
And we're expecting ---+ we provided all the engineering products, and we expect a large contract, therefore, in the long future.
And as you know, that's going to be over 1,000 satellites that would be launched sometime in 2018 and forward.
Got it.
And then looking at Instrumentation margins, you talked about how they were down this quarter due to some one-time charges in relocation.
If I go back, looking at, like, 2012, for example, where the Instrumentation module was 18%, is there anything tied to that margin level that requires oil prices to be, say, over $100 a barrel.
Or is that margin achievable at $70 or $80 or $85.
I'm just trying to get an understanding of how much the equipment might be tied to companies purchasing that can be justified when oil is very expensive, but perhaps, not so much when it's at a $70 level.
Yes, that's a good question.
The years you mentioned, our marine margins were about 18%.
As you recall, 2 things happened.
One, our Marine revenue between 2014 and 2016 went down over $200 million.
And it went ---+ in 2014, it was $655 million.
We finished 2017 closer to $430 million.
So that's a serious contraction.
The contraction, primarily happened in our oil and gas exploration and production business.
The rest of our Marine businesses have remained fairly good.
But in order to maintain content on our offshore platforms, we'd have to reduce price significantly by about 20% to 25%, which has affected margins, but at the same time, it has enabled us to get long-term majority commitments for majority of their products to be bought from us.
So coming back to the oil prices.
By the way, concurrent with all of that, of course, we've cut costs significantly and taken out almost 800, 900 of our employees.
On the oil price, as you know, Brent hit a 3-year high this year, close to $70.
We see signs of commitments to offshore production.
They take anywhere from 12 months to 24 months to become realized.
We see some improvements in Christmas trees, which are the equipment that go on the oil head in the bottom of the ocean.
2016 was very low.
2017 doubled from 80 to 170, 2018 is projected to go to 236; and '19, to almost 300 Christmas trees.
Now remember, the years you mentioned, going back before 2013, the average was about 400.
So I don't think it's going to get up there.
But I don't think oil has to be at $100 for that ---+ those businesses to get traction, partially because everybody's reduced their breakeven costs.
And some of the deepwater offshore production is now profitable at less than $50.
And so while volume, we expect will begin increasing in 2019, our margins, would go for what was in the Q4, less than 10%, should go above 10%.
Whether they'll ever get to 18%, I don't know, but they'll certainly improve somewhere between where they are now and where they were then.
I hope that answers your question.
Yes, it does, <UNK>.
And my last question is, e2v was ---+ has been ---+ just proven to be a home-run acquisition, and it's fundamentally changed the margin structure in the Digital Imaging segment.
Is that a function of their products just being fundamentally more profitable.
Or have you been able to significantly improve those operations.
And I'm thinking, can you bring that IP into other segments of Teledyne.
Yes, I ---+ let me just answer the first part.
It's been a great acquisition by any measure for us.
But you know, if I go back and look at our other large acquisitions, DALSA, when we acquired it in 2011, it had relatively compressed margins.
Now e2v has good margins.
But DALSA, this year, enjoyed margins approaching 20%.
E2v, on the other hand, while it has good margins, please recall that overall ---+ their margins are lower than DALSA, partially because we have intangible amortization.
In the Digital Imaging, for example, e2v's ---+ amortization for this year 2018, is about $11 million.
So that compresses the margin.
And consequently, e2v's overall GAAP margins are lower than DALSA.
Going forward, I think because of the intangible compression e2v would roll the overall margin for Digital Imaging.
Having said that, DALSA used to have a compressed margin, but its margins have more than doubled.
The same thing with LeCroy.
When we bought LeCroy, it had very low margins.
It has more than doubled since our acquisition.
And if we do what we did in those domains with e2v, I think our margins will improve with time.
They're also ---+ you asked the question of how some of those products may carry over to other segments.
First, in the space imaging domain, we have between DALSA, Teledyne Imaging here and e2v, we practically own the visible and the infrared businesses for astronomy, and we're making now some large inroads in defense programs.
And some of e2v, because e2v has not had access to the U.S. defense market, we expect that we'll be able to introduce some other products into our defense markets here, which is an, of course, a bridge across to our other products.
Also, we've inherited some really outstanding high-performance analog-to-digital and digital-to-analog conversion devices that cut across all of our businesses, between what they bring and what we have, I think would have a significant overlap and I certainly hope in all of our other segments.
So it's been a great acquisition.
It doesn't have the margins DALSA has.
But DALSA didn't have the margins it has now when we acquired it.
But it does have healthy margins.
It's got mid-double-digit margins, even with amortization of intangibles that I mentioned.
Yes, I think, I think, the valuation of course is problematic to a certain extent, but it's not a very good excuse in a lot of ways.
If we find the right thing, and we pay the right price, even if it's a little over what we would have paid 2 years ago, we would acquire businesses.
Our focus right now is in 2 areas.
Obviously, Digital Imaging and anything related to that domain would be very attractive for us.
And the other half of it is in the environmental portion of our Instrumentation business.
We make a lot of different products there, ranging from water quality monitoring, air pollution monitoring, particulates in air, and we made one small acquisition, SSI, in midyear, this year.
And we would like to do that, so ---+ more of that.
So we will make some acquisitions.
The size, of course, we prefer it, it was significantly larger, so it moved the needle.
But we expect to ---+ we have the money, we have the financial resources, as I said.
Our debt-to-EBITDA ratio is, right now, about 2.3%, was 3% when we acquired e2v.
Our debt is ---+ net debt is about $1 billion.
If we even generate the cash we did this year, which is over $300 million, that was significantly down this year.
And we have anywhere from, right now, about $600 million to $700 million capacity to buy things.
And by year-end, that should more go up by another $300 million.
So we buy things if we can find the right products.
Digital Imaging being first, environmental being second, in terms of our preferences.
Thank you, operator.
I'll now ask <UNK> to conclude our conference call, please.
Thanks, <UNK>, and again thanks everyone for joining us this morning.
If you do have follow-up questions, please feel free to call me on the number on the earnings release.
And of course, all our news releases are available on our website.
Tony, if you could please conclude the conference call and provide replay details for the audience, we'd appreciate it.
| 2018_TDY |
2018 | AFG | AFG
#Thank you.
Good morning, and welcome to American Financial Group's First Quarter 2018 Earnings Results Conference Call.
I am joined this morning by <UNK> <UNK> III and <UNK> <UNK>, Co-CEOs of American Financial Group; and Jeff <UNK>, AFG's CFO.
Our press release, investor supplement and webcast presentation are posted on AFG's website.
These materials will be referenced during portions of today's call.
Before I turn the discussion over to <UNK>, I would like to draw your attention to the notes on Slide 2 of our webcast.
Certain statements made during this call may be considered forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future performance.
Investors should consider the risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements.
A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or responses to questions.
A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy.
Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.
Now I am pleased to turn the call over to <UNK> <UNK> III to discuss our results.
Good morning.
We released our 2018 first quarter results yesterday afternoon.
Please turn with me to Slide 3 of the webcast slides for an overview.
AFG's first quarter results established a new all-time high for core operating earnings of $2.42 per share, up 43% from last year's first quarter.
These results include excellent profitability in our Property and Casualty operations and outstanding results in our Annuity segment.
First quarter annualized core operating return on equity was 18.6%.
<UNK> and I thank God, our talented management team and our great employees for helping us to achieve these results.
Net earnings per diluted share were $1.60 and included $0.82 per share in realized losses on securities after adopting the new accounting standard related to available-for-sale equity securities.
Jeff will discuss noncore items and the impact of the new accounting standard on our first quarter results as he recaps the components of our GAAP earnings.
Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future.
We did announce $1.50 per share special dividend payable on May 25, 2018, to shareholders of record on May 15, 2018, which is in addition to the company's regular cash dividend of $0.35 per share, most recently paid on April 25, 2018.
We're maintaining the 2018 core operating earnings guidance for AFG in the range of $7.90 to $8.40 per share.
<UNK> and I will discuss our guidance for each segment of our business later in the call.
Now I'd like to turn our focus to our Property and Casualty operations.
Please turn to slides 4 and 5 for the webcast, which include an overview of first quarter results.
As you'll see on Slide 4, our Specialty Property and Casualty insurance operations produced very strong core operating earnings and healthy growth during the first quarter.
Gross and net written premiums increased 10% and 7%, respectively, in the 2018 first quarter compared to the same quarter a year earlier.
Property and Casualty operating earnings were 11% higher year-over-year.
Higher property and casualty underwriting profit and higher net investment income were the drivers of the improved results.
Specialty Property and Casualty combined ratio of 91.7% improved 0.5 point from the 2017 first quarter and included 5.1 points in favorable prior year reserve development.
Catastrophe losses added 1.2 points, primarily due to winter storms in the Eastern portion of the United states and mudslide activity in California.
Overall, renewal pricing in our Specialty Property and Casualty group was up less than 1% during the first quarter.
Though if you exclude our workers' comp business, overall renewal pricing was up approximately 3% during the quarter.
Most of our pricing increases are coming from commercial auto and a few other businesses where we need to get more rate to achieve our targeted returns.
In contrast, the industry's strong workers's comp results have led to recommended rate declines in our workers' compensation businesses.
Even with these rate decreases, we believe we're making appropriate returns in our workers' compensation businesses in the current policy year.
Our overall loss ratio trend is approximately 1.7% and appears stable.
We're keeping our eye on inflation and interest rates though.
Now I'd like to turn to Slide 5 to review a few highlights from each of our Specialty Property and Casualty business groups.
Our Property and Transportation Group reported a first quarter underwriting profit of $33 million compared to $43 million in the prior year period.
The combined ratio for this segment was 90.4%, which, while very strong, was not quite as strong as the year ago 87.3%.
Higher underwriting profits in our agricultural businesses were more than offset by lower underwriting profit in our transportation and property and inland marine businesses.
Catastrophe losses in this group were $5 million in both the first quarters of 2018 and '17.
First quarter 2018 gross written premiums in this group were 2% higher than the comparable prior year period while net written premiums were flat year-over-year.
The growth in gross written premiums is primarily attributable to new business opportunities in our property and inland marine and transportation businesses, primarily driven by growth in the economy.
Higher sessions of crop insurance impacted net written premiums.
Spring discovery prices for corn and soybeans were virtually unchanged from 2017 levels, with corn coming in at $3.96 and soybeans at $10.16.
We estimate that the year-over-year change in base rates, volatility factors and commodity prices, however, will reduce industry premiums by about 3.5%.
So far this year, commodity pricing is holding up nicely, although it's very early in the season.
And planting estimates for corn and soybeans are down slightly from the 2017 acres planted.
The wet and cold weather has delayed corn planting, resulting in all states, except Texas and Missouri, being behind their 5-year averages at this point in the year, though very early to ---+ on the crop year to really prescribe anything.
Overall renewal rates in this group increased 4% in the first quarter of 2018.
We're achieving increases on our commercial auto liability lines of approximately 10%.
However, these increases were tempered by low single-digit increases in the profitable auto physical damage line of business.
Specialty Casualty Group reported first quarter underwriting profit of $41 million compared to $15 million in the first quarter of last year.
Higher profitability in our workers' compensation and executive liability businesses primarily attributed to higher prior year favorable reserve development as well as higher year-over-year underwriting profit in our excess and surplus lines were the drivers of improved results.
I'm pleased that we have continued to produce strong underwriting margins in our workers' comp businesses, as noted earlier, that we are seeing rate declines in this line.
We believe we're managing our D&O exposures prudently and believe that our risk selection and mix of business has enabled us to perform well over time in this market.
Similarly, I'm pleased with the year-over-year accident year combined ratio improvement in our excess and surplus lines businesses, following the combination of our American Empire and Specialty E&S businesses into Great American Risk Solutions last August.
Catastrophe losses for this group were $5 million in the first quarter of 2018 and $1 million in the comparable 2017 period.
The 2018 losses were primarily the result of mudslide activity in California.
Gross and net written premiums for the first quarter of 2018 were up 15% and 10%, respectively, compared to the same period in 2017, primarily as a result of growth within Neon.
Higher premiums in our executive liability and targeted markets businesses also contributed to growth during the quarter.
Neon continues to purchase a significant reinsurance program, which affected year-over-year growth in net written premium.
Renewal pricing for this group was down 1% during the first quarter.
But excluding rate decreases in our workers' comp businesses, renewal rates in this group were up 2%.
Our Specialty Financial group reported an underwriting profit of $15 million in the first quarter compared to an underwriting profit of $22 million in the first quarter last year.
The combined ratio for this group was a very good 90.2% in the first quarter, an increase from 85% in the first quarter of 2017.
Lower year-over-year favorable reserve development added 4.6 points while higher catastrophe losses added another point.
First quarter 2018 gross and net written premiums were up 9% and 5%, respectively, when compared to the prior year period, primarily as a result of higher premiums in our lender services and leasing businesses, which were largely ceded.
Renewal pricing in this group was up approximately 2% for the quarter.
Now please turn with me to Slide 6 for a summary view of our 2018 outlook for the Specialty Property and Casualty operations.
Overall, our guidance remains broadly consistent with the guidance we offered with our fourth quarter 2017 earnings release.
We continue to expect a combined ratio between 92% and 94% and growth in net written premiums in the range of 3% to 7% for the specialty ---+ Property and Casualty Specialty group overall.
Taking a look at each subsegment.
We continue to estimate a combined ratio in the range of 92% to 96% in our Property and Transportation Group.
A decision to cede a greater portion of our crop insurance business leads us to expect net written premiums to be flat to up 4% during 2018, a decrease from our initial estimate of growth in the range of 2% to 6%.
We continue to expect our Specialty Casualty Group to produce a combined ratio in the range of 92% to 96%, with growth in net written premiums in the range of 3% to 7%.
Our expectations for the Specialty's financial group were unchanged, with the combined ratio estimated to be in the range of 85% to 89% and net written premiums growth between 2% and 6%.
And we continue to expect overall Property and Casualty renewal pricing in 2018 to be up 1% to 2%.
We've narrowed this a bit from our original estimate of 1% to 3% with consideration to rate decreases we're seeing in our workers' comp book where we continue to achieve really strong returns.
Property and Casualty net investment income is expected to grow between 4% and 6% year-over-year, which is unchanged from our previous estimate.
Now I'll turn the discussion over to <UNK> to review the results in our Annuity segment and discuss AFG's investment performance.
Thank you.
Thank you, <UNK>.
I'll start with a review of our Annuity results for the first quarter, beginning on Slide 7.
Statutory annuity premiums were $1.15 billion in the first quarter of 2018 compared to $1.29 billion in the first quarter of 2017.
Higher premiums in the retail channel were more than offset by lower premiums in the financial institutions channel.
When looking sequentially, however, premiums in the first quarter of 2018 represent a 26% increase from sales reported in the fourth quarter of 2017, with growth in all product lines and channels.
Annuity earnings before income taxes were $125 million in the first quarter of 2018 compared to $96 million in the first quarter of 2017, an increase of 30%.
Under GAAP rules, a portion of the reserves for fixed indexed annuities is considered to be an embedded derivative and is recorded at fair value based on the estimated present value of certain expected future cash flows.
Assumptions used in calculating this fair value include: projected interest rates, option costs, surrenders, withdrawals and mortality.
Variances from these assumptions as well as changes in the stock market will generally result in a change in fair value.
Some of these adjustments such as unanticipated changes in market interest rates are not economic in nature for the current reporting period, but rather impact the timing of reported results.
The impact of fair value accounting for fixed indexed annuities includes an expense for annuity interest accreted on the embedded derivative reserve.
The amount of interest accreted in any period is generally based on the size of the embedded derivative and current short-term interest rates.
The interest accreted on this embedded derivative was $7 million in the first quarter of 2018 compared to $3 million in the prior year period.
In addition to this accreted interest, we experienced higher-than-expected renewal option costs in the first quarter of 2018.
This resulted in a $4 million negative impact to annuity earnings.
Lastly, in the first quarter of 2018, the benefit of significantly higher-than-expected market interest rates was partially offset by the impact of a decrease in the stock market, resulting in a net $24 million favorable impact to annuity earnings.
By comparison, during the first quarter of 2017, the negative impact of lower-than-expected interest rates was more than offset by the benefit of a higher stock market and certain other items, resulting in a net $1 million favorable impact to Annuity earnings.
For an analysis of fair value accounting, see our quarterly investor supplement, which is posted on AFG's website.
Annuity earnings before the impact of fair value accounting on fixed indexed annuities were $112 million in the first quarter of 2018, up 14% from the prior year period, establishing a new all-time quarterly high for the Annuity segment.
Turning to Slide 8.
You'll see that quarterly average annuity investments and reserves both grew by 10% year-over-year.
These results also include unusually high returns on certain private equity and limited partnership investments, which is not necessarily expected to be recurring.
The benefit of these items was partially offset by the runoff of higher-yielding investments.
Additional information can also be found at AFG's quarterly investor supplement posted on our website.
Please turn to Slide 9 for a summary of the 2018 outlook for the Annuity segment.
Our guidance assumes that Corporate A2 interest rates rise moderately by about 10 to 25 basis points, depending on duration, between now and the end of the year.
It also assumes the S&P 500 increases by 1% each quarter.
For 2018, we now expect earnings before the impact of fair value accounting on fixed-indexed annuities to be in the range of $410 million to $435 million, up from our original estimate of $400 million to $430 million.
Our original estimate for 2018 pretax annuity earnings remains unchanged is ---+ and is in the range of [$385] million to $425 million (corrected by company after the call).
While our 2018 first quarter earnings were outstanding, we do not anticipate a recurrence of certain items that favorably impacted the quarter, including the exceptionally high returns on certain investments.
Furthermore, we expect to continue to see the negative impact of higher indexed annuity option costs, which affects fair value accounting.
Since the end of 2017, these costs have exceeded our assumptions and expectations by a range of about 5 basis points to 20 basis points.
We will continue to monitor these costs, which have been elevated over the last 2 quarters.
If this trend continues, we will need to adjust renewal rates on our $19 billion of in-force indexed annuities to help mitigate the higher costs.
We've already made appropriate adjustments on pricing of new products to address this situation.
Finally, due to stronger-than-expected first quarter sales in our retail channel, we now expect that 2018 full year annuity premiums will be up 6% to 12% when compared to the $4.3 billion sold in 2017, an increase from our original guidance of up 2% to 6%.
Please note that fluctuations in returns on investments, large changes in interest rates and/or the stock market, or higher or lower FIA option costs as compared to our expectations could lead to significant positive or negative impacts on the Annuity segment's results.
Please turn to Slide 10 for a few highlights regarding our $46 billion investment portfolio.
AFG reported first quarter 2018 net realized losses on securities of $74 million after tax and after deferred acquisition costs, which includes $71 million in realized losses on securities after adopting the new accounting standard related to equity securities previously classified as available-for-sale.
This compares to a net realized gain on securities of $2 million in the first quarter of 2017.
As of March 31, 2018, unrealized gains on fixed maturities were $342 million after tax, after DAC.
As you'll see on Slide 11, our portfolio continues to be high quality, with 89% of our fixed maturity portfolio rated investment grade and 98% with an NAIC designation of 1 or 2, its 2 highest categories.
We've provided additional detailed information on the various segments of our investment portfolio in the quarterly investor supplement on our website.
I will now turn the discussion over to Jeff, who will wrap up our comments with an overview of our consolidated first quarter 2018 results and share a few comments about capital and liquidity.
Thank you, <UNK>, and good morning, everyone.
I'm on Slide 12, which summarizes AFG's operating earnings results on a consolidated basis.
The $2.42 in core EPS we reported in the quarter is based on core net operating earnings of $219 million.
The increase in core earnings in the first quarter was primarily the result of very strong operating earnings in our insurance businesses, bolstered by a lower effective tax rate, which was 19% in the quarter.
Several factors contributed to higher property and casualty pretax operating earnings.
In addition to a $13 million or 16% increase in specialty P&C underwriting profit, P&C net investment income grew $14 million or 16% year-over-year, primarily the result of unusually high returns on certain private equity and limited partnership investments.
The sale of real estate in the 2017 first quarter offset other expenses in that period, making the first quarter 2018 P&C other expenses line higher by comparison.
Pretax earnings for our Annuity segment increased 30% year-over-year.
Parent company interest expense decreased by $6 million year-over-year as a result of our 2017 debt refinancings.
Other expenses increased by $1 million, and now includes income and expenses related to AFG's previously recorded runoff lines of businesses.
Slide 13 provides a reconciliation of core net operating earnings to net earnings.
ASU 2016-01, effective January 1, 2018, now requires holding gains or losses on equity securities be recognized through earnings.
This drove noncore results this quarter.
As a result of adopting these new rules, AFG recognized $71 million or $0.78 per share in net after-tax realized losses related to equity securities still held.
Other net after-tax realized losses on securities were $3 million or $0.04 per share.
As indicated on Slide 14, AFG's adjusted book value per share was $54.74 at March 31, 2018.
Annualized growth in book value per share plus dividends was a strong 11.8%.
We returned $31 million to our shareholders with our regular quarterly dividend, and we will return an additional $133 million to shareholders with the payment of the special dividend later this month.
Parent cash was $280 million at the end of the first quarter.
We maintain sufficient capital in our insurance businesses to meet our commitments to the ratings agencies.
Our excess capital stood at approximately $845 million in March 31, 2018.
Please remember, we plan to hold approximately $200 million to $300 million of dry powder to maintain flexibility for opportunities as they arise.
Our management team reviews all opportunities for deployment of capital on a regular basis.
In closing, Page 15 shows a single page presentation of our 2018 core earnings guidance.
Our range is unchanged from our initial guidance issued in January.
It assumes an effective tax rate of approximately 20% on core pretax operating earnings.
AFG's expected 2018 core operating results exclude non-core items such as realized gains and losses and other significant items that may not be indicative of ongoing operations.
Now we'd like to open the lines for any questions.
<UNK>, this is <UNK>.
We ---+ in our guidance, we don't just look at loss ratio.
We kind of really are trying to look at the whole picture.
So I think you're best off looking at our overall guidance and for our overall group in that.
Generally, if you look back historically, we really don't ---+ we've not changed guidance after the first quarter.
Part of that has to do with the crop business being further along to kind of get some feel on that.
Also, when you look at the ---+ in our industry, you look at hurricane season and that type of thing, and you like to be a little bit farther along on that.
And then I think, <UNK>, do you have a perspective on the annuity business probably a little early.
<UNK>, what I would say is we're extremely pleased with our start to the year, but it's early in the year and there are a couple of things that can have a significant impact on fair value accounting, the biggest one being interest rates and secondarily, option costs.
So we just thought it was a bit early in the year to change the guidance even though we're very pleased with the start to the year.
Well, in Florida, I believe there's a change of about 1.8% decrease in that.
We've already factored that into our outlook.
There's a lot of talk in California and when you look at our other larger states in that.
But I think if it's in the same range as Florida, I don't think it would change our outlook a whole lot.
Well, <UNK>, as I think as I've ---+ we've been prolific starters of business over ---+ during my career, and we've also made some nice acquisitions.
Summit being probably the largest here.
But we're ---+ when we buy things, we not only want them to be accretive.
We want them to have the opportunity to have double-digit plus returns, either by fixing them up or by the unique franchise that those are.
I think our sweet spot obviously has been in the $0.5 billion or under in that and ---+ were businesses that have specialty focus or some unique franchise or capability within their space, that's our focus.
I don't think ---+ you're not going to see us expand in the catastrophe, the property CAT side of things or ---+ we're not a buyer for Aspen.
So that's generally what our philosophy is.
We don't like to put lots of goodwill on the balance sheet, so we're just ---+ I think we're careful prudent acquirers.
<UNK>, this is <UNK> again.
I'll let Jeff address Neon, and I can talk about the commercial auto side of things.
In the quarter, we had a good quarter at national interstate with an accident and calendar year a little bit under 95 combined ratio again.
Workers' comp was very profitable.
Commercial auto's making an underwriting profit there, but still need more rate in the commercial auto liability part of that book in order to get the combined ratio to a level that meets at least our companies' return objectives.
Overall, rates were up 5% for National Interstate in the quarter, so we're continuing to take rate after 3 or 4 years of rate.
So I'm very pleased with where that business is.
Our Great American trucking business, which is ---+ had great underwriting results the last couple of years, they had a little bit of a rough quarter, a little bit over 100 combined ratio.
They're getting price increase also on their business in that.
There's a little noise in the quarter from the ---+ a couple of aviation losses related to a number of helicopter losses in that.
And I think that's probably what ---+ is more noise in the quarter than commercial auto maybe.
Jeff, you want to talk Neon.
Thanks, <UNK>, and always good to hear from you.
When you introduced the topic by indicating you want to talk about businesses that we're inflecting, I think that's a good characterization for where we hope Neon is.
Last year, we did complete the reinsurance to close transaction to eliminate all the legacy liabilities before our new management team.
And so management's free to concentrate on growing the business.
You would have seen some references in our earnings release to Neon being a source of growth in the Specialty Casualty segment.
I think on a gross basis, Neon will be probably 30% bigger at the end of this year than they were last year.
But then we went on to say that Neon is purchasing a comprehensive reinsurance program, so we took great care in our 10-K and in our last call to talk about our aversion to outsized catastrophe risk.
And so that's something we're still managing very carefully for Neon even as the business expands.
In terms of the overall business there, I think a lot of people have remarked who followed the London markets that there isn't any kind of a broad turn in rate in the market as a result of last year's record catastrophe activity worldwide.
As we measure it, probably the syndicate is up maybe 3% in rate overall since much of the property business we underwrite is not renewal business.
Property doesn't contribute more than, say, 20% to the statistics on renewal rate change.
But thus far, we feel, like, on a like-for-like basis, before model loadings, we'd probably have achieved about a 10% increase in property treaty business where we're deploying our capital and maybe a little bit more than 5% in the property D&F business.
Those are decent rate increases, but they're not sending us the signal that we need to expand our business dramatically there.
So our focus with Neon is to grow the business and prudently deploy our catastrophe aggregate and let the new management team do what they need to do to create franchise value in the company.
So hopefully, it will be another modest step forward this year as compared to legacy years, and then we'll keep going from there.
The 1.7% was overall for the whole group in that.
And we've been in the crop business for a long time, probably long ---+ as long or longer than anyone else.
Part of our skill set is year-by-year, choosing which bucket in the government multi-peril program, how much business we want to cede to which bucket there and how much business we want to retain.
In this quarter, I think we chose to retain a little bit less and that ---+ I think, that's one thing that impacted on the net premiums.
Yes.
Thank you, Takeeya, and thank you all for your time and attention this morning.
We look forward to speaking with you again at the end of next quarter.
| 2018_AFG |
2016 | COTY | COTY
#Yes, so let me start with the organization.
So, I think we will have with the P&G merger a much stronger organization in place than what we've had on either side before.
So, not only do we have a better structure, which I think will be more competitive in the marketplace simply because it is more focused.
It is more focused from a portfolio point of view ultimately once we do execute the divestitures.
But it is also more focused from an organizational set up point of view.
We would have Coty luxury competing heavily in the prestige channel on two or three categories, the same for Coty beauty in the mass channel in two or three categories, and the same basically for Coty professional in the professional channel on two or three categories.
So, I think we are leaving ---+ we are putting in place a much stronger, more focused organization which is also staffed with better talent.
On the first four levels in the organization we have selected every [individually] by looking at the P&G people, the Coty people and in a number of cases external people.
That staffing process is pretty much completed.
So, I think from an organizational set up and staffing point of view we are in much better shape.
In terms of the key initiatives that we have in the fourth quarter, we had DAVIDOFF Horizon, which is a new fragrance; Rimmel's Super Gel Nail Polish; Marc Jacobs [Splash]; OPI's Hello Kitty; and the adidas UEFA Championship League Edition.
All did very well.
Having said that, we are still not where I want to be from a growth point of view.
We have a number of new initiatives going in the marketplace.
We have Calvin Klein Deep Euphoria to re-launch the Euphoria line; and Marc Jacobs Divine Decadence to build on the Decadence success; Chloe's Fleur de Parfum to further enhance Chloe's image in top-line growth.
We have launched Sally Hansen's Color Therapy line which adds argan oil to the nail system to nourish and moisturize the nail for healthier looking nails.
We are launching Rimmel basically Scandaleyes reloaded, which is an extended wear mascara which is very easy to remove.
So we are launching a number of new initiatives.
Having said that I still think, like I said before, that we have room for further improvement.
We need to make ---+ get more productivity out of our investments.
We still have opportunity to improve our in-store execution to improve how we digitally engage our consumers.
So there is a number of buckets where we have further opportunity.
So we are putting in place a much better organization, much better structure, much better staff, more focused.
So, we are positioning ourselves well for growth.
So I am very hopeful that with that, and an intense focus on a number of areas where we can improve, that we are ultimately going to deliver from a growth point of view.
Well, thank you very much for attending the call on the fourth-quarter results and the full-year results.
Like I said, I think we are well positioned for the future and we had some nice results, so thank you all for attending the call.
Thank you and have a good day.
| 2016_COTY |
2015 | SAM | SAM
#Good day, ladies and gentlemen, and welcome to the Boston Beer Company's second quarter 2015 earnings conference call.
At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session, and instructions will be given at that time.
(Operator Instructions).
As a reminder, this conference call is being recorded.
I would like to introduce your host for today's conference, <UNK> <UNK>, President and CEO.
Please go ahead, sir.
Good afternoon, everyone.
As we stated in our earnings release, some of the information we discuss in the release and that may come up on this call reflect the Company's or Management's expectations or predictions of the future.
Such predictions and the like are forward-looking statements.
It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements.
Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's most recent 10-K.
You should also be advised that the Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
This is <UNK> <UNK>.
I'm President and CEO, and I'm pleased to be here to kick off the 2015 second quarter earnings call for the Boston Beer Company.
Joining the call from Boston Beer are <UNK> <UNK>, our CFO, and I have to announce that <UNK> Cook, our Founder and Chairman, is currently in traffic and will hopefully join us during the call.
But if he doesn't, I feel more than comfortable that myself and <UNK> can answer your questions, and we apologize for that traffic delay.
I'll begin my remarks this afternoon by covering what <UNK> had planned to say in a few introductory comments, including some highlights of our results.
I will then focus on the financial details of the second quarter as well as a review of our outlook for ---+ sorry, then I will talk about the business in a little bit more detail and then turn it over to <UNK>, who will focus on the financial details for the second quarter as well as the review of our outlook for 2015.
Immediately following <UNK>'s comments, we will open the line for questions.
Our total Company depletions trends of 6% in the second quarter of 2015 have slowed in comparison to prior quarters due to some developing weakness in our Samuel Adams brand.
While our total growth is testament to our strategy of diversified brand portfolio, our Samuel Adams trends appear to represent a very competitive category where drinkers are facing greatly increased choices and established brands are being impacted.
We believe that quality, freshness, innovation and variety will be the basic requirements for success in this environment.
We believe that craft beer will continue to grow and that we are positioned to share in that growth through the quality of our brands and beers, our innovation and speed to market capability, and our sales execution along with our strong financial position and ability to invest in growing our brands.
We were delighted to learn that for the seventh year in a row, our distributors ranked us as the number one beer supplier in the industry in the annual poll of beer distributors conducted by Tamarron Consulting, a consulting firm specializing in the alcoholic beverage industry.
This is a testament to the efforts of all Boston Beer employees to service and support or distributors' businesses and to the relationships we have built with them.
I will now move on to my own planned detailed ---+ comments on the detailed overview of our business.
In the second quarter, our depletions growth benefitted from strength in our Angry Orchard, Twisted Tea and Traveler brands that offset declines in some of our Samuel Adams styles.
The decline in some of our Samuel Adams styles is due to increased competition, which particularly impacted Boston Lager and some of our seasonal beers.
Accordingly, we have decreased our expectations for full-year depletions growth to between 6% and 9%, to reflect the most recent trends.
We are working hard to improve the Samuel Adams brand trends, and in the second half of the year, we expect to introduce new packaging and advertising to support our planned promotional activity.
The national rollout of our Traveler is currently in progress, supported by national media, and in mid-July, we began our national rollout of Coney Island Hard Root Beer.
Both of these rollouts are being well supported by distributors, retailers and drinkers.
We are pleased with Traveler's progress this year, but it's too early to tell how successful the Coney Island Hard Root Beer introduction will be.
We are planning continued investments in advertising, promotional and selling expenses, as well as in innovation, commensurate with the opportunities and the increased competition that we see.
We continue to focus on our supply chain, with ongoing investments in improved training, stable scheduling and operating efficiency and reliability improvements.
While we have made progress, we believe we still have capacity and cost improvement opportunities.
We also continue to make supply chain improvements intended to further increase the freshness of our beers and enhance our drinker service.
This includes piloting one wholesaler on a pure replenishment service model within our Freshest Beer program, which, if successful, would further reduce wholesaler inventories.
Looking forward, we expect to maintain a high level of brand investment as we pursue sustainable growth and innovation.
We remain prepared to forsake the earnings that may be lost as a result of these investments in the short term as we pursue long-term profitable growth.
Based on information in hand, year-to-date depletions through the 29 weeks ended July 18, 2015, are estimated to be up approximately 6% from the comparable period in 2014.
Now <UNK> will provide the financial details.
Thank you, <UNK>.
Good afternoon, everyone.
We reported net income of $29.9 million, or $2.18 per diluted share, for the second quarter, representing an increase of $4.5 million, or $0.30 per diluted share, from the same period last year.
This increase was primarily due to shipment increases, improved gross margins, a slightly lower income tax rate, partially offset by increased investments in advertising, promotional and selling expenses.
Core shipment volume was approximately 1.1 million barrels, a 7% increase compared to the second quarter of 2014.
Our second quarter 2015 gross margin increased to 54%, compared to 53% in the second quarter of 2014.
The margin increase was a result of price increases and lower ingredients costs partially offset by product mix effects.
We are currently maintaining our full-year gross margin targets of between 51% and 53%.
Second quarter advertising, promotion and selling expenses were $5.4 million higher than costs incurred in the second quarter of 2014.
The increase was primarily a result of increased investments in media advertising, increased costs for additional sales personnel and commissions, point of sale and increased freight to distributors due to higher volumes.
General and administrative expenses increased $1.4 million compared to the second quarter of 2014, primarily due to increases in salary and benefit costs and consulting costs.
Our income tax rate decreased to 36.2%, from 37.5% in the second quarter of 2014, due to lower state tax rates.
Based on information of which we are currently aware, we have left unchanged our production of 2015 earnings per diluted share of between $7.10 and $7.50, but actual results could vary significantly from this target.
We are currently planning 2015 shipments and depletions growth of between 6% and 9%, and price increases of between 1% and 2%.
We intend to increase investments in advertising, promotion and selling expenses by between $25 million and $35 million.
This does not include any increases in freight costs for the shipment of products to our distributors.
We believe that our 2015 tax rate will be approximately 37%, a decrease from the previously communicated estimate of 38% due to the favorable impact of lower state tax rates.
We are continuing to evaluate 2015 capital expenditures and our current investments of between $70 million to $100 million, a decrease of the range from the previously communicated estimate of $80 million to $110 million.
We expect that our June 27, 2015, cash balance of $147 million, together with our future operating cash flows and our $150-million line of credit, will be sufficient to fund future cash requirements.
During the 26-week period ended June 27, 2015, and the periods from June 28, 2015, through July 24, 2015, we repurchased approximately 170,000 shares of our Class A common stock for an aggregate purchase price of approximately $41.4 million.
As of July 24, 2015, we had approximately $51.2 million remaining on the $400-million share buyback expenditure limit set by the Board of Directors.
On July 29, 2015, the Board of Directors approved an increase of $75 million to the previously approved $400-million share buyback expenditure limit, for a new limit of $475 million.
We will now open up the call for questions.
Thank you.
(Operator Instructions).
<UNK> <UNK>, Cowan and Company.
So my first question has to do with kind of the state of the portfolio, and <UNK>, you mentioned in your prepared remarks that the beer consumer today expects a couple of key characteristics, right ---+ quality, innovation, freshness.
You named a number of different characteristics, but in my mind, given where you guys sit in the competitive landscape, quality and freshness I think are almost a given.
So as you talk about and think about your plans for the Sam Adams brand in the back half of the year and potentially into 2016, can you talk about the role that innovation is going to play in terms of reinventing the brand, please.
Sure, <UNK>.
First of all, before I answer, I'd just like to announce to the call that <UNK> Cook is currently on the call and is able to join us and will be able to comment and also answer questions as appropriate.
But on your question, I would say that I think ---+ and it wasn't explicit in your question, but we certainly believe we have some of the freshest beer in the market, and one of the things we can do is work on education of drinkers as to the taste impact of that and the benefit of that, so that's still an opportunity for us, and we continue to wrestle with how best to present that.
I think as we look at the next 12 months, we're working on a number of innovation ideas, both within the Sam Adams family and with a view to trying to have some innovative, new beers and packages that will help, much like Rebel helped last year to raise the level of interest in the brand and the retailer execution of the brand, which obviously help each other.
And as we look at that, our expectation for those sorts of things is Q1, and we're not in a position yet to talk publicly about that, but probably in October we'll be talking to our wholesalers and retailers to secure that execution and promotional support.
And then, also, innovation plays a big part in the rest of the portfolio too.
Within our craft beers, they're seeing the same sort of thing that Sam Adams is seeing, so we're working hard on unique beers for each of those brands.
And then in the cider category and with Angry Orchard, from its leadership position and strong market share, it's seeing ---+ well, we're seeing a startup of small, local ciderers on a pretty accelerated scale, certainly much faster than it took for that to be seen in craft 20, 30 years ago.
This is happening in 12 months, and that's leading to innovation and high in ciders and different tastes.
And so we have that as an opportunity for our cider brand too, and on a similar basis, we're falling into a planned innovation cycle around the chains for a Q1 launch.
I think we're anticipating continued pressure, and we've modeled continued pressure.
Would we be delighted to see an improvement from some of the initiatives mentioned in my comments.
Of course, but I think a significant change in trends is more likely to be delayed to the more significant activity in Q1.
But I could be pretty surprised.
Thank you very much.
So, first, a housekeeping question.
So the depletions are up 7% through 2Q, but then it looks like 6% ---+ and there might be some rounding in here, so correct me if I'm wrong, but up 6% for the 29 weeks through July 18th.
My back-of-the-napkin math suggests that depletions would be down 3% through mid-July.
Is that correct.
<UNK>, I think we're sort of trapped in the fact that we have chosen historically to not disclose decimal places on that number, so I would just comment on ---+ say that and say that you should interpret these numbers to be rounded to the nearest full number.
That's fair.
Maybe you can just talk, I guess, qualitatively, then, about trends in July.
Yes, well, I would refer you to (inaudible) numbers and just say that I think our July trends, as we've seen them to date, have mirrored what we've seen in the previous periods or immediately previous periods, and we haven't seen anything that significant in changes in what's been going on.
If I was to summarize, again, obviously Sam Adams is competitively ---+ in a very competitive environment, and those trends have been pretty consistent over that period of time.
Tea has been healthy and somewhat in its own small niche, and that's great, and we're obviously happy with that, and with some ups and downs around holidays and other sorts of things.
And then Angry Orchard has regained ---+ at least based on the publicly available data, has regained some share of cider from this time last year, but the cider category as a whole has slowed, and obviously that's impacted the Angry Orchard volume numbers.
And that's, again, looking at the publicly available data, so I'd say all of those things have continued.
Okay.
That's helpful.
And then, <UNK>, I have a question on margins.
So gross margins are down for the Company over 300 basis points.
I know some of that is mix.
You guys have had a tremendous amount of success with Angry Orchard, but how should investors think about the gross margin opportunity for this Company.
Can you get back to levels where you were going back three to four years ago, and is there a bigger impetus now to go after the margin opportunity given some of the top-line pressures and the more competitive environment that you guys are dealing with.
Yes, it's really hard.
I think I would just say that you're right, that the gross margin squeezes are somewhat mix related, somewhat operating cost related and input related, and certainly a number of those we can go after.
Back in the 1990s, when growth stopped for us, that's what we did, and I think we proved to ourselves we were pretty good at it.
I'd like to tell you that we'll do that every year anyway, but it's certainly an opportunity for maybe an increased level of focus.
And as we look forward, we have opportunities, as I said in my comments, for operational efficiencies at our breweries, which we're working hard on, and also for capacity throughput, which would defer any required capacity expansions.
And as always, there are always opportunities for other sorts of savings in those areas.
But flipping the question a little bit, our number one priority remains to focus on the top line and ensuring that that remains healthy.
Okay.
And just one more, if I ---+ thank you for that, <UNK>.
<UNK>, I have a question.
So you made some interesting comments today.
You obviously have voting control of the Company.
I was curious to the extent that you can comment at all how you ultimately ---+ and then the comments, I'm referring to today's with respect that you be the last US owner of the Boston Beer Company.
Can you help investors better understand how you ultimately foresee your role with the Company progressing and your ownership with the Company progressing over time.
Would a sale of the Company make sense, and over what period of time.
How should investors be thinking about that.
How are you ultimately thinking about an exit from the Company that you've so admirably built.
Thank you.
I don't think investors should be thinking about my exit, because I'm not.
So my comments today really reflected the flaws in the current corporate tax structure that, along with my other panelists who had similar points of view, make American-owned companies more valuable to somebody who can move income out of the US and reduce the taxes paid to the US government, but they were not in contemplation of an exit.
Thank you for that.
<UNK> <UNK>, Goldman Sachs.
So <UNK>, I just wanted to go back to your depretion [sic] guidance, and just given the year-to-date trend up 6%, I'm just struggling a little bit to sort of get to even kind of the mid to high end of that range, so I guess maybe some color just in terms of what's happening in terms of on-premise trend, because that is a channel that is a little bit difficult for us to gauge, and how you see the on-premise playing out for the balance of the year.
And within that 6% to 9%, how much do you think that you can actually get from innovations this year with Travelers and the root beer that you're launching right now.
So just some color on that would be great.
Sure.
On the on-premise, I think we see sort of overall on-premise volumes pretty stable, plus or minus one or two percentage points.
It's a very competitive environment, with a lot of new startups pitching draft and stuff, so it's very challenging.
I think we've been happy with being able to, I think, hold our share of the on-premise, based on sort of the tracking data that's available.
Again, it's a little bit of a murky trade, cost of trade, but I think we're happy with what we've been able to do.
We're not, perhaps, gaining handles like we were last year with Angry Orchard and Rebel sort of launches, but we're certainly sort of holding our share, we believe.
With regards to looking forward, when we do these ranges, we look at everything that we have going on and try and project out the next four or five months, and we have a lot going on.
We have new packaging, new tap handles for Sam Adams.
We expect that we are likely to have new media sometime in Q3, Q4.
We've got some things going on on the Angry Orchard side with the planned opening of our cidery probably in Q4.
So there's a lot of stuff going on that could impact the numbers positively, obviously, or, I suppose, potentially negatively.
Plus, Traveler is entering its full season.
Traveler actually does a little better in the fall than it does in the summer.
The share of the shandy market, our Jacko, which is going to be hitting retail probably in the next week or so, should have a nice bump on that and be a bigger impact for us on a national basis than perhaps our summer shandy was, so we have that in mind.
And then we have the unknown of Coney Island Root Beer, which launched last week, which we just don't have a feel for.
Okay, that's helpful.
And then maybe just on Angry Orchard, I think the category certainly has slowed down a little bit.
You're obviously doing still very well in terms of Angry Orchard growth.
It does look like distribution gains are going to be more difficult to see, just given it's pretty high in terms of the ACV, so how do you think about kind of the same-store sales transfer on Angry Orchard.
Can you talk about some of the innovations in the back half that could potentially drive even better velocity for the brand, just some thoughts on how you see that playing out.
Yes, I think the ---+ what I would say is the deceleration of the growth of cider has been pretty dramatic as a category, and I want to say this time last year, the category growth was 70% and maybe today, the last full week 13-week type time periods, it's down maybe in the teens, so this has been a little bit of a surprise to us.
We've obviously watched it and been very happy that we've maintained share and we've maintained growth, and we're studying it, trying to understand is it the trial in the cider category that stopped but the underlying drinker base is still strong, or is it something else like maybe other sweet beverages coming in, and we're still looking at that.
So I really don't think we're in a position to say exactly what it is or what the future is.
I think we remain confident that cider as a category is a viable category, one with a long history and pedigree on a global basis and even on a US basis going back to when the settlers came.
And so we don't think it's going to go away, and we certainly think there's a lot of room for it to grow.
We're guessing that it's probably around 1% of beer orders of magnitude, so that leaves a lot of opportunity still, and certainly relative to other countries, that's a low percentage of beer for the cider market.
So we remain positive and just watching what's happening and trying to understand it, but very comfortable in, obviously, our position and our ability to hold share in that environment.
Okay.
And then my last question is this year's innovations, the Travelers and then the Rebel line extentions ---+ just some thoughts on how those are tracking versus your expectations, and particularly on the Travelers side.
I know we haven't seen the full impact of the launch, but sort of how do you think it's tracking versus some of your prior innovations at this point.
Yes, well, sometimes we're conservative in our expectations, and sometimes we're unrealistic in our expectations, and I don't know which one our expectations were.
I think it's meeting our expectations, and would I be happier if it was doing better.
Of course, but I'm certainly happy that it's got the trends it has, and I think we're set up well for Q3 as it relates to our potential and our strength.
And we've also, through the elusive grapefruit shandy, had introduced a different flavor of shandy, which has been well received, so that's also been, I think, a win for us.
And I think ---+ so looking forward, we'll see, but I don't ---+ certainly it's not that we're unhappy.
That's good.
Okay.
Thank you very much.
(Operator Instructions).
<UNK> <UNK>, CLSA.
I'm really interested, <UNK>, if you could comment on the phenomenon of brew pubs.
My understanding is they're becoming a really large part of the market in certain cities and that the margins in operating a brew pub are quite enormous and allowing brew pubs to then fund more capacity additions.
Do you think this is a change that's going to spread through the country, and is this creating the rebirth of so much competition.
I mean, you've always had competition, but it seems very fierce right now.
Just to some extent, yes, it is creating a bigger wave of competition.
We have some experience with brew pubs.
Actually, we opened the first brewery in Philadelphia in the early 1990s as the Sam Adams Brewhouse, and we currently have some insight into it through the alchemy and science incubator, because we're basically operating brew pubs in Los Angeles and Miami and about to open one in Brooklyn and Coney Island in the next couple weeks.
And, I mean, you're quite right, they basically generate on order of magnitude $1,000 a barrel ---+ I mean, a half barrel, $1,000 a keg versus $100 a keg selling it through a distributor.
So if you have a successful social hall or bar as part of your brewery, you can be profitable at fairly small volumes, so it allows basically people to try things out and see if they can grow from there.
And I don't see that trend abating, just because it's not only quite profitable, but drinkers like it, so I think we will continue to see a large number of openings of craft brewers, and many of them will have that quite successful business model, depending on the state law.
So my follow up would be are you interested in being in that business in a bigger way, and could we see you put a push behind that.
Because the economics sound amazing.
Well, the economics are attractive, but of course you do have considerable investment, and you're also running sort of a small-scale business and it's very suited to sort of a one-man operation, a one-woman operation, so I don't think we see ourselves as opening enough of these kinds of places to make a meaningful contribution to our financials.
I think for alchemy and science, they've really been, while profitable, focused on being brand-building exercises that give drinkers a good experience, and hopefully they'll go out and purchase a six pack off premise.
So then just talking about the competitive environment, again, it does seem brew pubs maybe are one part of it, but what else has changed this time around.
I mean, you've had fierce competition in the past.
Do you think it's any different now.
Well, it's always been extremely competitive.
I think it's a very fast growing environment right now.
People are expecting maybe the craft segment will double, so it's bringing in lots of new entries, something like 700 a year, though even the Brewers Association isn't able to keep track of all the new openings.
And you also have an increase in talent throughout the industry.
You've got private equity coming in, you've got foreign ownership expanding, so it's attracting very good, very capable people who ---+ I think all of us together are expecting to be able to continue to grow the craft beer category.
Are you looking at exports in any more aggressive way.
You've never done that aggressively in the past.
Again, I don't see them in the short term being a huge source of growth.
I guess our perspective on it is that we have a little over 1% of the US beer business, and we can all imagine doubling that, and that's what we are focused on rather than trying to get a smaller amount of volume spread out through 50 countries.
Great, and then one last question, for <UNK>, if you could just elaborate a little bit on what the opportunities are specific to brewery efficiencies.
As you add new products, does that go against efficiency, or can you make significant progress, as you have done, even as you innovate.
Yes, a great question.
To give you a sense of ---+ this is something we've been working on pretty hard.
Our breweries today are operating a little more efficiently than they were last year, but they're actually doing twice the changeovers, and so that's just in a year.
What they've been able to accomplish is absorb twice the changeovers while increasing the total throughput slightly.
That's pretty cool, and we have a big focus on designing our processes and running the breweries to get the freshest beer and produce what we need when we need it, and that's led to that scheduling cadence of doubling of changeovers across all our lines, some more than doubling, and we've been able to do that and absorb it.
And I think we see a path to, frankly, decreasing the time required for those changeovers further and getting better at them as we do them more often, and also addressing the operating efficiency of the lines and the equipment reliability.
I would say that we've grown over the last three years, four years pretty aggressively in terms of our own capacity and equipment, and we have a lot of great new employees that are part of the organization, and we have, as you would expect, the usual opportunities in training and rotation and getting them involved in how to run our breweries better.
So we have lots of opportunity, both on capacity by improving throughputs and how we use the equipment and also on costs by reducing waste.
And I'm not that comfortable putting a hard dollar number on it, but it's part of our long-term vision as we try to get back to historic gross margins.
Thanks so much.
<UNK> <UNK>, Jefferies.
I appreciate you taking the follow-up question.
It's just with respect to the balance sheet and uses of cash.
So given the pullback in the stock here, would you think about announcing perhaps a much larger buyback than what you guys have done in the past, which has generally just sort of been to offset share creep from option exercises.
Can you do M&A in a sensible way such that it doesn't cannibalize the existing portfolio.
Some commentary there would be appreciated.
Thanks.
Sure.
As it relates to the buyback is you see that we've announced an increase in the authorized buyback that was approved ---+ I think it was dated yesterday ---+ that increases our ability to buy back.
Historically, we've approved buyback quantities sufficient to support us for a while as opposed to very large quantities.
And I think as we look at how we run the business, we're very focused on growth, and we never know when an opportunity might present itself for investment to get there.
And therefore, in our history, we've avoided that and have wanted to make sure that our cash flow is adequate to support our capital needs as we see them or any acquisition needs prior to the buyback.
So we have, I think, a nice history of a steady buyback, and obviously the announcement is intended to signal whatever it signals.
In regards to mergers ---+ I think that was your second question, acquisitions.
Yes.
Yes.
We've done a few little ones.
We've done them in two categories.
One is brewing capacity.
We built the Cincinnati brewery in 1997 and the Pennsylvania brewery in 2008, and we remain open to capacity acquisitions.
If we need that capacity, it's certainly a potential avenue for us.
On the brand side, our acquisitions have been somewhat limited.
We've put out just a couple of small, existing brands with limited wholesaler footprints.
We're very concerned about having multiple wholesalers in a market, which might occur if we were to buy a brand and be unable to move the wholesaler to our current wholesaler, so we have been reluctant to do that unless it's an exceptional opportunity.
And we look at that sort of multiple wholesaler network as being a little bit of a negative synergy of an acquisition, so in our evaluation of the acquisitions, we tend to perhaps not take all the synergies because we recognized some pretty significant negative ones, and I think in the past we, therefore, haven't been the high bidder.
That doesn't mean to say that we wouldn't entertain things and for the right things, and we certainly have done some small ones quite successfully where the wholesaler footprint has been able to be adjusted to meet our needs.
Okay.
Thanks for taking the follow up.
Thank you.
I'm not showing any further questions in queue.
That ends today's Q&A session.
Ladies and gentlemen, thank you for participating in today's conference.
That concludes today's ---+
| 2015_SAM |
2017 | ELY | ELY
#<UNK>, I don't have the December share in front of me although <UNK> is flurrying through so if do you have another question, I might have that by the end.
Yes, <UNK>.
This is <UNK> .
It is early ---+ those expenses are front end loaded early in the year mostly Q1 and Q2.
That's probably a decent estimate.
Yes.
December was 13.4% <UNK>.
Thank you.
Well, thank you everybody for calling in.
We appreciate the opportunity to discuss the business with you and we look forward to updating you further on Q1 earnings call.
Thanks very much.
| 2017_ELY |
2016 | NWN | NWN
#Thanks, <UNK> and good morning everyone, and welcome to our second quarter earnings call, and my first call in my new role.
It is an honor to be speaking to you this morning as Northwest Natural CEO, and I am pleased and humbled to be the 12th CEO appointed by the Board.
I would like to take a moment and personally thank <UNK>g Kantor for his nearly 20 years of service and especially his leadership over the past seven and a half years as CEO.
He has been a great mentor, partner, and friend during this transition.
We all wish him the best in his well-deserved retirement.
Turning to the quarter, I'll start with some highlights and <UNK> <UNK>, our CFO, will cover the financials, and finally, I'll close with an update on our North Mist project.
Financial performance this quarter was steady with earnings per share at $0.07.
An uptick in our gas storage revenues and strong customer growth nearly offset the impact of extremely warm weather in the second quarter.
In fact, this quarter was our second warmest on record.
On a year to date basis, earnings per share was $1.40 per share.
That's up $0.28 over last year.
The major piece of this story was our environmental regulatory proceedings and the non-cash charges incurred in both the first quarter of 2015 and 2016.
While these charges were disappointing, we have begun collections from customers and believe the environmental mechanism provides a good path forward for all stakeholders.
This is even more critical as the EPA moves towards selecting an environmental cleanup plan for the Portland Harbor.
Currently, the EPA is targeting a decision by January next year.
Outside of the environmental charges, our year to date results reflect strong customer growth, cost of gas incentive gains, and higher gas storage results.
Now, moving to the economic indicators for our region.
Oregon continues to add jobs as the labor force grows.
In June, the labor force hit an all-time high of around 2.1 million workers.
The state has reached a milestone in terms of recovery and expansion.
In fact, Oregon has added enough jobs to regain all the losses during the great recession.
This was no small task.
In 2010, at the height of the recession, the gap between potential employees and available jobs hit 170,000 individuals or 10% of the workforce.
Today, not only have we regained those jobs, but more importantly, our job growth is keeping pace with our strong population growth.
Our service territory in Southwest Washington has also experienced a strong recovery.
As you know, job growth coupled with a strong housing market continues to signal a robust economy here.
Single-family construction permits rose sharply over the past 12 months, with a 21% increase in Oregon statewide permits and a 22% increase in the Portland/Vancouver metro area.
These were the highest increases in single-family building permits since June of 2007.
And over the last year, home sales were up about 11% of the Portland area, with average home prices increasing by about 9%.
We are seeing similar permit trends in our Washington service territory, where about 11% of our customers are located.
The expansion of the economy coupled with a very competitive price position drove customer growth.
In the past year, we have added over 10,500 new customers, which equates to a 1.5% growth rate.
A majority of this growth stems from new single-family construction, as well as a steady stream of conversions.
We now are honored to serve over 718,000 customers.
Combined with this healthy economy is a strong preference for natural gas.
In fact, a recent Market Strategies International Survey found in our market, nine out of ten homebuyers would pay $50,000 more for a home equipped with a natural gas heating and appliances, an amazing statistic, frankly.
A similar multi-family study showed 80% of Portland area renters paying average rent prices or above also prefer amenities such as cooktops, water heating, and of course fireplaces.
Whether renting or buying, consumers prefer natural gas for its affordability, performance, and efficiency.
In fact, our customers are paying less for their natural gas now than they did 15 years ago, another amazing statistic.
And recently, these low gas prices, coupled with the benefits from our asset management activities, allowed us to refund nearly $30 million to customers this summer.
With that, let me turn it over to <UNK> to cover the financial details for the quarter.
<UNK>.
Thank, you <UNK>, and good morning everyone.
Starting with consolidated results for the second quarter of 2016, we reported consolidated net income of $0.07 per share or $2 million compared to $0.08 per share or $2.2 million for the same period last year.
The quarter's results reflected utility customer growth and higher gas storage revenues, offset by an increase in O&M expenses, and a net decrease in utility margin from significantly warmer weather than the prior year.
For the first six months of 2016, we reported consolidated net income of $1.40 per share or $38.7 million, compared to $1.12 per share or $30.7 million for the same period last year.
Year to date results were largely driven by non-cash regulatory environmental charges.
As <UNK> mentioned, we worked through our environmental docket in 2015 and early 2016, which resulted in a mechanism that allows us to recover prudently incurred environmental cleanup costs, allocated to Oregon for our legacy manufactured gas plants.
Although virtually all the environmental costs were deemed prudent, the commission disallowed $9.1 million of after tax costs in 2015 due to over earning in years past.
An additional $2 million after tax in the first quarter of 2016 was also disallowed, primarily related to accrued interest on the original disallowance.
Excluding these charges, on a non-GAAP basis, net income was $1.47 per share or $40.7 million for the first six months of 2016, compared to $1.45 per share or $39.8 million for the same period last year.
This $0.02 EPS increase is the result of some larger offsetting drivers.
First, strong utility margin contributed $0.10 and our gas storage segment added $0.08 to net income.
These gains were almost entirely offset by a significant decrease in other income related to the 2016 environmental disallowance and equity earnings recognized in 2015 ---+ in the first quarter of 2015 ---+ that did not recur in 2016.
Shifting to our segment results, for the second quarter, the utilities segment net income decreased $1.7 million.
Based on a $1.3 million decrease in utility margin, a $900,000 increase in O&M expense, and a $700,000 decrease in other income.
The decrease in utility margin was driven by significantly warmer weather than last year, offset by customer growth, and rate based returns on certain tracked investments.
Total utility volumes delivered this quarter decreased 7% over the second quarter of 2015, due to the impact of 21% warmer weather than the prior year.
Utility margins are largely but not entirely protected from the impact of weather to the Company's weather normalization mechanism in Oregon.
We saw the benefits of this mechanism for the second year in a row, as the region experienced 42% warmer than average weather in the second quarter of 2016.
Utility O&M for the quarter increased $900,000, primarily reflecting higher contractor and professional service costs.
Utility other income decreased $700,000 as a result of lower interest earned on regulatory assets.
For the first six months of 2016, utility segment net income increased $5.8 million based on higher utility margins of $4.7 million and O&M expense decreasing $13.8 million.
These positive drivers were offset by other income decreasing by $8.5 million.
Utility margins for the year to date period reflected strong customer growth and rate-based returns on certain tracked investments, as well as an increase in gains from gas cost incentive sharing, as the Company and customers benefited from lower actual gas costs than prices set in the PGA.
Although weather for the six months ended June 2016 was comparable to the prior year, with only five fewer heating degree-days, deliveries increased 5% to the comparatively colder weather in the first quarter of 2016 during our peak heating season.
Utility O&M for the first six months decreased $13.8 million, primarily reflecting the previously mentioned $15 million environmental disallowance, offset by an increase in contractor and professional service costs.
In the second half of 2015, management instituted a number of temporary cost saving natures.
Through these targeted efforts, we reduced budgeted O&M levels by approximately $5 million or $0.11 per share last year.
We have been gradually resuming normal operating expense levels in the first half of the year, but expect to fully reach our footprints in terms of headcount and non-payroll costs by year-end.
As mentioned, utility other income decreased $8.5 million in the first six months as a result of the $2.8 million 2016 environmental disallowance, along with $5.3 million of equity earnings recognized in 2015 when we received the original order.
For the quarter, our gas storage segment net income increased $1.5 million, reflecting higher asset management and firm revenues at both our Gill Ranch and Mist storage facility.
Gill Ranch also had lower operating expenses as a result of lower power costs and managing the business to a lower cost structure at the end of 2015.
We also saved $400,000 in interest expense by redeeming the Gill Ranch note in the fourth quarter of 2015.
For the first six months, gas storage net income was $2.2 million compared to just $28,000 for the prior year.
We saw improvements in operating revenues at both facilities and a reduction in operating expenses at Gill Ranch.
Cash provided by operating activities increased $32 million compared to last year, primarily due to inflows from net deferred taxes, reflecting the extension of bonus depreciation and beginning cash collections under the environmental mechanism.
Cash used in financing activities increased $27 million.
As we leveraged our strong operating cash flows to reduce short-term financing by over $117 million in 2016, compared to a reduction in short and long-term debt of $84 million in the prior year.
Finally, the company reaffirms 2016 earnings guidance today in the range of $1.98 to $2.18 per share, which includes the $3.3 million pretax or $0.07 per share after tax charge from the January 2016 order.
Excluding the charge, on a non-GAAP basis, our guidance range is $2.05 to $2.25 per share.
With that, I'll turn the call back over to <UNK> for his concluding remarks.
Thanks, <UNK> and I'd like to close with a brief update on our North Mist Storage expansion project.
As you may remember, this project is an expansion of our Mist storage facility in Oregon and will provide storage services to PGEs generating plants at Port Westward.
The project includes a new reservoir, providing up to 2.5 billion cubic feet of available storage, an additional compressor station, and a new pipeline.
You may recall in April, we received approval for the amendment to the Mist site certificate from the Oregon Energy Facility Siting Council, better known as EFSC, which was a critical permit needed to move forward on the project.
In May, we launched an RFP to capture the best terms and pricing for the engineering, procurement, and construction portion of the project.
We received final bids in June and are working closely with PGE to evaluate proposals and select a preferred vendor.
We hope to finalize that selection soon.
At the same time, we are competing ---+ completing a full project estimate, including an update EPC contract, well drilling and financing costs, and obtaining a few final permits.
We continue to work closely with PGE to obtain a notice to proceed and anticipate a notice this fall, after receipt of additional permits.
Achieving that milestone will allow the project to remain on track for an in-service date during the winter of 2018/2019.
And finally, this morning, I would like to say it's a privilege to lead this 157-year-old company.
Like those before me, I am deeply committed to operating a safe and reliable system in an environmentally responsible manner, and providing exceptional service to our customers.
I am also dedicated to partnering with regulators to productively meet the energy needs of our communities while creating solid value for our investors.
I believe we are well positioned for the future and could not be more proud of our employees.
Their service ethic and unwavering commitment to the safe and reliable delivery of natural gas is second to none.
Thanks again for taking the time this morning to join us, and with that, Zelda, I'll open it up for questions.
Yes, <UNK>, we're always in discussions with customers and as you indicated, we're fairly short in our contract book.
So if there is any improvement in price, as we would hope to capture that.
As you saw spreads in the market this last year, they did increase.
Some of that might have been driven a little bit by Aliso Canyon, but a lot of it was probably more driven by weather and the front end of the curve dropping to the full storage prices.
Frankly, it's starting to look like that's setting up again of the coming year but who knows But we're in contact with all those individuals and nothing to report at this time in terms of additional contracts to ---+ as a result of that.
Our share was a little over 200.
I'm looking at my controller.
Sorry, you can't hear him.
Net book is around $200 million right now, <UNK>.
So remember, we have 16 Bcf out there and about five of that is for the interstate market.
And so as we go forward, there will be opportunities for other customers there.
But for related to the expansion, the 2.5 Bcf, right now that is solely for PGE and there's ability if others want to kind of sign up for it.
But at this juncture, they're the only customer that has signed up for it.
Good to speak to you this morning.
Environmental remediation charge ---+ we didn't have an environmental remediation disallowance, if that's what you're talking to.
That was recorded in the first quarter and it was a gross of $3.3 million, $2.8 million impacted interest expense and roughly half a million impacted our own end line.
And that's what was reflected in this quarter, the first quarter of 2016 when we received the final order on our environmental remediation.
And correspondingly, in the first quarter of 2015, we recognized a $15 million gross disallowance on environmental charges, $9.1 million after tax, with the issuance of the order in Q1 2015.
So we had, Q1 to Q1, we had charges of both in 2016 and 2015.
Does that answer your question.
Yes, we continue to ---+ we continue to have environmental expenditures each quarter, which are put onto our balance sheet and we recognize an interest or carrying cost on those on our balance sheet.
In addition, we are collecting in-rates currently charges environmental recoveries of our accrued balances of environmental each quarter, and you'll see that for the full year.
<UNK>, we've been accruing every quarter when the liability moves.
So what was really, even though we had to take some of the charges, as you pointed out, we now have a mechanism in place in Oregon for basically full recovery of our environmental cost.
The exposure would have (inaudible) that they're not prudent, just to be blunt, but that would be an issue that we would not ---+ we would anticipate not having.
But between a standard revenue addition each year, and then also there was a balancing account in case that revenue per year is not enough.
And so essentially, you get recovery fairly quick at the expenditures.
So it's overall positive for the Company and credit positive for the Company for us to be able to kind of ---+ to move forward on the environmental expenditures we have, and also have recovery of those as those move forward.
I guess the factors really are on re-contracting the facility at Gill Ranch, as well ---+ is your question focused on Gill Ranch or our storage segment in total.
So as you know, we have ongoing optimization activities and asset management activities that are 5 VCF of interstate storage (inaudible) missed.
So those can fluctuate with market demand over time but we generally recognize pretty sustained demand.
Pricing tends to be very good there.
We do have some long-term contracts there.
So the Mist doesn't tend to be volatile year-over-year or period over period.
Gill Ranch, as we've mentioned, tends to operate under shorter term seasonal contracts, which are renewed annually.
We have some ---+ a modest amount of multi-year or two year contracts, but we end re-contracting that regularly under shorter-term contracts.
And that will be subject to the impacts of the California marketplace.
<UNK> had mentioned that Aliso Canyon may be impacting demand for storage, as does weather, as the need for storage either increases or is impacted by weather and seasonal demand.
Well, <UNK>, I think any time you're a utility, you're directly tied to the service area that you have the obligation and honor, frankly, to serve.
And what I was trying to indicate is that the economic factors in the region are doing very well right now.
And that tends to be a fairly decent predictor of whether they're going to be building new houses, new multi-family type operations, whether new commercial type opportunities are coming.
No guarantees in life, obviously, as you go through this, but they're all positive indicators that typically means that the region is growing and therefore, that typically translates into customer growth.
<UNK>, this is <UNK>.
Nothing new on that front right now.
I will tell you we're making very good progress there.
I think Kim Heiting, our chief marketing officer, has done a fantastic job of just kind of identifying the opportunity here and working with the builders, getting awareness.
We have seen some increase in this market.
Haven't done anything on the regulatory front right now.
I think what's most important for us is to try to figure out if we can do this outside the regulatory environment, and then as we go forward, if we need to file a tariff to address some of the issues that we've talked about before, we will.
But right now, we're just focused on seeing if we can work directly with builders and trying to capture as much of that growth as we possibly can.
That is an area that is very important to us because what we're seeing going forward, especially with housing prices and rent prices, there's probably pent up demand for more multi-family.
So I'm very excited that we're addressing this market and I'm hopeful we can make a good stab at getting a large market share of that market too.
Well, thank you, Zelda.
I appreciate everybody joining us this morning.
If you have any questions, give <UNK> a call.
Otherwise, we'll talk to you soon.
Have a great day.
| 2016_NWN |
2018 | HSKA | HSKA
#Thanks <UNK>.
And good morning, everybody.
Today, we're pleased to report fourth quarter and full year results for 2017.
Our release this morning contains information and details around a one-time non-cash charge of $5.9 million or $0.77 per diluted share related to enactment of the 2017 Tax Cuts and Jobs Act.
Adjusted and on a non-GAAP basis to exclude these impacts, Heska delivered record fourth quarter net income of 39.8% over the prior year to $4.8 million, which is $0.63 per diluted share.
For the year, we produced a 50.8% increase to $15.9 million in net income, which is $2.07 per diluted share.
Consolidated gross margins rose 5.4% in the fourth quarter to 46%, and 3.6% to 45% for the full year, which helped to deliver a 3.2% rise in operating margin for the fourth quarter to 19.7%, with full year operating margins rising to 14.1%.
Cash flow from operations rose 77.8% over the prior year to $10.4 million.
Our balance sheet is in excellent condition, and our liquidity position is healthy and supportive of our growth plans.
On an operational and profit basis, Heska exceeded my goals for 2017.
Missing my goal was a $7.7 million shortfall in imaging sales compared to the very strong prior year, which resulted in the majority of the consolidated revenue underperformance for the year.
Going forward, however, for 2018, we see imaging revenues returning to 10% growth and early results for January and February are confirming this rebound.
The core of our growth and profitability is, and continues to be, our point-of-care laboratory consumables and subscriptions under our unique Heska Reset subscriptions model.
In the fourth quarter and for the full year, Heska won market share, realized increasing test volume and price and finished the year with the largest installed base of users in our history.
Given that this is our highest margin product line, its continued strong growth in excess of 15% throughout 2017 and into 2018 is encouraging.
For 2018, our job at Heska is clear: first, continue to win in our baseline domestic plan that emphasizes Heska Reset diagnostic subscriptions; second, continue the growth in Heska Imaging that we have seen in January and February; and third, work to deliver on our next big product and geographic expansion opportunities to drive major steps up in growth.
I'm optimistic that we can do these things well.
As we do our work, I hope long-term shareholders may invest and benefit alongside us, our customers and our industry partners.
Now I'd like to take a moment to welcome <UNK> <UNK>, our Chief Accounting Officer to the call.
I, the Board of Directors of Heska, and the entire accounting and finance teams of Heska have been impressed by <UNK>'s intelligence and excellent work for some time now, and we couldn't be happier for <UNK> and for investors that she has taken on an expanded role.
In addition to <UNK>'s excellent work, she's a genuinely wonderful person, and I'm sure everyone will be better off for knowing her and for working with her.
Now with that, I'll turn the call over to <UNK> to go through the details of the quarter and the year.
Following <UNK>'s comments, I'll provide additional insight into our plans and upcoming Investor Day scheduled for May 15 in New York City.
Then we'll open the call to your questions.
<UNK>, you're up.
Thanks, <UNK>.
For the fourth quarter, we recorded revenue of $36 million, an 8.9% decrease over $39.5 million in the fourth quarter of 2016.
And full year revenue of $129.3 million, a 0.6% decrease over $130.1 million in 2016.
Revenue for the Core Companion Animal Health segment, or CCA, was $29.7 million in the fourth quarter, a 10.2% decrease over $33.1 million in the fourth quarter of 2016.
CCA revenue was $105.2 million for the full year, a 2.1% decrease over $107.4 million in 2016, largely due to $7.7 million less in imaging revenues.
As a reminder, CCA revenue is comprised of: first, our care ---+ our core point-of-care laboratory products, which include subscription agreements comprised of several components, including lab consumables and equipment; second, our point-of-care imaging products; and third, our single use pharmaceuticals, vaccines and diagnostic tests for companion animal use.
Our Other Vaccines and Pharmaceutical segment, or OVP, generated revenue of $6.3 million in the fourth quarter of 2017, down slightly from $6.4 million in the same quarter last year.
However, on a year-over-year basis, the OVP segment revenue increased 6.5% to $24.2 million in 2017, from $22.7 million in 2016.
Our gross margin improved in Q4 to 46% as compared to 40.6% in the fourth quarter of 2016.
Full year 2017 gross margin increased to 45% from 41.4% in 2016.
Improvement in gross margins for both periods largely resulted from favorable pricing across point-of-care lab and imaging products, favorable product mix in our OVP segment and full year 2017 revenue and cost of revenue offsetting adjustments as reported in our Form 8-K.
Total operating expenses on a year-over-year basis grew 7.2% to $40 million from $37.4 million.
The increase was most notable in G&A expenses, which were up 12.9% year-over-year due to increases in compensation and consulting fees.
Fourth quarter operating income grew 8.9% on a year-over-year basis to $7.1 million, compared to $6.5 million in the fourth quarter of 2016.
Full year operating income grew 10.2% to $18.2 million, compared to $16.5 million in 2016.
Depreciation and amortization was $4.8 million in 2017 as compared to $4.6 million in 2016.
Stock-based compensation was $2.7 million in 2017 as compared to $2.3 million in 2016.
Our effective tax rate for the quarter was 115.1% and 48.5% for the full year.
As a result of the enactment of the 2017 Tax Cuts and Jobs Act, we revalued our deferred tax assets, primarily consisting of our net operating loss carryforwards, in light of the reduction to the federal tax rate.
This resulted in a nonrecurring, non-cash accounting charge of approximately $5.9 million.
Excluding the impact of this one-time charge on a non-GAAP basis, our effective tax rate was 31.6% for the quarter and 16.4% for the full year.
Including the ---+ including impacts from the 2017 Tax Cuts and Jobs Act, net loss attributable to Heska Corporation for the fourth quarter of 2017 was $1.1 million or a loss of $0.14 per diluted share.
For full year, net income attributable to Heska was $10 million or $1.30 per diluted share.
Excluding the previously mentioned nonrecurring, non-cash accounting charge attributable to U.<UNK> tax reform, adjusted net income attributable to Heska for the fourth quarter was $4.8 million or $0.63 per diluted share as compared to $3.5 million or $0.46 per diluted share in the fourth quarter of 2016.
On a full year basis, excluding the impact of U.<UNK> tax reform, net income attributable to Heska was $15.9 million or $2.07 per diluted share as compared to $10.5 million or $1.43 per diluted share in 2016.
<UNK>, back to you.
Thanks, <UNK>.
Before we go to questions, I'd like to spend a few moments updating you on our outlook for 2018.
In our Core Companion Animal segment, the outlook for our point-of-care laboratory and imaging products in 2018 is encouraging.
Our teams and customers remain confident in the unrivaled accuracy, speed, breadth and value combination of Heska technology under the Heska Reset model.
We believe Heska Reset subscriptions will win market share for Heska and currently serve domestic markets and in potential international markets.
In lab consumables, the major growth and high-margin profit driver for Heska, we anticipate consumables growth to continue to be between 15% and 20% with stable-to-improving gross margins.
Contributing to lab consumables growth in 2018 and beyond is our expectation that Heska will win between 350 and 475 new veterinary hospital subscribers from competitor accounts.
To support organic, domestic customer share gains and any future product line extensions, Heska intends to expand the North American based point-of-care diagnostic sales and utilization teams from 85 dedicated professionals to 106, a roughly 25% increase beginning in June and paced evenly through December.
This expansion in sales professionals will also prepare Heska for upcoming growth initiatives, which include new product launches into the North American market in the first half and possibly also in the second half.
As indicated on our last call, we have begun a new product release cycle in point-of-care laboratory equipment and consumables.
To kick things off for 2018, late last year, we launched the new Element COAG analyzer and test platform.
This is a new and additive product line for Heska point-of-care laboratory, and we've been pleased that this launch has gone well and customers and the sales teams have responded enthusiastically.
Close on the heels of last year's Q4 launch of the Element COAG platform, in early February at the 2018 VMX Conference in Orlando, veterinarians were excited to learn of the prerelease debut of Henry Schein Animal Health's new Axis-Q lens software solution.
Axis-Q lens consolidates trends, reports and shares in-clinic laboratory and reference laboratory results from a broad array of providers chosen by the veterinarian for display and analysis on computers, smartphones and tablets.
Because of Henry Schein's leadership in practice information management solutions, the majority of veterinarians will now have the choice and the flexibility to consolidate and trend results from Heska in-clinic laboratory with their reference laboratory provider's results.
This has been a major request from veterinarians for several years and Henry Schein and Axis-Q lens are delivering strongly.
Continuing with the momentum, on March 4 at the 2018 Western Veterinary Conference in Las Vegas, Heska will release the first major new addition to the Heska dry chemistry product line since 2012, the Element DC5.
The all-new Element DC5 delivers the highest throughput of any fully featured point-of-care veterinary dry chemistry solution by combining a new and higher level of automated workflow, unique simultaneous staging of 5 patient samples, onboard bidirectional data sharing with Axis-Q and other practice management software solutions, a streamlined touch interface, a modern and compact form factor and superior accurate dry chemistry performance from FUJIFILM, the inventor of dry chemistry technologies.
The ultra-premium Element DC5 will be preferred by the highest volume multi-doctor specialty hospitals that do the most point-of-care testing.
Element DC5 is targeted to begin to ship to customers during the second quarter of this year.
In imaging diagnostics, last year's mid-November debut of the all-new Slate Hub went well and the additional accessories for Slate Hub are expected to be generally available in the second quarter of this year.
For Heska Imaging in 2018, we are pleased to begin the year on a solid go forward footing.
While imaging revenues for 2017 were $7.7 million less for the full year than in the prior year, which accounts for the majority of our consolidated revenue shortfall, we expect imaging to return to 10% growth in 2018.
In contrast to early 2017, Heska Imaging enters 2018 integrated, with a robust pipeline, benefiting from newly launched products, capturing a new extended maintenance revenue stream and experiencing a good head start from a solid performance in January and February.
Moving on to our Other Vaccines and Pharmaceuticals, or our OVP segment, Heska's team delivered an above trend line result in 2017 with revenue growth of 6.5% to $24.1 million and gross margins that increased by 6.9% to 31.4%.
Each of these achievements exceeded expectations and historical ranges, which we have viewed for some time as 3% multi-year revenue growth trends at 18% to 20% gross margins.
In-line with these multiyear trends and adjusting for 2017 outperformance, absent new initiatives in 2018, we expect OVP to achieve approximately $21 million in revenues at roughly 19% gross margins.
Overall, veterinary market indicators continue to point towards broad-based growth with industry estimates of 5% veterinary hospital growth and 7% hospital diagnostics growth appearing to be intact as 2018 begins.
Our baseline target for 2018 is for approximately 7% consolidated revenues growth from the areas discussed previously on this call, namely a mix of market share gains in existing markets, increased sales team density, tests and analyzer additions, healthy pricing and increased utilization from the largest installed base in our history.
Due to positive margin mix led by higher-margin, faster-growing laboratory consumables and a return to growth in Imaging products, our baseline target for 2018 assumes gross margin expansion of 30 to 50 basis points along with positive inventory conversion trends.
It is important to note that our baseline target for 2018 excludes the effects of growth initiatives, which we currently identify as being geographic expansion and major product line extensions and investments that may result in substantial impacts to our estimated baseline target in 2018 and the actual future performance.
Key growth initiatives are scheduled to be more fully shared during our Investor Day, scheduled for May 15 in New York City.
Key growth initiatives may include: research and development investments for projects slated for launch in 2019 and 2020; major new product line extensions into addressable markets in excess of $100 million in size, the first of which is expected to occur during the second half of 2018.
As a reminder, Heska has been pursuing urine sedimentation, urine chemistry, fecal testing, analyzer-based single and multiplex measurement of unregulated substances and infectious disease detection as well as other product line extensions.
Growth initiatives may also include geographic expansion investments and initiatives outside the United States, which are anticipated to be meaningful and a significant opportunity and challenge for 2018 and 2019.
We will host an Investor and Analyst Day in New York City on May 15 to update our baseline target for 2018 and to provide more details on our growth initiatives and their potential impacts for 2018 through 2022.
At this point, we'd like to take the opportunity to open the call up for your questions.
Operator.
That's correct.
The new sales hires will be in that plan, we called that out for June through December but the baseline, the way I look at it, is blocking and tackling and running our current playbook domestically.
So geographic expansion is outside of that, major analyzer additions are outside of that ---+ and I would look at the sales force expansion as two things.
Part of that is part of realizing our roughly 2% market share gain and then part of that is an anticipation of growth initiatives.
So we would, kind of, have to do both of those things.
<UNK>, I don't want to scramble the egg, I'd purposely unscramble the egg by saying, look the baseline business is doing well.
Consumables are good, profitability is good, gross margins are good, we're executing well, the macro market in the U.<UNK> is good.
There are going to be some headwinds in OVP year-over-year, they are still doing fine, but that's ---+ when it's up 6.5%, it's got to normalize to a long-term trend of 3%.
So you'll have up years and you'll have down years.
So what I'm trying to say is to make it easy on folks, if you kind of put the puts and takes into the mix, you come up with a 7% baseline.
And then on top of that, if we successfully launch a new product or do a geographical expansion, then yes, I think growth is in excess of 7%.
The question then becomes for folks like you to answer at what time do we do that and how much does that affect the calendar year.
Fortunately or unfortunately, I'm not entirely calendar-year driven, so if we get it right and it costs us 2 months, I'm ---+ of delay to get it right, I'm not that stressed about whether or not growth comes in at 7% or 9% in 2018.
I'm more focused on what does a 3-year plan look like and getting that right.
So I'm not squirming on you a little bit, but I'm trying to be a little more precise to say baseline is 7%, if we get these step-up events earlier, 2018 could be higher than that.
If we get them later, they have less impact in the calendar year.
No.
We look at that ---+ the term we've used, I think, for years, even years before I even got here, so maybe decades, has been inflationary grower.
I moved away from that term because I'm not aware there has been a lot of inflation in the last couple of years, I didn't know that it was all that precise.
But I think inflationary grower has often been interpreted as about 3% growth.
And so I think that's really been a trend line and it's lumpy.
It's a contract manufacturing business largely, so it is reliable and you know generally what you're going to get for the year.
You don't really know what you're going to get for each quarter, so it's lumpy because it's based on purchasing managers at the contract manufacturing side taking inventory that meets their needs, and we simply produce and deliver on their schedule, not ours.
So, no, I would look at that as a 3% long-term grower, and so if it outperforms to 6.5%, it's got to normalize with a down year, and I think that's all we're seeing.
And then next year could be up again.
A lot of it is just based on again trends of the people who buy the products out of that facility.
So I think they're doing a good job.
They're doing their job, which is producing really quality stuff at a USDA facility for folks like Elanco, Bayer, Merck, and they're doing a good job, but they don't control the end-user market and pull through and the timing of their inventory shipments as much as our other businesses.
So it's both.
When we do a subscription, there are multiple components to a subscription.
And there are a number of options to doing that.
So if you place a more expensive piece of equipment, you'll have higher costs on that equipment in that placement.
Now depending on the total value of the long-term contract, you'll get an equipment portion of revenue booked the month that you place that.
Some of these specialty hospitals, on the other hand, we might place them at no minimum usage, knowing that these are very, very large users and placing a $1,500 a month minimum usage or a $3,000 a month minimum usage isn't what's going to drive the usage.
If we were to do that, it would actually fall under operating lease accounting, where you would get no upfront revenue for the equipment, all of which is to say, in my mind, it doesn't matter a whole lot how we recognize the equipment portion of our placements.
What I focus on is market share gains, the number of veterinarians who themselves are growing diagnostic 7%, 8%, that have agreed to put all of their dog and cat blood through our infrastructure.
And if I can get the largest users to put the most amount of dog and cat blood through our infrastructure for 6 years, I'm far less concerned about the upfront revenue recognition.
So I would just caution folks that sometimes we focus on the what happened this month.
The whole point of moving to a subscriptions model was to not focus on the upfront equipment sale portion but to capture and grow and benefit with the veterinarian as they put dog and cat blood through our infrastructure for 6, 7, 8, 10 years.
That's really the goal.
Does that answer your question, Ray.
Yes it is, and I'm going to kick the can down the road a little bit to Investor and Analyst Day because there are a lot of moving parts in that question.
So you have the flow in of the expense, you have the productivity of the new sales reps, layer on that the market share gains and then layer on that any new product launches.
And I think what we're saying by the expansion is first of all, we can use more density because we're growing and second of all, we need more happy, smiling, trained, enthusiastic faces in front of veterinarians because 9 out of 10 veterinarians still haven't converted from a competitor to Heska yet.
So we need more people to go to talk to 9 out of 10 who still have something else that should hear our value proposition.
And I think the third thing that we might be saying with that is if we layer on a major new product launch, it's a new segment, a new product area for us, then we probably need more happy, smiling, enthusiastic faces to go tell 10 out of 10 veterinarians that don't have Heska in that product area why they should.
We'll be a little more specific on the Investor Day about the financial impacts and how to model that but pretty difficult to do I think on a call without a PowerPoint slide or 2.
Candidly, lower than the statutory and blended state rates, hovering around 20%.
I know you're trying to avoid that scrambling and unscrambling, but I'm looking at the 2-year stock growth rate, and you ran at 11%, now you're going off an easy comps, so that 7% growth rate that you're calling out as the base case, now would there be upside to that given the fact that we are kind of in a 2017 easy comp here.
Got it.
I apologize.
I know that was one you are trying to avoid.
I'm going to go to on to some of the new products here.
Can you talk about whether you're going to rely a little bit more on third-party.
Or with this, you might take some of this in-house.
Can you talk about what the rationale would be either to take it in-house or rely on the third-party.
And what the both ---+ the impact would be both on the P&L and from a revenue impact.
Yes, <UNK>.
I can tell you what I've done in the past, and how I think most of this is done in actuality, whether it's Heska or our competitors.
For most of these analyzer-based technologies, with a couple of exceptions, we rely on third-party partners who manufacture hardware and technology, and we do it with them to [veterinarize] it.
I do think that some of these products we've been working on are maybe a little bit more tailor fit and customized to our needs, so we are spending a little bit more time.
We think getting them right as opposed to just adapting things that are available on the human side, and I would point to kind of the urine sedimentation and chemistry space as an example.
We do think we can do some interesting things there.
But we're not going to announce that we've purchased a plant in Shenzhen, China, and we're now manufacturing things directly.
And I don't think that's inconsistent.
I think Apple uses contract manufacturing as well, so we won't be spending tens of millions of dollars on fabrication and things like that.
Did that answer the question.
I think that was the question.
Actually, going a little bit more ---+ I'm looking more about the impact on R&D on the P&L as you're going to do these new products, whether, I don't know, for instance, you're talking about a urine sediment analyzer, I'm guessing that's going to be something that you would have a third party OEM and manufacture to you and then maybe your R&D would just come in at the very end as you're [veterinarizing] it.
I'm just trying to get a handle on what the P&L might look like as you're launching these new products.
Keeping in mind, I know a lot of this is coming in the Analyst Day, if you want to get vague, that's perfectly fine with me.
I'm just trying to understand what these new products are going to be in terms of impact on P&L.
I think you've got it, in terms of concept.
Again, the reason we called out, kind of, a base case 2018 target and then we've got the growth initiative off to the side is there's nice symmetry there.
And I think investors would then be able to say, okay there's an investment here that may or may not run through the P&L but here's exactly the size of the market.
Here's the opportunity, here's the margin, here's the step-up event.
And I think having that symmetry just off to the side where you can evaluate that as a project base as opposed to having it embedded in your 2018 base target is helpful to investors.
And so we tend to want to focus on May 15 on some of the growth initiatives as stand-alone evaluation as opposed to, again back to scrambling the egg, we're trying to avoid scrambling the egg.
And you touched on, in prior calls, about winning more consolidated practices.
Now you have a new really high throughput instrument, you called out that this is going to be for large vet practices.
Now, would this have maybe some upside opportunity to win maybe some consolidated practices that also have to be maybe consolidated in the same region.
Just give us, maybe, a way to think about some of the upside with this new product and new kinds of customers that maybe traditionally you haven't been able to get in the past.
So I'll take it in reverse order.
It does not require an acceleration from what we're seeing in January and February.
So there is a nice start to the year that I think just confirms what we're thinking for the full year.
In terms of the fourth quarter launch, the Slate Hub products and those accessories launched, I think on November 14, and then when you back into Thanksgiving and then you back into Christmas, you back into New Year's, you don't really have an awful lot of selling days, let alone an awful lot of shipping days.
And so I think, the team did a really good job.
They also, from a profitability standpoint ---+ we don't look at it on a product line or unit base profitability but they generated an awful lot of contribution margin for the fourth quarter.
The prior year's fourth quarter was just really good and ---+ but the fourth quarter for 2017, I think, was profitable and the folks did a very good job.
So all of which is to say, I think, imaging is integrated.
We had to focus on integrating that business from June 1 through December.
And I think it's largely integrated, and I think gross margins for the fourth quarter were good.
I think, the product launch went very well.
I think, the accessories will start to layer on, which are kind of additive revenues.
We've never had those accessories that are new with Slate Hub, so it's a little bit of tailwind there.
They've got the service revenue.
I mean, there are just a number of reasons why we're pretty optimistic that it's back on the solid footing and back to a 10% grower.
We didn't, and I think it's actually slated for the first half.
So I'm going to get a little squishy on you on that one, but I don't think it's not a 1Q.
I'm still optimistic that it's a first half.
We will push very hard.
I think, heartworm season is coming up into full swing, and we'd like to be on market.
I will point out though that ---+ I want to put that into context because that's a nice additive, but it's not really core to really our growth plans going forward.
That heartworm franchise was maybe a $10 million franchise in 2012, and it's shrunk now to just under $2 million.
So if you look at that and you just straight line that, maybe it's going backwards $2 million a year for the last couple of years.
So it's been a headwind.
But it's already under $2 million, so even if we did nothing, it would be pretty difficult to lose more than $2 million because it's already under $2 million.
So there's not a lot of downside in that.
And so I do think, on a go-forward basis, when that new reformulation comes to market at much better gross margins, which means much better end-user pricing, I think the differentiation between multiplexing tests that do 4 tests as opposed to a heartworm test, which I think is still a very popular segment, I think that slightly under $2 million franchise probably goes back to growth.
But again, we're still in USDA regulatory, and we're still in acquiring samples to get that.
That continues to be the delay.
I'm still optimistic that we might get that in the first half.
I think that's fair.
And we haven't been precise on that, but we'll be more precise on it on the Investor Day.
But even then, it's ---+ spreadsheets are very precise, they might not be very accurate.
So there's still a human factor here.
You still have to recruit people in June and July and August and September, then you have to roll things out and so you can't control all those human factors.
And I pointed out in the past, we are still of a size where those human factors can move things on a 30- to 90-day basis.
They aren't really trends, they are just a function of the fact that we're still of a size that you can do better on a 30- or 90-day and you get a positive swing or you can have that human factor that delays things or costs things a little bit higher in terms of expense for a 30- or 90-day period and you have a negative swing.
And so I just caution folks to not extrapolate that forward.
The strategy in the long-term benefits of a 3-year rollout are far more important than trying to nail whether or not it's X basis points or Y basis points in terms of operating margin.
I think so, I ---+ know past performance is no guarantee of future performance disclaimer, but I recall when we started our work in early 2014, we were under 10%, maybe 8% operating margins.
I think, we finished this year at 14%.
So we've picked up about 200 to 250 basis points in most years that I've been here.
I don't think there's anything miraculous that would cause that to stop on a long-term basis but I would just caution folks that a quarter doesn't make a trend.
So we've taken it from 8% to 14%, we had a high watermark of 19% and change in the fourth quarter.
So every year, we have a high watermark in the fourth quarter that's higher than last year's high watermark and then we drift towards that.
And I think, I've said publicly for a couple of years that I do see our long-term operating margins drifting up towards where our bigger competitors are, and I still that ---+ I still see that to be the case.
Yes.
Yes.
So we have blood diagnostic laboratory point-of-care folks, we have imaging folks, we have some that have been piloting a dual role where they carry the entire point-of-care diagnostics offerings, and then we're divided into regional manager territories and each of those territories is expanding and actually has been expanding for some time.
I think, we're just a little quieter about it.
We went ahead and called this one out because there's a step-up.
I think just in anticipation of maybe some new products that are going to require more happy, smiley faces telling veterinarians about why they should switch to Heska.
So I would just think it's more ---+ we're not revolutionizing the sales force, we're just increasing the density.
And we saw open territories literally where it's just plain too much geography for a human being to cover all the clinics in the territory.
So for us finding points of expansion without pinching high performers is, I think, easier than it is for folks who have higher density already.
No, we do assume that there are corporate wins in that number.
And I do think the DC5 will help us with some specific corporate accounts that we've been working to convince, but it's competitive.
The other guys might decide to put 5 analyzers on the counter and say they have a DC5 too, I don't know.
It's competitive, so ---+ but I think we're just confirming maybe with a number as opposed to a percentage to try and give some context.
People here, 1.5% to 2% they may not be aware of just how many hospitals that is, so I just try to put a number on it.
That's really the only change in my script.
That's a good question.
International is a hugely important growth initiative for us.
And so I go back in preparation for calls and I read the transcripts and I look at the last couple, and this is a continuation of the work that we've been doing for 1.5 years now.
But I think, we're solving for a 20-year problem in terms of logistics, in terms of infrastructure, in terms of reach.
We would like to establish a structure that is competitive with the largest competitors, much more than we'd like to have a tiny beachhead somewhere that just improves this year's results.
So we've been focused, I think, a little bit more longer term with maybe a little bit bigger of an appetite.
We have that progress, we've spent a lot of time on this particular issue.
Recently, we have entered into a letter of intent that codifies some of that progress for an expansion.
And so it does look like it's pushed out, but we do think there will be some success here in 2018.
We're not at the point now that we want to call it out here in February 28, but we do think we're getting close to being able to launch in a bigger way.
Thank you, operator.
And thanks to all the investors and analysts who called in.
I'll just leave you with a couple of my thoughts.
There is ---+ the value-creating work that we've done in 2017 has positioned us, I think, very well for the next several years.
And 2017 was uncharacteristically quiet on major step-up events, but our pipeline of major opportunities has never been this large, broad, healthy or ripe.
Our first act from 2013 to 2017, that period rewarded us primarily for improving our base business, and I think we've achieved that.
I think our second act from 2018 to 2022 holds more value-creating opportunity and reward than our first act.
And in that new period, we're going to focus on broadening our product and expanding geographically.
I'm fully aware of the strength and the size of our competitors and the difficulty of the goals that we have, but I am placing my confidence in Heska to win in this next act from 2018 to 2022.
And I'm super encouraged that we have well-informed industry partners and we have long-term investors who join me in my optimism that we can accomplish these things.
So I look forward to updating everybody on May 15 during our Investor Day on our progress and with more details on this optimism and our plans.
And we'll see you soon.
Thanks.
Bye-bye.
| 2018_HSKA |
2017 | WRK | WRK
#Good morning, everyone
Thanks for joining our call today
We're well on our way to implementing our strategic plan
We're building an industry leader that's well-positioned to profitably grow, by serving attractive paper and packaging markets
WestRock offers a unique set of product and capabilities to our customers, from corrugated boxes to folding cartons to in-store displays
These product and capabilities allow us to work with customers to provide them with differentiated paper and packaging solutions
That's what we're working toward and I'm happy to be able to say we're making progress with this strategy in the marketplace
For the past six quarters, we've transformed our portfolio in a way that's seldom seen from public companies
The merger between Rock-Tenn and MWV brought two complementary industry leaders together
We've improved our folding carton business to our acquisition of Cenveo Packaging and strengthened our corrugated packaging business with the purchase of SP Fiber
We've continued to rightsize our mill network
We integrated the Carolina Commercial Print Product line and gained a successful partner in Mexico through our joint venture with Grupo Gondi
We're moving quickly to monetize our land and development portfolio
Last spring, we spun off our specialty chemicals business into Ingevity
As you saw yesterday, we've entered into an agreement to sell our Home, Health & Beauty business to Silgan, from which we're expecting that $1 billion in proceeds after tax and after transaction fees
This cash will be used for our most recent strategic announcements, the acquisition of Multi Packaging Solutions, a leading global provider of print-based specialty packaging solutions, serving attractive markets
This portfolio news have focused and strengthened our core paper and packaging businesses
I believe that WestRock is in an outstanding position to develop our capabilities, enhance our reach, improve our margins and generate attractive returns to stockholders
Before discussing the MPS transaction, <UNK> and I will provide highlights on our first quarter performance
Sales for the quarter were $3.4 billion and adjusted EBITDA was $490 million, for a margin, 14.2%
Adjusted earnings per diluted share were $0.47 in the quarter
$50 million in higher input cost, including 20% increases to both OCC and caustic soda prices and a 30% increase in energy cost, contributed to the year-over-year EBITDA decline
Results were also unfavorably impacted by previously announced consumer-grade price reductions, Hurricane <UNK>hew and a legal settlement
These headwinds were largely offset by the favorable impact of our ongoing productivity programs in our corrugated segment which is successfully implementing a container board price increase across both domestic and export markets
The corrugated packaging team delivered solid results in the quarter that included the negative impact of prior-year price reductions, somewhat offset by recently announced price increases and meaningful inflation
Box shipments increase 2.2% per day as compared to last year, highlighting the strength from eCommerce, retail and consumer and produce and agricultural markets
North American adjusted EBITDA margins were 15.8%
The year-over-year decline resulted from higher input costs
Productivity improvements drove a $42 million benefit in the quarter from a year-ago period and the domestic container board price increase began to flow through our results, with a $14 million favorable impact in the first quarter
We expect to exit the second quarter at a quarterly run rate in excess of $50 million
Adjusted EBITDA declined by $38 million from the prior year, more than half of which was related to Hurricane <UNK>hew and the legal settlement
Excluding the 33,000 tons of lower production caused by the hurricane, our total segment shipments were above our expectations
Healthy demand in our export markets allowed us to announce a price increase which we'll begin to realize some benefits starting this month
And we managed our inventories well despite the hurricane, with levels that were largely unchanged from the fourth quarter of FY '16. We're confident in our ability to improve our results in our corrugated segment
This is a top priority for our Company
We have made and will make investments in our mill and box plant network, our processes and our people
This agenda will support our ability to serve our customers with our differentiated solutions and products to fundamentally improve our cost position, improve our integration levels, generate strong cash flows and improve our margins
Given the challenging market dynamics, our consumer packaging segment generated stable results in the quarter, with higher input costs and lower volume mostly offset by strong productivity performance
Shipments of paperboard and converted products were up slightly and the segment delivered revenues and EBITDA of $1.5 billion and $215 million, respectively
$14 million in productivity was driven by continued internalization of SBS volumes, procurement cost reductions and our ongoing performance excellence program
Our SBS and CNK backlog now stand at four weeks and CRB at two weeks
Dollar growth in the foodservice and liquid packaging markets were offset by softer demand for processed foods and tobacco
During the first 11 months of 2016, North American folding carton industry sales declined 1.3% due to lower volumes and pricing
For that same period, WestRock's folding carton organic sales in North America increased 1.4%, driven by strong volume, partially offset by lower pricing
Beverage sales were stable
Looking forward, we see a stable demand environment and continued input cost inflation
We've announced price increases to our customers for both CRB and ERB
<UNK>, I will turn it over to you for second quarter guidance
Thanks <UNK>
I'm going to shift gears and discuss our agreement to purchase Multi Packaging Solutions
Why it's such a compelling, strategic and financial transaction for WestRock
We've been interested in this business for some time now so we're delighted to have reached this agreement
Turning to slide 11, provides a summary of the strategic rationale, financial considerations pertinent to our acquisition of Multi Packaging Solutions
Since merging Rock-Tenn and MWV in 2015, we developed the most comprehensive portfolio of paper and packaging solutions in the industry
The focus is on providing customers with unmatched depth and breadth of product and services to help them win in their markets
Our agreement to purchase MPS is another step in that journey and one that greatly advances our business, both strategically and financially
The acquisition of MPS is highly aligned with our strategy
From MPS' market positioning, products, geographic presence, production footprint to its relationships with its customers, MPS has a strong fit with our consumer packaging business and it represents an important part of our evolution toward higher growth, higher value businesses
MPS strengthens our portfolio of differentiated value-added product offerings and enables us to serve a broad range of customers' needs for paper and packaging solutions
This further supports our enterprise sales approach as we look to build long term relationships with our customers and increase our share of their packaging needs
MPS enhances our participation in the attractive growing segments of consumer packaging where we're well positioned to compete
The segments include health care, cosmetics, confectionery and high-end spirits
The requirements of our customers across these markets is increasing
<UNK>et trends are leading to channel, product and SKU proliferation
And the corresponding need for shorter run sizes, more declaration and more differentiation to stand out in increasingly competitive markets
The combined capability of WestRock after the acquisition will be well suited to meet these requirements
We will have substantial potential to expand our customer relationships by offering MPS' solutions to WestRock's customer base and WestRock's solutions to MPS' customer base
MPS balances our revenue mix between our corrugated and consumer packaging segments and it brings $85 million of synergy and performance improvement opportunities, including converting MPS into a customer for WestRock's paperboard
The increased paperboard consumption will allow us to replace pulp production across our SBS system
This meaningful mix improvement further insulates our SBS system from demand volatility
The financials of the acquisition are compelling
We're paying $18 per share for MPS and assuming their debt for a total enterprise value of $2.28 billion
This equates to 9.6 times trailing 12-months adjusted EBITDA and 7.1 times after including full run rate synergies and performance improvements
The acquisition will be accretive to our earnings per share and cash flow from the start
This is inclusive of the impact of purchase accounting
We expect to fund the transaction through a combination of cash on hand in both the United States and Europe, approximately $1 billion from the sale of Home, Health & Beauty, when it closes and existing committed borrowing capacity
On a pro forma basis, our capitalization will remain strong, with a leverage of 2.55 times including synergies
Following the transaction, more than $1.5 billion credit capacity will remain available to us to continue executing our strategic plan
The transaction is subject to normal regulatory approvals and requires approval by MPS shareholders
While MPS has been public since October of 2015, it's majority owned by Madison Dearborn Partners and the Carlyle Group
We expect to close the transaction in our fiscal third quarter ending in June of 2017. Our business generates very robust and consistent free cash flows
This acquisition aligns very well with our balanced capital allocation approach which is focused on investing for growth, both organically and inorganically, maintaining capital expenditures and returning meaningful capital to stockholders through share repurchases and dividends
We evaluated this acquisition on a number of factors, including earnings and cash flow accretion, improving our business, providing future growth opportunities
We believe that on all of these items this acquisition delivers a superior return profile when compared to repurchasing shares
Our Management Team has a track record of solid execution
Since forming WestRock in 2015, we've achieved more than half of our goal for run rate synergies, ahead of our expectations
We've completed a number of transactions to focus our business
I am confident in our ability to deliver on a successful integration of MPS into WestRock due to the quality of the WestRock and MPS teams and the alignment of MPS' business and culture with WestRock
I've had the pleasure of getting to know both Marc Shore, MPS' Chief Executive Officer and Dennis Kaltman, President, over the last few months and developed an even greater appreciation for them as a Management Team
I can't wait to have them join our team at WestRock
Marc and Dennis have spent their entire lives in the packaging industry
Marc's family company, Shorewood, acquired Dennis' family business in 1998 and they have worked together ever since
It has been a productive partnership over this time
Marc started MPS in 2005 and Dennis joined the business the following year
Together, they have built MPS through a series of 17 acquisitions and one merger, had a proven track record of integrating packaging businesses, realizing synergies and delivering value for new packaging products and capabilities
MPS' clients are some of the largest and most demanding companies in the world, with complex needs and requirements
By combining MPS' capabilities with those that exist at WestRock today will create opportunities to further differentiate our offerings and bring another level of value to our customers
MPS is a leading provider of high value-added print-based specialty packaging serving attractive and growing end-markets
Almost all their sales are to Consumer and Healthcare markets; sectors that are expected to grow at low- to mid-single digit growth rates through 2020. In Consumer, they serve image-sensitive markets such as confectionery, cosmetics, fragrance, spirits and other high-value goods
In Healthcare, MPS is known for their ability to provide complementary packaging components, speed to market, quality control, brand security and environmental solutions
These are markets that demand innovation, customized solutions, rapid new product development and a high performance to meet regulatory requirements
Like WestRock, MPS has close and long-standing relationships with their customers
They bring expertise in branding and regulatory compliance which are critical to companies in the Consumer and Healthcare sectors
They have established a reputation for working with customers to meet the challenges of operating in these industries and delivering consistent high-quality solutions
They are a leading supplier of premium folding cartons which will integrate nicely and complement WestRock's business
They also provide products such as inserts and labels which will extend the range of capabilities we can provide to our combined customer base
The transaction further diversifies WestRock's geographic presence, allowing us to better support our customers with the solutions that they need where they need them
MPS will further strengthen WestRock's position in North America and expand our presence as the industry leading provider of folding cartons in Europe
At the same time, MPS' operation in Asia will establish a platform for WestRock to leverage growth opportunities in that region, enhancing its already strong combined position in emerging markets
Turning to slide 14, MPS has a superb and highly diversified roster of long-standing world-class customers
Highly customized, short run, premium packaging and labeling is increasingly complex and valued by these customers
The ability for customers to effectively market their product with unique graphics is something they offer to customers within the Consumer and Healthcare industries
Bundling, folding cartons, leaflets and labels is a service that sets MPS apart from competitors
We will be able to bundles these capabilities with our products such as corrugated and displays and create an even more powerful customer offering
I will now turn it over to <UNK>, who will walk through some of the financial aspects of the transaction
Thanks <UNK>
We're excited about the MPS transaction
MPS will make WestRock a better Company
MPS will add to WestRock's already comprehensive suite of packaging solutions and increase our capabilities in healthcare, cosmetics, spirits and confectionery packaging, while further diversifying our product offering with labels and inserts
And, we will gain additional access to international high-growth consumer end-markets
The acquisition of MPS will further WestRock's vision to be the premier partner and unrivaled provider of winning solutions for our customers
As we're successful, we will be able to create value for our customers, employees and our stockholders
We look forward to sharing more information as we move forward
That concludes my prepared remarks
<UNK>, we're ready for questions
First of all, you've got the rationale for MPS spot on
I think you have also identified opportunities in corrugated
I don't view that as being a choice
I think that's our strategy for the Business is to be paper and packaging solutions provider, providing both corrugated and consumer
So we've been doing, I think, a very good job at meeting needs in both consumer and corrugated packaging markets
I could see additional activity, both organic and inorganic, on the corrugated side along the lines you've described
Sure
Marc Shore will report to me and will work closely with <UNK> <UNK> to ---+ as part of the corrugated packaging segment ---+ I'm sorry, as part of the consumer packaging segment
MPS has been very successful in bundling, say, leaflets and labels with their folding carton business
We're also having success on our side as well, combining our products
And I'm going to ask <UNK> <UNK> to talk about what we're doing in that area in corrugated
We think we're a customer-focused packaging company now
We also operate mills well
I have been delighted to be able to spend time with Marc Shore and Dennis for the past several months
I think it's a great fit
I think both of our organizations are going to be a lot better because of the combination
So I look at this as entirely opportunity for us
I think Shorewood was owned by another organization
That was before I came into the business
I came into the business a long time ago
So it was just a different business, different time
So I really can't comment on that very effectively
What I can comment on is I think we've been very clear on our strategy and very clear on what we want to do with respect to markets
MPS adds better markets to us
It expands our service and product offerings
We've got opportunities to add synergies and performance improvements
I think we're the best buyer and the best owner for the company
I think MPS can bring a great deal to us and vice versa
So I just think it makes sense for us
I think with respect to the uneven performance, I think we've had ---+ there has been volatility in the markets
I think if you look at this on a long term basis, maybe like, say, a year or two, three years, it's just going to make us a better Company
The latter, the market is moving that way
We want to move with the market
I wasn't at either one of the companies when they bought them, so I really can't comment from knowledge based on what they did
I can comment on what MPS does and WestRock does
I think we're very well aligned
We do at very similar times, our businesses complement one another
I take your point on wanting to align the incentive systems
And I think we've done that very effectively at WestRock across a number of businesses
I will also point out that on the ---+ one of the businesses that you identified, I think we had made on Home, Health & Beauty, that management team had performed outstandingly well over the past three years
In fact, I was recognized on the call yesterday
So I have a high degree of confidence in our ability to integrate and in large part because of my knowledge of the people at WestRock and the knowledge that I have of the way MPS operates their business
Okay
I'm going to let <UNK> handle that since he responded to the prior CRB question
I think it is improving it
MPS on markets, the healthcare and consumer markets, are growing faster than the rest of our markets
It is additive to our overall opportunity of growing the Business
No, I think it's adding to our core business; we look at our core business as being paper and packaging, serving both consumer and corrugated markets
This fits very nicely with and adds to, what we have
So I think it's entirely consistent with what we have been doing
Yes, of course
That has been part of what has made MPS successful and that's going to continue to be an opportunity for us
The regulatory approvals we think we need at this point are U.S
, Mexico, European Union, Canada and China
It's early for us to comment on the outlook for that
That is correct
That is difficult for me to comment on an overall industry basis
I think for this particular transaction, to me, the core reason for the transaction is MPS's position and the packaging business
I've told several people this in the process
Look at this as cake and icing
The core business and the packaging business is the cake
The integration is a nice addition
It is the icing to the transaction
Whether that holds true for the rest of the business and the industry, I can't speak to it
All I can say, this is a fantastic transaction for us and I am very much looking forward to getting it closed and working with the MPS management team
| 2017_WRK |
2017 | TPRE | TPRE
#Thank you, operator.
Welcome to the Third Point Reinsurance Limited earnings call for the fourth quarter of 2016.
Last night we issued an earnings press release and financial supplement which is available on our website www.thirdpointre.bm. A replay of today's conference call will be available through March 3, 2017, by dialing the phone numbers provided in the earnings press release and through our website following this call. Leading today's call will be <UNK> <UNK>, Chairman and CEO of Third Point Re. But before we begin, I would also like to remind you that many of the remarks today will contain forward-looking statements based on current expectations. Actual results may differ materially from those projected as a result of certain risks and uncertainties. Please refer to the fourth-quarter and full-year 2016 financial results press release and the Company's other public filings including the risk factors in the Company's 10-K where you will find factors that could cause actual results to differ materially from these forward-looking statements. Forward-looking statements speak only as of the date they are made and the Company assumes no obligation to update or revise them in light of new information, future events or otherwise. In addition, management will refer to certain non-GAAP measures such as diluted book value per share, which management believes allow for a more complete understanding of the Company's financial results. A reconciliation of these measures to the most comparable GAAP measure is presented in the Company's earnings press release. At this time, I will turn the call over to <UNK> <UNK>. <UNK>.
Thanks, <UNK>.
Good morning, and thank you for taking the time to join our fourth-quarter 2016 earnings call.
In addition to <UNK> <UNK>, Chief Financial Officer of Third Point Re, with me today are <UNK> <UNK>, CEO of Third Point LLC, our Investment Manager; and <UNK> <UNK>, President and Chief Operating Officer of Third Point Re.
Last we issued a press release announcing the promotion of <UNK> <UNK> to CEO of Third Point Re, effective March 1.
<UNK> is an invaluable member of the Company's management and is well-placed to take over as CEO.
I've always recommended him as my successor in discussions with the Board, and we decided that now is a good time to make this transition.
I will remain Chairman of the Board, Chairman of the Underwriting Committee of the Board and CEO of our US operation, Third Point Re USA.
<UNK> and I enjoy a great relationship having worked together over the past five years to form and develop Third Point Re, and this is a natural progression of our respective roles.
We expect a smooth transition.
I look forward to continuing to work with <UNK> and to support him in his new role.
Another point I want to discuss before I turn the call over to <UNK> is our stock buyback plan.
In our last earnings call we said we would buy back our shares if they traded at 90% of book value or below.
During our normal open trading window following our third-quarter earnings call, there were a handful of days that we traded below 90% of book value per share.
However, during those days we were in a trading black out period because we were in possession of material, non-public information.
Our intent remains to buy back shares should our shares trade below 90% of book value in the future, subject to market conditions and applicable securities law.
I will now hand the call over to <UNK>.
Thanks, <UNK>, and thank you for your friendship and all of the support and guidance over the years.
Here's the plan.
I will provide a brief overview of our results, as well as an update on current market conditions.
<UNK> will discuss the performance of our investment portfolio and <UNK> will discuss our financial results in more detail.
We will then open the call up for questions.
I will start by discussing our results.
For the fourth quarter, we reported net loss of $47 million or $0.45 per diluted share.
This compares to net income of $42 million or $0.39 per diluted share in last year's fourth quarter.
for the full year of 2016 we earned $28 million, or $0.26 per diluted share versus a loss of $87 million or $0.84 per diluted share for 2015.
Now let's talk about our combined ratio.
Our combined ratio for the fourth quarter was 105.0%, which is in line with our expectations given current market conditions and the lines of business on which we focus.
There was a small amount of net favorable reserve development in the quarter.
Also, the combined ratio benefited from a lower than typical expense ratio.
This was due to lower incentive compensation accruals, which <UNK> will discuss in more detail.
Okay, now for gross premium.
Gross premium written in the quarter dropped by 19% to $81 million compared to the fourth quarter of 2015.
For the full year of 2016, it decreased by 12% to $617 million.
We believe gross premium written could drop further in 2017 as we continue to work towards improving our combined ratio.
In several lines of business such as Florida homeowners and non-standard auto, we have pushed for improved terms at renewal to counter worse than expected underlying results where our competitors, in many cases, renewed reinsurance contracts at or very close to expiring terms and conditions.
Although our premium decreased in 2016 and is likely to decrease further in 2017, we have continued to generate float.
Our invested assets to equity ratio was 1.55 times at year end, close to what we believe is an ideal level for us given risk management considerations, of course.
It should remain close to this level throughout the year even if we reduced premium.
I will now hand the call over to <UNK> <UNK> who will discuss our investment performance in more detail.
Thanks, <UNK>, and good morning.
The Third Point Reinsurance investment portfolio managed by Third Point LLC was down 1.7% in the fourth quarter of 2016 net of fees and expenses, versus returns for the S&P and CS event driven indices of positive 3.8% and positive 2.3%, respectively for the quarter.
The count was up 4.2% for the year net of fees and expenses, versus returns for the S&P and CS event driven indices of 12% and 2.7%, respectively for the year.
The Third Point Reinsurance account represents approximately 15% of assets managed by Third Point LLC.
Markets were volatile in 2016 due to multiple macro surprises, culminating with Trump's election, and the Republican majorities in the Senate.
Correct analysis of market moving events, corrective positioning and nimble portfolio management were vital to generate solid returns.
The net investment results for the year were driven by contributions from most strategies and sectors in the portfolio.
Credit contributed the largest share of profits with modest losses in structured credit, greatly outweighed by gains in corporate and sovereign credit.
Investments in the energy sector were the primary drivers of returns for the year in corporate credit.
Within equity, strong performance from investments in financials and industrial sectors countered negative attribution from two large healthcare positions.
The Third Point equity portfolio was down 3.1% on average exposure during the fourth quarter.
We shifted exposures meaningfully following the election, decreasing exposure to TMT and consumer and ramping up investment in financials, industrials, and other cyclicals.
Despite these moves, gains in financials and industrials were offset by losses in consumer and healthcare investment.
The corporate credit portfolio returned 6.8% in Q4 and 33.3% for the year on average exposure.
Our structured credit portfolio was down 1.9% on average exposure during the quarter, and detracted modestly from returns for the year amidst a challenging market.
Throughout the year, we decreased exposure to US RNBS and added exposure in other areas of structured credit, including marketplace lending.
The sovereign credit book was down 16.4% in Q4 but returned 20.7% for the year, largely due to gains from our position in Argentine government bonds.
We're excited about the opportunity set presented by the current market environment.
We expect a combination of accelerating growth in fiscal stimulus in US will create an reflationary market which is favorable for Third Point's investment strategies, including event driven and value investing risk arbitrage and activism.
Now, I'd like to turn the call over to <UNK> to discuss our financial results.
Thanks, <UNK>.
For the three months ended December 31, 2016, diluted book value per share decreased by $0.39 per share or 2.9% to $13.16 per share from $13.55 per share as of September 30, 2016.
For the 12 months ended December 31, 2016, diluted book value per share increased by $0.31 per share or 2.4%.
Gross premiums written decreased by $18 million or 19% to $81 million for the three months ended December 31, 2016, from $99 million for the three months ended December 31, 2015.
For the full year of 2016, gross premiums written decreased by $85 million or 12% to $617 million from $702 million for 2015.
The decrease in gross premiums written for the 3 and 12 months ended December 31, 2016, was primarily a result of contracts that were not subject to renewal, and contracts that we chose not to renew due to pricing and/or terms and conditions, partially offset by new contracts and positive changes in premium estimates.
Net premiums earned for the three months ended December 31, 2016, increased by $58 million or 43% to $192 million due to continued growth in our in-force underwriting portfolio.
For the 12 months ended December 31, 2016, earned premium decreased by 2% to $590 million, as compared to the 12 months ended December 31, 2015.
The decrease in net premiums earned for the full year of 2016 was primarily due to retroactive reinsurance contracts of $108 million written and earned in the prior year, compared to none in 2016, partially offset by an increase in net premiums earned as a result of a larger in-force underwriting portfolio.
As we have mentioned several times during previous calls, movements in earned premium can be significantly impacted by retroactive deals, which are fully earned when they are written.
We generated a $9.5 million underwriting loss for the three months ended December 31, 2016, versus an underwriting loss of $9.2 million in the prior year period, and our combined ratio was 105.0%, compared to 106.9%.
The most recent quarter included a small amount of net favorable development compared to net adverse development of $3.3 million for the three months ended December 31, 2015.
Also in the fourth quarter, we recorded a small loss of $1.8 million from Hurricane Matthew related to one Florida homeowners contract.
For the three months ended December 31, 2016, Third Point Re recorded a net investment loss of $36 million compared to net investment income of $62 million for the three months ended December 31, 2015.
For the 12 months ended December 31, 2016, net investment income was $99 million compared to a net investment loss of $28 million in 2015.
The changes in net investment income were primarily driven by the returns in the respective periods that Dan discussed in detail, as well as a larger investment portfolio during 2016 compared to 2015, as a result of net investment income and float generated during the year.
General and administrative expenses for the fourth quarter and the full year of 2016 were $5.5 million and $39.4 million, respectively, down from $10.2 million, and $46 million in the previous year period.
The decrease was primarily due to the reversal of bonus pool accruals in the fourth quarter of 2016.
Our bonus pool is based on the Company's return on average equity, and we did not meet the minimum funding hurdle return of 5%.
Other than incentive compensation expenses that will vary based on our results, our G&A expenses have remained steady for several quarters, and we do not anticipate any significant changes.
We expect a run rate of approximately $11 million per quarter of total G&A, subject to the impact of our performance on bonus accruals and performance-based share awards.
The foreign exchange gains for the quarter and year were primarily related to the revaluation of foreign currency insurance liabilities denominated in British pounds where the US dollar strengthened during the period.
We hedge most of our foreign currency insurance liabilities by posting collateral in the same currency.
The foreign currency collateral accounts are held within our investments, and therefore, the foreign exchange gains from the insurance liabilities were generally offset by losses on the collateral assets, which flow through net investment income.
I will now hand the call back over to <UNK>.
Thank you, <UNK>.
We continue to navigate difficult reinsurance market conditions by maintaining our underwriting discipline and targeting the few pockets of better priced business such as mortgage insurance.
Our premium volume is likely to decrease further in 2017, as we push for improved composite ratios on the deals we underwrite.
Regardless, we expect our invested assets to equity ratio to remain stable at approximately 1.5 times.
We still have $93 million available under $100 million buyback program, and intend to buy back shares this coming quarter if our share price remains below 90% of book value.
We thank you for your time, and will now open the call for questions.
Operator.
So, <UNK>, this is <UNK>.
<UNK> and I founded the Company, worked together for the last five years.
And my input was definitely heard.
And so, I would not expect any major changes in strategy, and we will continue to focus on bringing down the combined ratio and generating float.
Yes, Kia, I think a great point to emphasize is that my commitment to the Company doesn't change.
The time I spend on the Company doesn't change.
There's certain functions that I'm very happy that <UNK> and <UNK> <UNK> will be doing more of, and those are really relating to the regulatory and compliance.
We often say, we're a publicly-traded New York Stock Exchange company with 25 people.
And just all of the various things you have to do because of that are big, so I am on one respect, I am moving a step away from that.
And that allows me to step into, I think, a better role in business development, the underwriting stuff, and really focusing more on developing our US operation.
We lost two people earlier this year.
We're getting close to augmenting that staff with something pretty exciting.
So, there's still plenty to do.
You know, that's really ---+ the area we see it the most in is the auto book.
And we along with many people saw that a couple of years ago.
And in <UNK>'s comments, he said two years ago we tried to take that into account in the reinsurance terms and conditions and weren't successful ---+ unsuccessful.
So, that book is getting smaller.
We're watching that.
We think the market will wake up and rate levels will adjust, and there will be opportunities.
But right now, we're not seeing that.
So, really, the best thing we can do is when we think we see trends, we think things that are deteriorating and making the potential gains smaller or even negative, we step away from the business which is the reason why our volume 2016 over 2015 is down.
Kia, on the non-standard auto portfolio, we're down to only three clients now.
And so, we've greatly deemphasized it.
And as <UNK> said, we see the severity trends, the lost trends moving against us and try to improve the terms on the reinsurance contracts, and the market just isn't following us.
So we backed away.
Thank you for the question.
And before get started, I just want to thank <UNK> for helping found the Company, and we're delighted that he's staying on as Chairman in this transition period as well.
What gives me confidence about the future is, I just think we've had a paradigm shift with the new administration in terms of having a backdrop that is supportive of business and pro-growth, as opposed to the prior administration which was pro- regulation and was not supportive of business.
I think the result of this will be higher earnings, more growth as we referred to, more investment, and just a better climate for the stock market in general.
But in particular, I think as an event driven investor, we will have the benefit of a rising market and rising valuations.
And don't get me wrong, there will be winners and losers in this.
This isn't just an across-the-board statement about how this does apply to every company, so you'll have to be selective.
But there will also be an increase.
We're already seeing it in corporate activity which is something where we typically thrive.
So, I'm very optimistic.
We've had good performance.
We expect that to continue into the medium term, for sure.
Yes, I mean, look, we ---+ market levels are important.
I'm not sure that, given the increase in S&P earnings that we expect, due to changes in policy as well as tax reform, that it's as over-valued as people think.
But we don't invest in markets.
We invest in individual companies and we're seeing plenty of good valuation situations, particularly those in which companies are involved in some sorts of corporate transaction.
And the complexity is obscuring the earnings power of the company or companies that are going through financial or operational restructuring.
So, we're not really fazed by that.
And don't forget, we're a long short firm to the extent certain companies get ahead of themselves, that provides a good hedging opportunity.
Or short-selling opportunity for us as well.
So, we're not really fazed by that way of thinking.
Theoretically, it could.
I guess the other impact is that, our US competitors, and there's only a couple, if their tax does down, again theoretically their cost of goods drops.
But there's so much distance between where we are today in tax reform, it's really hard to speculate.
I'm reluctant to speculate.
Yes, I think ---+ <UNK>, that's a very insightful question.
Companies will make more money.
Their surplus positions will be stronger, and they'll have less need for the quota shares.
Certainly there's a group of companies that quota share reinsurance is part of their capital structure.
These tend to be the smaller, medium-sized companies that really need it.
A lot of the other quota share buying right now is purely discretionary.
It's being done because the terms and conditions are very attractive.
Very opportunistic buying, and I think that will continue regardless of tax position.
If when the buying company runs the deal through their analytics, and if it makes sense for them to buy, they'll continue to buy.
But I think there's really two groups of quota share buyers.
Those that really need it, and those that are taking advantage of market opportunities to buy.
I think, it's a little bit of a moving target.
I think, clearly, cheaper prices, people drive more.
That's a fact.
The distraction of the smartphones and all of the things you can do with them while you're driving, I think that's still on the rise.
And last year, 2016, there were 40,000 highway deaths, it's the first time it's been over 40,000 in many years.
In two years deaths are up 16%, fatalities from traffic accidents.
And as we all know, it seems like, weekly, there are more things, there are more distractions on your smartphone.
Until that gets under control, I think we're going to continue to see, potentially see increases in accidents and frequency.
We're also seeing, especially on the nonstandard side, we were talking about the other day, collision losses are up.
So, you get a nonstandard insured who maybe has an older car, hits a new car with the sensors and everything.
A fender bender becomes very expensive.
A lot more expensive that it has in the past.
There's a lot more going on than just gasoline prices.
Thanks.
Thank you very much for dialing in, and we look forward to talking to you next quarter.
Thank you.
| 2017_TPRE |
2017 | LNTH | LNTH
#2016 was a successful year for Lantheus as we delivered significant value to shareholders on a number of levels.
A principle contributor to that success was stabilizing the base of business represented by our nuclear products portfolio.
We successfully accomplished this through disciplined execution of our nuclear products contracting strategy which we started in the latter half of 2015 and had fully in place by the start of 2016.
Additionally, a resourceful approach to supply chain logistics, coupled with our agile operational infrastructure, provided the foundation by which Lantheus profited from unanticipated opportunities in the marketplace.
Finally, our fiscal discipline drove improved free cash flow and continued reduction of our leverage and interest expense.
We ended 2016 with an improved financial profile as compared to prior years, positioning us well to capitalize on the opportunities ahead of us.
Before turning the call over to <UNK> for a more detailed review of the numbers behind our 2016 performance, I would like to summarize achievements against our 2016 priorities.
As you may remember, they were one, grow revenue and unit volume of our commercial portfolio; two, advance our pipeline assets and business development opportunities and three, create efficiencies in operations and optimize our capital structure.
With respect to revenue and unit volume, as expected DEFINITY remained a key growth driver in 2016.
From a marketplace perspective, we saw continued growth in the number of echocardiography studies performed and more importantly, the percentage of those procedures utilizing a contrast agent.
We believe our industry leading sales force drove this through their consultative approach.
As a result, awareness and usage amongst industry participants continued to increase.
In the same time frame, Lantheus maintained our leading share of the US echo-contrast market.
We also continued to expand the world wide footprint for DEFINITY.
And in 2016, we saw increased sales in international markets through the reintroduction of DEFINITY in Germany, UK, the Netherlands, and Austria, where it is sold through our distribution partners CS Diagnostics and Lamepro B.
V.
To assure continued supply for our increasing demand of DEFINITY, in September we extended and expanded our manufacturing and supply agreement with Jubilant HollisterStier, JHS, for the manufacturing of DEFINITY through January 2022.
As discussed previously, our technology transfer activities with Pharmalucence have been repeatedly delayed.
As a result, we are now in the process of negotiating an exit to that arrangement.
As part of our next generation strategy for DEFINITY, we have active programs underway with both JHS and Samsung Biologics for the future US supply of our DEFINITY products.
I will share more about our next generation programs later on in the call when I address our 2017 outlook.
For our nuclear products, as we have discussed on previous calls our focus on executing multi-year contracts aligned perfectly with our desire to provide predictable and stable revenue and unit volume stream for our key nuclear products.
In 2016, this strategy delivered with our agreements with the four largest radiopharmacy groups yielding increases in both revenue and unit volume.
Additionally, TechneLite performed at higher than forecasted revenue as our customers intermittently requested additional orders above contracted minimums that we were able to supply.
We also continued to be the leading supplier of Xenon following our successful transition from NRU to IRE-sourced Xenon, allowing Lantheus to be a stable provider of this critical imaging agent to the medical community.
Turning to the advancement of our pipeline assets and business development opportunities, as promised, throughout the latter half of 2016 we continued active negotiations with potential strategic partners to assist in the further development, manufacturing, and commercialization of our Flurpiridaz F 18 agent.
This afternoon, we announced the signing of a term sheet with GE Healthcare related to the continued phase 3 development and worldwide commercialization of this next generation PET cardiac imaging agent, which I will cover in more detail as part of our outlook for 2017.
During the year, we further leveraged our own manufacturing capabilities with the addition of two Cyclotron-based products which we are now supplying to non-medical customers.
We also completed the divestiture of our Canadian and Australian radiopharmacy businesses, coupled with finding favorable multi-year distribution and supply contracts with the buyers of each.
Finally, turning towards creating efficiencies in our operations and improved capital structure, in 2016 we continued to deliver on our commitment to de-leverage our balance sheet.
By paying down $75 million of outstanding principle through a combination of cash on hand as well as proceeds from follow on primary stock offerings throughout the year, we significantly improved the company's gross debt leverage ratio, reducing our debt by over 20% on a year over year basis.
Finally, despite using $29.8 million of cash on hand from our balance sheet to pay down debt, we ended 2016 with a healthy $51.2 million dollars of cash.
As I shared at the outset of my remarks, 2016 has been successful on a number of levels.
While we are proud of our performance, we recognize that it was a necessary step towards realizing our longer term vision.
I now invite <UNK> to provide a more detailed review of our fourth quarter and full year 2016 results as well as guidance for 2017 after which I will share our corporate vision for the year.
<UNK>.
The tables included in today's press release as previously noted, include a reconciliation of our GAAP results to the as adjusted non-GAAP performance I'll be covering with you today.
I'd like to start by focusing first on fourth quarter results followed by our full year results and then 2017 guidance.
In the fourth quarter of 2016, we delivered $74.4 million in revenue.
As <UNK> <UNK>'s comments indicated, our continued focus towards driving DEFINITY revenue, as well as the successful implementation of our nuclear products contracting strategy were keys to our performance.
Looking at our revenue results on a product line basis, DEFINITY once again delivered, posting revenue of $34.1 million in the fourth quarter, a five percent increase compared to the prior quarter and an 18% increase on a year over year basis.
Our TechneLite business boasted worldwide revenue of $24.6 million for the fourth quarter, consistent with the prior quarter and a 44% improvement on a year over year basis.
Opportunistic sales were a contributor to our strong performance in 2016, accounting for approximately $8 million in revenues for the full year.
Xenon revenues totaled $7.5 million in the fourth quarter, an increase of 12% compared to the prior quarter driven by customers buying at higher than contracted volumes.
As expected, Xenon revenues were down 32% as compared to a year over year basis.
Revenue from our other products category, which represents approximately 11% of total revenue, was $8.2 million during the fourth quarter of 2016 down $6.1 million compared to last year.
This decrease was driven primarily by the divestiture of our Canadian and Australian radiopharmacy businesses in the first and third quarters of 2016, respectively.
As we had previously discussed, these transactions were accretive to adjusted EBITDA.
Moving below the revenue line, our fourth quarter 2016 gross margin, excluding technology transfer activities, which we referred to in our reconciliations as new manufacturing costs, totaled 47 percent, a one percent decrease on a year over year basis.
Operating expenses were 22.4 million for the fourth quarter of 2016, representing an increase of seven percent on a year over year basis.
The increase in 2016 primarily reflects accelerated depreciation related to our campus consolidation as well as our decision to invest in additional promotional activities in support of DEFINITY.
Adjusted operating income was $13.6 million for the fourth quarter of 2016, representing an increase of nine percent on a year over year basis.
Moving below operating income, fourth quarter interest expense totaled $5.8 million, a 14% improvement on a year over year basis following our aggregate $75 million of voluntary pre-payments made on the principal of our term facility during 2016.
Pretax earnings for the quarter totaled $5.7 million, an increase of $0.7 million on a year over year basis.
A key driver of this increase was the reduced interest expense as a result of our debt reduction activities.
Moving on to our year-end balance sheet, cash flow, and liquidity.
As of December 31, 2016 we had cash and cash equivalents totaling $51.2 million.
Borrowing capacity under our ABL facility was $35.7 million, taking into an account and $8.8 million letter of credit as well as no outstanding balance at year end.
Total liquidity, including cash on hand, as well as availability under our revolving credit facility, was $86.9 million providing substantial support for our operating needs.
Fourth quarter 2016 operating cash flow totaled $12.8 million compared to $12.6 million in the fourth quarter of 2015.
As for the other key components of our cash flow, capital expenditures during the fourth quarter of 2016 were $2.4 million compared to $4.7 million in the fourth quarter of 2015.
Our follow on primary offering during the quarter raised gross proceeds of $9.3 million which we used, along with cash from our balance sheet, to prepay $20 million of our term facility, again substantially improving our leverage ratio.
Turning now to our full-year results, I would like to reiterate <UNK> <UNK>'s earlier comment regarding our success adding that the company again exceeded its revenue and adjusted EBITDA guidance.
Worldwide revenues for 2016 totaled $301.9 million, representing a 3 percent increase over the prior year.
On a gap basis, the company recorded net income of $26.8 million in 2016, an increase of $41.5 million compared to a net loss of $14.7 million recorded for the same period in 2015.
This improvement is primarily attributable to operational improvements, decreased interest expense, and one-time activities in 2015 associated with our initial public offering and refinancing activities.
Adjusted EBITDA was $78.3 million during the year as compared to $76.3 million in 2015.
We also delivered operating cash flow in 2016 of $49.6 million and free cash flow of $42.2 million while reducing our outstanding debt by 21 percent and expanding total liquidity by 28 percent, all indicative of the strong year that we have had.
Now, I will turn and discuss guidance for full-year 2017, as well as for the first quarter of 2017.
Our guidance does not reflect any impact of the partnership for Flurpiridaz F 18.
In addition, similar to 2016, our 2017 guidance does not reflect any potential opportunistic sales of our nuclear products.
As stated in today's press release, we anticipate total revenue for full year 2017, to be in the range of $312 to $317 million.
For the first quarter of 2017, we expect to see revenue in the range of $77 to $80 million.
Also as stated in today's press release, we anticipate adjusted EBITDA for the full year 2017, in the range of $79 to $82 million, representing 24.9 percent to 26.3 percent of anticipated 2017 revenue.
For the first quarter of 2017, we expect to see adjusted EBITDA in the range of $18 to $20 million.
Overall, we are very pleased with both our fourth quarter and full-year 2016 financial performance and we remain focused on driving strong financial results in 2017.
With that, I will now turn the call back over to <UNK> <UNK>.
At this point, I would like to move on from 2016 and share our outlook for 2017.
<UNK> and I both believe that Lantheus is well-positioned for the future.
While 2016 was a story about stabilization, 2017 will be the start of a story about growth.
That growth will come from both organic and business development activities.
Our capital structure now allows us to participate opportunistically across that spectrum.
Today's flurpiridaz F 18 announcement is one such example.
We are excited about the prospect of GE Healthcare being our global partner to bring this next generation PET cardiac imaging agent to market.
As GE Healthcare touches every level of the PET diagnostic delivery continuum and shares our commitment to serving the nuclear medicine community.
The collaboration would enable us to participate in the long-term economic success of flurpiridaz F 18.
Lantheus will also continue to advance our other pipeline assets, deploy additional resources towards the Next Generation Program for DEFINITY, and pursue additional near-term business development opportunities to drive growth.
Under the proposed transaction, GE Healthcare would completely fund the agent's second phase three clinical study as well as worldwide regulatory approval and worldwide launch and commercialization.
Lantheus would collaborate in both development and commercialization through a joint steering committee and would also maintain the option to co-promote the agent in the U.S. GE Healthcare's development plan would focus on obtaining regulatory approval in the U.S., Japan, Europe, and Canada.
Under the proposed transaction, we would receive a $5 million upfront cash payment and, if successful, up to $60 million in regulatory and sales milestones payments, plus tiered double-digit royalties on U.S. sales and mid-single-digit royalties on sales outside of the U.S. Both parties anticipate entering into a definitive agreement for the proposed transaction in the second quarter of 2017, subject to the completion of satisfactory due diligence and necessary approvals.
In additional to Flurpiridaz F 18, we remain excited about the rest of our product pipeline.
Our cardiac neuronal agent, which we also refer to as CNA or LMI 1195, is a fluorine 18-based PET agent capable of identifying heart failure patients who may benefit from implantation of cardioverter defibrillator, decreasing the risk of sudden cardiac death.
Heart failure is a major public health problem in North America, associated with high morbidity and mortality, frequent hospitalizations, and at a major cost burden to the health care system and patients.
CNA presents an opportunity to better match patients to treatment based on the identification of the underlying driver of disease progression and compliments other modalities that assess structure and function.
A phase I study has already been completed and we are currently working closely with independent investigators in the U.
S.
, Canada, and Europe, to develop additional clinical data which may allow us to enter into pivotal clinical trials.
It is still too early to tell what path future development and commercialization of this agent may take, however, the number of options available to us are numerous and we intend to be opportunistic in our approach.
For DEFINITY, we have launched a Next Generation Program that includes formulation, indication, and manufacturing alternatives to our current DEFINITY offering.
Activities supporting this program are underway with both JHS and Samsung Biologics.
Additionally, we recently announced U.
Information concerning administration in patients with a cardiac shunt continues to appear in the Warnings section of the prescribing information.
The label change implemented by the FDA is reflective of both the extensive data on contrast agents and the well characterized and stable safety profile of DEFINITY.
Finally, we will continue to drive execution of our nuclear products contracting strategy, which to date has allowed us to develop and protect our baseline business.
Our contracts in 2017 specify greater volumes of key products as compared to 2016.
In 2017, our corporate priorities will continue to focus on growing revenue and volume, advancing pipeline assets and business development opportunities, and creating operational efficiencies.
We remain committed to creating additional shareholder value through expansion of our nuclear product portfolio, our Next Generation DEFINITY program, and our ongoing commitment to pipeline products such as CNA.
I look forward to keeping you updated on our progress throughout the year.
With that, I'll conclude my comments and open the call for questions.
So the way that we've guided, I want to unpack your question a little bit.
Most of the one-time items in any, we would capture it to the adjusted EBITDA guidance.
So if you are going look at our revenue, revenue is pure, and then when you kind of look at our add backs between net income and adjusted EBITDA, I think we capture most of the one-time items through that adjusted EBITDA calculation.
So when you look through that, you will see anything of a recurring nature.
One thing I would think about is kind of the campus consolidation cost which you can see broken out in our - in the detailed reconciliations in our press release.
So I think that guidance that we give does contemplate it but again it adds it back to the adjusted EBITDA.
You asked about co-commercialization and I don't know if you were referring to the agreement that we're talking about with GE - and at this point, if you think of all it kind of the timeline ahead of us, there would be none of that that would be contemplated in the 2017 at this point.
I will pause there and see if that answered your question.
We do not offer guidance on a product-by-product basis.
We do talk about it retrospectively.
I think what is fair to take away from the comments that we offered today is that DEFINITY continues to be a growth driver for our company and the growth rates that we see with that product exceeds that we see for our nuclear business.
In '16 and the latter half of '15 we worked very hard and very successfully to ensure that we had a stable source of revenue and volume for our nuclear business, and the contracts that we signed that now comes into play in '17 actually called for greater volumes in 2017 for some of the key nuclear products compared to the volume commitments that had been in '16.
So that will be a source of growth for us but one that's already predicted by the contracts that we signed.
Yes, so the mechanics of the GE deal, once fully signed, and as we shared, we anticipate that that deal will be fully consummated in Q2 of 2017.
The first economic factor that you'll see will be the $5 million up front cash payment that we will receive and you'll see the accounting treatment for that money as it enters our ledger.
The rest of 2017 will quite frankly be quiet because, as I noted in my comments and I think it is also explained in the press release, what happens next is GE undertakes all responsibility for the conduct of the second phase 3 clinical trials as well as the rest of the activities that relate to the march towards what will be regulatory approval and ultimately commercialization.
So we would not anticipate having any other financial events that occur in '17.
I will respond also to the final question that you posed which had to with the future relationship with GE as is very common in this marketplace; GE is both a partner and a customer of ours.
And they're a very long-standing customer on receipt of our nuclear product portfolio that they deployed through their radiopharmacies in the United States.
We absolutely expect that relationship to continue.
It's one that has been in place for a very long time and one that is very healthy and amiable to both parties.
So, you may hear us talking about that relationship as we go forward.
<UNK>, let me speak first to market opportunity in the U.S. Quite frankly, let's just call it large.
And it's one that we and GE are already familiar with because we both operate in it.
Currently this market is mostly satisfied using the spec modality to conduct MPI or myocardial perfusion imaging studies using spec modality.
The advantages of PET, use of PET modality and then an agent like Flurpiridaz, are quite dramatic in the clarity and the diagnostic certainty that it adds to exams.
So we would anticipate in the future when the product is available that it will successfully compete in what is currently called the MPI marketplace.
I can tell you that on an annual basis, currently, there are approximately 6.1 million studies, MPI studies, conducted annually in the U.S. I'm not prepared, <UNK>, to speak to the relevant size of O.
U.S. markets.
I don't compete there right now and therefore I wouldn't feel comfortable giving you what I would consider to be relevant or up-to-date data.
I think you had another question.
The clinical pathway is dictated by the FDA, and not by an individual company.
As a refresher where we are at this point in this clinical pathway is one phase 3 study has been completed.
The FDA has approved an SPA, which is a protocol for conduct of the second study, by [how the] FDA drives its own regulatory approval practice you're required to conduct two phase 3 trials which then are used to populate an NDA or new drug approval application which is then offered to the FDA.
And based on the assumption of paying a user fee, the FDA has approximately a 10 month window during which to consider the contents of your application and offer opinion back to the company as to whether the application is complete and approvable as is, or whether there are questions they would like answered.
As I mentioned, while we, Lantheus, will be fully involved through a joint steering committee, GE will head that process as we go forward and we anticipate given their long-standing presence in the United States marketplace they have a well-established relationship with the FDA that they will use as a venue for the movement of that program.
It's a very fair question <UNK>, and I'll - I can answer it very directly for you.
While the label change was individually awarded to each of the three products that currently compete in the U.S. market place in echo contrast, the net result to the label for those three products is the same.
Each of the products prior to their label change, carried in the contraindications section, a contraindication against use in the patient population that I mentioned.
And as a result of each of the three companies, for their product, submitting for the change to the FDA, each of the labels has been updated.
Therefore, I think what a fair answer to your question is; The product, the three products are at par with reference to how that particular patient population is referenced in their package inserts.
And of course, I would refer you to the package inserts, for the other products to confirm that.
The effect may be positive to the kind of larger issue of safe use of contrast and therefore may evidence itself in an increase in contrast penetration rate, but it's probably too early to say that and we will continue to monitor the market.
Yes, <UNK>, it's <UNK>.
I think the way that we look at, just to take you back there - one of the things that we have talked about during the year, the opportunistic sales we have with our nuclear products.
And as you recall, I did give a quantification of the year, of about $8 million for this year in 2016; and those opportunistic sales because they are really incremental to us, we have a greater margin on those than we do our baseline business.
So when we forecast to our baseline business we don't capture that margin improvement that we give with the opportunistic sales.
So if you would kind of strip those out from the 2016 results and look at the margin on our baseline business, I think we are we are pleased with the margin improvement that we predict in 2017.
But, again those opportunistic sales is something we don't forecast.
But they do give us greater margin, because we are spreading over a fixed cost base on manufacturing.
So all we are really picking up for those are just the incremental raw material costs.
Yes, one of the things that we have talked about <UNK> in the past; in 2017 we do get incremental volume under our contracts; with our four largest radiopharmacies in 2017 versus 2016.
So I think that would be one of the drivers for the sequential improvement in Q1 2017 over Q4 2016.
Also <UNK> as you remember this is <UNK> <UNK>.
Also have a little bit of lumpiness in some of our quarters with the number of selling days.
And Q4 is our typically lower end selling days versus other quarters.
And in fact if we look at Q4 '16, Q4 '16 had what we consider 62 selling days, while Q1 of '17 we're noting that there are 64 selling days in that quarter.
So let me first preface by saying while we have added these products to our manufacturing mix, I would be remiss if I did not qualify that as compared to the rest of our products they are low revenue opportunities.
But what's exciting about them is really two things.
One, it moves us into the non-medical community for sale of these products.
And as you can imagine, we are very strongly oversighted for our manufacturing capabilities, not only because they're nuclear products, but because they're also used in humans in medical diagnostics.
So having met that hurdle, we certainly meet the hurdle for selling product for non-medical uses.
The second piece that it really attends to is the expertise that we have in cyclotron technology, and the manufacturing of different isotopes, using our cyclotrons.
So these are two different isotopes.
I won't say specifically which they are because I don't want to draw competition, but suffice it to say, it's two different isotopes that have use in non-medical applications perhaps in some type of testing for machinery or equipment, and we can produce them on our cyclotrons and sell them to the public based on the capabilities that we already have.
The sales started in 2016, they were very light and it was late in 2016.
2017 will truly be the first full year of sales.
Right now it's with two products, we hope that we continually add more.
Yes, this is <UNK>, I can take the first part of that question which is the revenue recognition on the upfront $5 million.
We're still in the process of evaluating that.
I think it's safe to assume we will see that, presuming the second quarter signing throughout 2017 it would get spread over a long term, but we'd like to finalize on that and give guidance when and if we announce that deal as final.
And I'll take the second part of the question which is regarding DEFINITY China.
I think we are status quo with where I left us when I commented, and that is that our partner in China which is Double-Crane, now has responsibility for conducting the small clinical trials which we'll use as a basis of approval.
One piece of added information that we have is that the Chinese FDA did ask us to include an additional small study.
It's a pharmacokinetic study for DEFINITY as well.
It will occur and be conducted simultaneously with the other study, so it will not add time to it.
Having said that, as I mentioned, the ball is now in Double-Crane's court, by nature of our partnership and contract, it's their responsibility to conduct the trials, to accumulate the data from those trials, and then submit it to the Chinese FDA.
| 2017_LNTH |
2015 | MDR | MDR
#Hi, <UNK>.
It's <UNK>.
Hi, <UNK>.
It's <UNK>.
The $100 million we mentioned for 2015 was cash savings in year.
Now, not all of that is going to flow through to the profit and loss, given some of it is subject to a percentage of completion in our projects.
And then next year, we are seeing that we will be able to generate an additional $50 million of in-year cash savings on top of the previous $100 million target.
Yes.
Because the capitalized interest is occurring on the DLV-2000 and we expect that to be delivered at the end of the first quarter, we are expecting quite a step up in the interest charge in the P&L next year.
As you saw from the third quarter results today, we are capitalizing $5 million of interest.
We have $18 million of gross.
After Q1 next year, you would expect the $18 million of gross to stay in the P&L.
Absolutely.
When you look at our working capital in the balance sheet, on the asset side you are seeing quite an increase year to date on our contracts and progress.
That's really driven by our Middle East business and our BSP project in Asia.
In the Middle East, we are working through a number of change orders with the customers, and when those get agreed, then we will be able to agree billings and also cash collection.
BSP had a very, very active quarter in Q3, so we did a lot of work there that we will bill out and collect in the fourth quarter.
And then on the other side of the balance sheet, you also see a big drop-off this year in our advanced billings.
And those advanced billings really relate to our Ichthys project and also our PB Litoral project.
All of that is run rate business, and we do not recognize any potential change orders in our P&L and therefore our balance sheet, unless we have a demonstrated track record with the customer and a sound contractual basis to recognize them.
In the event there is a dispute on a presented change order, we would then move that to a formal claim.
And at the end of the third quarter 2015, we only had $9 million of claims recognized on our balance sheet.
This is <UNK>.
Absolutely.
On our head count reductions, there's really ---+ as you've seen our headcount drop this year, really driven by two factors.
Firstly, it's our project work load as we sequence within projects.
Available workforce, that would be our craft labor, or some of our project-specific labor.
We would release when the project is finished, if there's not a new project to move onto.
And then there's the profitability initiative headcount reductions that we've made.
We've made in excess of 1,000 head reductions this year with MPI related to rightsizing, centralization and other initiatives.
Yes, so at the end of the third quarter 2015, we have $317 million of backlog on the lost projects.
Year to date 2015, on the three active projects that we have, they have been accretive to approximately $28 million to gross profit, so we've successfully either negotiated change orders or achieved other cost recovery or contract extension to approximately $28 million.
Good afternoon.
This is <UNK>, <UNK>.
When we're specifically talking about Batam, yes, the Ichthys workload completes toward the end of the fourth quarter.
However, you will notice in our supplemental deck, we do include a fabrication-only project that's going into Batam that was awarded in the third quarter of 2015.
That is producing LNG modules for the [Amal] project.
This is part of our fabrication-only strategy that we started in the earlier part of the year, where we're looking to provide certain of our yards baseload work moving through the cycle.
We would hope that that would absorb a significant amount of our both fixed ---+ our fixed cost base going into 2016.
That's correct, yes.
We gave a total fixed cost net absorption number for the quarter, and this quarter we were slightly underabsorbed by about $5 million.
Rob, let me just clear that and I'll ask <UNK> to add more detail, but contrary to what ---+ we've also heard is that working in the Middle East is we haven't seen any structural change of how we are working with our customers, both in terms of negotiating terms and conditions or negotiating change orders.
We haven't seen any significant change of what's been happening in the past.
<UNK>, do you want to add to that.
Absolutely.
On working capital specifically in Saudi Arabia, in the new long-term agreement, there was a subtle change to the procurement payment schedule, in that it's now driven by receipt of materials in-country as opposed to within our yard in Jebel Ali.
However, we are allowed to receive advanced payments if we post advanced payment guarantees for that amount.
We are able to manage that change in contracting terms.
In other parts of the Middle East, the working capital parts of the contract remain stable as from the last couple of years.
Yes, this is <UNK>.
Our bids outstanding at end of the third quarter were slightly above $2 billion.
With the DLV-2000, we expect delivery at the end of the first quarter.
That delivery includes the basic sea trials performed by the building contractor, which is [Keppel].
Post-receipt, we will put the vessel through pipelay trials and some other operational aspects specific to the equipment, at which we will deem it in-service.
As <UNK> has said, we've always actively looked to deploy the vessel either in a contract that we have or on a new contract that we're currently bidding.
The vessel is due to go in-service in the middle of the second quarter next year, and we are not yet in a position to release what the first project will be for the vessel.
Thank you, Sonya.
And thank you, everyone, for joining us today.
As <UNK> mentioned, next Tuesday on November 17, McDermott will be hosting its 2015 investor day, which will also be webcast live.
The link to the webcast and a copy of the presentation will be available on our website in the Investor Relations section next week.
And we look forward to seeing you there or having you join us on the webcast.
Operator, this concludes our call.
Thank you.
| 2015_MDR |
2015 | IPCC | IPCC
#Well, good morning, everyone, and thanks for joining us for our conference call.
I'm pleased to be joined by <UNK> <UNK>, our CFO, who's on the call this morning, as well.
And I want to start things off with a quick overview on slide three.
As you read in our earnings release this morning, we had another quarter of solid earnings.
Our overall GAAP combined ratio for the third quarter was 94.2%, which included $11.3 million of favorable loss reserve development from prior years.
The 2015 GAAP accident year combined ratio was relatively unchanged at 97.6% compared with 97.7% as reported last quarter.
Florida's accident year combined ratio improved during the quarter, as we'd hoped, but we had increases primarily in commercial vehicle, and to a lesser extent in California, offsetting the Florida improvement.
Gross written premiums were down as expected during the quarter, with an overall decline of 3.8%.
However, we continued to see premium growth in California, as well as our commercial vehicle product.
Our year-to-date growth in our four focus states and CV was just under 5%.
And our return on equity for the quarter was 9%.
So, let's get into the details behind the highlights on slide four.
For the third quarter of 2015, net earnings per diluted share were $1.38, up from $1.29 in the same quarter of last year.
Operating earnings in the quarter were $1.41 compared with $1.23 in the third quarter of 2014.
Operating earnings were up primarily from the increase in favorable loss reserve development I mentioned earlier.
Our 2015 GAAP accident year combined ratio was 97.6% compared with our 2014 combined ratio of 97.1% as reported in September of last year.
The $11.3 million of favorable loss reserve development we experienced in the third quarter of this year compares with $5.4 million of favorable development in the third quarter of last year.
The favorable development this quarter was primarily a result of decreases in severity related to Florida bodily injury coverages, as well as decreases in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014.
In terms of the top line, gross written premium declined 3.8% during the third quarter.
Premium growth in California and our commercial vehicle program was more than offset by declines in our other states.
Our book value per share at September 30, 2015 was $61.71, a 4.2% increase from the prior year.
Excluding unrealized gains, our book value per share has increased 5.9% since September of last year.
Regarding capital management actions during the quarter, we repurchased 121,378 shares at an average per-share price, excluding commissions, of $77.91.
Turning to slide five, we'll move on to a more detailed update by state.
Let's start with California.
Their premiums grew 9/10 of 1% during the third quarter but are up 10.2% on a year-to-date basis.
Premium growth slowed during the third quarter as expected, as underwriting actions to address increasing loss cost trends and improved margins slowed our new business applications.
While our accident year combined ratio in California is still solid at 94.6%, we have seen our loss costs increasing during the year as a result of the improving economy as people are buying more new cars and driving more miles.
In the second quarter, industry claim trends in California for all coverages, excluding comp, continued to rise.
Overall loss cost was up 18.5% in the second quarter of this year versus last year, and up 11.1% on a trailing 12-month basis.
And while the industry claims data is showing a double-digit increase in bodily injury loss cost, we are not seeing that same trend in our book on an accident year basis.
The increase in our accident year loss cost is driven primarily by property damage and collision, and is a mix of both frequency and severity.
We have additional rate filings for our programs currently pending with the Department of Insurance that we hope to get approved soon, which should help address some of these issues.
Moving on to Florida, overall gross written premiums in this state declined 5% during the third quarter and 1.8% on a year-to-date basis.
Premiums continue to grow in our Miami urban zone, up 10.6% during the quarter, with declining premium in the remainder of the state.
Our overall accident year combined ratio has improved to 99.4%, down from 101% in the second quarter.
This lower combined ratio has been driven primarily from improvement in Orlando, Sarasota, and Tampa, where we have been pulling back on new business and focusing on improving profitability.
The decline in the combined ratio in the third quarter in these urban zones is partially offset by an increase in Miami of less than a point.
Our accident year loss costs in Florida are driven by increases in frequency and, to a lesser extent, severity in property damage, PIP, and collision coverages.
The good news about our Miami and Florida business in general is that we implemented an additional rate increase of 7.7% effective August 10th, which followed a 6% rate increase that was effective in March of this year.
The rate increases we took in August on PIP, property damage, and collision were double-digit.
These were the coverages with the most significant increases in loss cost.
Industry second quarter calendar year trends in Florida are up, as well, with loss cost inflation, excluding comp of 9.3% on a quarter-over-quarter basis, and up 7% on a trailing 12-month look.
These trends are driven primarily by frequency, and to no surprise, we continue to see competitors aggressively taking rate this quarter, especially in PIP, since loss costs are outpacing increases in average earned premium.
Switching to Texas, gross written premiums in this state declined 15.8% during the third quarter of 2015 and 15.9% year-to-date.
The decline in premium during the third quarter was primarily driven by a 9.1% rate increase we implemented in December of last year.
This proactive rate revision impacted new business production during the first quarter of this year, and renewals during the third quarter.
Our overall accident year combined ratio in Texas of 95.1% was relatively flat compared with the second quarter of 2015, and has improved nearly six points from a year ago.
The primary drivers of the improvement are higher averaged earned premium, a lower new business combined ratio, and a shift in our mix to more renewal business.
And with an average increase in written premium of 7.2% compared with an average increase in earned premium of 5.2%, we still have more rate to earn in, which should further help our combined ratio.
Our accident year loss cost trends are modest and increases during the year from severity on collision.
As for the industry, loss costs are up across most coverages.
The increases in average earned premium for the industry are starting to fall behind loss cost inflation, so the industry loss ratio may begin to rise.
Touching briefly on Arizona, gross written premiums declined 8.7% during the third quarter of this year and 9.4% year-to-date as growth in new business was more than offset by a decline in our renewal book.
The overall combined ratio in Arizona increased slightly during the third quarter.
However, a 1.5% rate increase we implemented in August should help improve the profitability.
We will continue to evaluate the state and begin growing as market conditions improve.
As for our commercial vehicle product, gross written premium growth continues to be strong, with an increase of 12.6% during the third quarter and 15.9% on a year-to-date basis.
This growth is primarily due to renewal policy growth and higher average premiums in Florida, California, and Texas.
In the third quarter, we did see an increase in our commercial vehicle accident year combined ratio, primarily due to increases in both frequency and severity.
The rising trends impacted our new business loss ratio, especially in Florida.
Through rate revisions, we implemented over two points of rate in the second quarter and an additional 3.7 points in the third quarter.
These rate increases will help address the same higher trends that we recognized in our personal auto book.
I'll wrap up my comments with our outlook for 2015 on slide six.
We continue to anticipate our top line to be flat to up 2.5% this year.
And while we continue to take steps to improve profitability, we would expect our 2015 GAAP accident year combined ratio to be around 97.5%.
Bottom line, we expect 2015 operating earnings per share to be between $4.20 and $4.50.
This guidance does not include any additional reserve development during the fourth quarter of the year.
I will now turn the presentation over to [<UNK>] to review our financial performance for the third quarter.
Thank you, <UNK>, and good morning, everyone.
I'll be discussing the financial results for the third quarter of 2015.
Slide seven provides a summary of Infinity's financial performance for the quarter.
I'll cover this performance in further detail on slides eight through 10.
So, let's turn to slide eight.
Revenues for the third quarter of 2015 increased 1.7% compared with the third quarter of 2014, primarily from an increase in earned premium.
Net investment income increased 13.9%, or $1.2 million, during the quarter as compared with the third quarter of 2014, principally as a result of bond prepayments in the current year quarter.
Average quarterly investments at cost decreased .
5% during the third quarter of 2015 as compared with the same quarter of 2014.
Investment income as a percentage of average investments at cost for the third quarter increased 32 basis points compared with the third quarter of 2014.
From a total return perspective, our investment portfolio, which has a double-A-minus average credit quality, had a pretax total loss in the third quarter of 2015 of eight basis points, but 63 basis points from current income more than offset by 71 basis points from realized losses and a decrease in unrealized gains.
These returns are not annualized.
At September 2015, book and market yields on the fixed income portfolio were 2.5% and 2.1% respectively.
This compares with book and market yields on fixed income portfolio at September 2014 of 2.6% and 2%, respectively.
Duration on the fixed income portfolio was 3.2 years for September 30, 2015 compared with 3.5 years at September 30, 2014.
In order to assist you in your analysis, as we have done in the past, this morning we posted to our website a list by QSIP of our entire consolidated portfolio.
Turning to slide nine, operating earnings and underwriting income increased in the third quarter of 2015 compared with the third quarter of 2014, primarily due to an increase in the favorable development on prior accident year loss and LAE reserves.
$11.3 million of favorable reserve development during the quarter was primarily due to decreases in severity related to Florida bodily injury coverages, as well as decreases in loss adjustment expenses related to California bodily injury coverages in accident years 2013 and 2014.
The 2015 GAAP accident year combined ratio through September was 97.6% compared with 97.1% as of September 2014.
Wrapping up on slide 10, the effective operating tax rate for the quarter was 31.1%.
We would expect the effective tax rate on operating earnings for 2015 to be around 31%, given our expectation of greater underwriting profits in 2015, which are taxed at the corporate statutory rate of 35%.
Finally, as <UNK> mentioned, we repurchased 121,378 shares for an average price, excluding commissions, of $77.91 during the third quarter of 2015.
As of the end of September, we had approximately $58 million of capacity left on the share repurchase program, which is set to expire at the end of 2016.
This concludes our formal presentation, so at this time we would like to open it up for questions.
Yes.
Well, we've been, needless to say, <UNK>, very aggressive in terms of our rate actions certainly over the past nine, 12 months, even going back 18 months.
I think we recognized these trends going back to the fourth quarter of last year, and I think we're a little bit ahead of the pack, given what we've done rate-wise here in the more recent past, I guess.
The fourth quarter, again, we gave you guidance for the year, again, flat to up maybe 2.5%.
We haven't given guidance or talked about 2016 at this point in time, although I will say this.
When we see what competitors are filing today, and see their indications, they're not taking nearly enough rate, in our opinion.
So, I think they're going to have to take more rate actions, and in particular in California and Florida, which should open some opportunities up for us in 2016.
I think we have been ahead of the curve, and that's always a good thing when you're taking rates aggressively in times like this.
So, I think we may have some big opportunities in California, and possibly Florida, again in 2016.
So, we're pretty optimistic, going forward, in terms of our ability to grow.
And again, if you think about our four targets states and CV, we're growing almost 5% through nine months of this year.
So, we've been impacted a little bit ---+ well, more than a little bit, I guess you could say, with the runoff states, Nevada, Georgia, Pennsylvania, where we stopped writing new business in January of this year, and the renewal book is [attriting], as you would expect.
So, that hurt us a little bit in terms of top line.
But again, a lot of that will be behind us for next year, and we're pretty optimistic.
Well, typically in CV, sometimes the lumpiness is one or two big claims in a given quarter, and that tends to make it a little bit more of a roller coaster ride.
So, I wouldn't place a lot of credibility or emphasis on that quarter.
I think if you take a good look at the CV program at year-end when we announce the fourth quarter earnings, you'll have a much better gauge in terms of how that program's doing.
By the way, it's doing quite well.
We're very pleased.
When you consider the type of growth that we've had in that program over the past three years, and given the combined ratios that we've been able to generate, it has done quite well versus the industry ---+ trucking industry, I guess, at large, which seems to be struggling somewhat.
So, we're pretty optimistic about CV, too, certainly going forward.
Thank you.
Wow, we're impressed.
Yes, it's, again, a very, very strong competitive advantage for us, <UNK>.
I think the GAAP underwriting expense ratio for the third quarter was 18.5%.
I think that's probably improved from last year close to a point.
We did some restructuring last year.
We refocused our resources.
Again, we got out of the three states, or we're not writing new business in three states that we felt like weren't great opportunities for us in the near-term, at least, and we've been able to focus on four states that have higher average premiums, which help.
But, it's just a total focus by the Company to improve, given our expense structure.
I've talked about this before.
I think the companies that have the lowest expense structures and do the best job in terms of pricing and claims handling will be the winners, going forward.
And we've done a pretty good job at that.
And we've got other opportunities, quite frankly, in terms of effecting that expense ratio, as well.
But, when you think about a company that operates primarily through an independent agency system, having that type of expense structure is pretty impressive.
See, I know you didn't ask this, <UNK>, but I want to comment about the claim trends, because it seems like everyone's asking.
And I just want to make this comment, that you cannot compare company-wide claim trends among companies without analyzing where they write business, in other words, in what states and the amount of business they write in each state, for that matter.
So, for example, in California and Florida, the loss cost trends are rising faster than most other states, significantly faster, for that matter.
So, if a company has a sizable market share in those states, their country-wide trends will look higher than the company that doesn't.
But, I don't know.
I guess I get a little bit, I don't know, frustrated or something when I see all the comparisons among companies when it's really an apples-to-oranges comparison, and it shouldn't be done that way.
But, they are going up in California and Florida, for sure.
And again, the good news for us is we've been ahead of the trends in terms of taking great action.
So, I probably answered more than you asked, but anyway, I had to get that in.
Yes.
I just want to close with a couple of key points.
Again, I just want to state that we are looking to grow where we're good, where we have our core strengths.
That's our focus.
I think sometimes when companies go in too many different directions, they get distracted.
And without a doubt, we are completely focused on where we want to write and how we want to do it.
<UNK> asked about the expense ratio.
That is a big advantage, but we also have a heck of a team and infrastructure in claims.
And I will say this also.
We've identified some unique opportunities in our data in terms of how we're going to be able to target certain territories, [refine] them so we can reach our customers more effectively.
So, again, I'll just restate the fact that we think we've got a big opportunity in California in 2016, again in Florida quite possibly, as well.
And again, so we're looking forward to it.
So, having said that, thank you all for listening in and asking the questions.
And we look forward to seeing you, or hearing from you next quarter, rather.
| 2015_IPCC |
2018 | WIRE | WIRE
#Yes.
Thank you, Maddie, and good morning, ladies and gentlemen, and welcome to the Encore Wire Corporation quarterly conference call.
As stated, I'm <UNK> <UNK>, the President, Chief Executive Officer and Chairman of the Board of Encore Wire.
With me this morning is <UNK> <UNK>, our Chief Financial Officer.
We're pleased to report a great fourth quarter and full year.
Our unit sales were up in both copper and aluminum building wire for the year.
One of the key metrics to our earnings is the spread between the price of the copper wire sold and the cost of raw copper purchased in any given period.
The copper wire spread increased 9.9% in 2017 versus 2016, as the average price of copper purchased increased 25.4% in 2017 versus 2016 and the average selling price of wire sold increased 19.8%.
We're also encouraged by the fact spreads improved during the fourth quarter of 2017 versus the third quarter of 2017.
Copper spreads increased on a sequential quarterly comparison, climbing 2.7%.
In addition, as a result of the December federal tax legislation changes, we recognized a $13.5 million decrease in our deferred tax liability, offset by the special bonus of $1,000 we gave to all of our employees, except for the corporate officers, resulting in a net one-time gain of $0.60 per share.
The $2.61 in net earnings per common share from core operations is the second best year in our history and is a 60% increase over last year.
The overall construction and building wire markets remain strong.
The anecdotal information confirms our belief that there are still large commercial and industrial projects in the pipeline.
The U.S. economy appears strong as in ---+ as is the construction activity, and we believe that some of our financially stressed competitors have struggled and acted erratically in what we consider a strong business environment.
When volumes are good, margins should also be strong.
Based on discussions with our distributor customers and their contractor customers, we believe there is a good outlook for construction projects for the next year.
We continue to strive to lead and support industry price increases in an effort to maintain and increase margins.
We believe our superior order fill rates continue to enhance our position.
As orders come in from electrical contractors, the distributors can count on our fill rates to ensure quick deliveries from coast-to-coast.
We believe our performance is impressive, and we thank our employees and associates for their efforts.
We also thank stockholders for their continued support.
<UNK> <UNK>, our Chief Financial Officer, will now discuss our results.
<UNK>.
Thank you, <UNK>.
In a minute, we'll review Encore's financial results for the quarter.
After the financial review, we'll take any questions you may have.
Each of you should have already received a copy of Encore's press release covering Encore's financial results.
This release is available on the Internet.
Or you can call Denis McCarthy at (800) 962-9473, and we'll be glad to get you a copy.
Before we review financials, let me indicate that throughout this conference call, we may make certain statements that might be considered to be forward-looking.
In order to comply with certain securities legislation and instead of attempting to identify each particular statement as forward-looking, we advise you that all such statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed today.
I refer each of you to the company's SEC reports and news releases for a more detailed discussion of these risks and uncertainties.
Also, reconciliations of non-GAAP financial measures discussed during this conference call to the most directly comparable financial measures presented in accordance with GAAP, including EBITDA, which we believe to be useful supplemental information for investors, are posted on our website, www.encorewire.com.
Now the financials.
Net sales for the fourth quarter of 2017 were $301.3 million compared to $239.2 million during the fourth quarter of 2016.
Unit volume, measured in copper pounds contained in the wire sold, increased 5.8%.
And the average selling price per copper pound sold increased 22.8% in the fourth quarter of 2017 versus the same period in 2016.
Sales prices increased primarily due to higher copper prices, which increased 30.1% versus the fourth quarter of 2016.
Net income for the fourth quarter of 2017 was $28.5 million versus $11.4 million in the fourth quarter of 2016.
Fully diluted net earnings per common share were $1.36 in the fourth quarter of 2017 versus $0.55 in the fourth quarter of 2016.
The $1.36 fully diluted net earnings per common share in the fourth quarter of 2017 include $0.76 from core operations and $0.65 from the adjustment of deferred tax liabilities, offset by $0.05 associated with a special bonus of $1,000 paid to all employees of the company except corporate officers.
Net sales for the year ended December 31, 2017, were $1.164 billion versus $940.8 million during the same period in 2016.
Copper unit volume increased 5.6% in 2017 versus 2016, coupled with a 19.8% increase in the average selling price per copper pound sold in 2017 versus 2016.
Sales prices increased primarily due to higher copper prices, which increased 25.4% in 2017 versus 2016.
Net income for the year ended December 31, 2017, was $67 million versus $33.8 million for the same period in 2016.
Fully diluted net earnings per common share were $3.21 for the year ended December 31, 2017, versus $1.63 for the same period in 2016.
As delineated for the fourth quarter of 2017 above or earlier, the resulting fully diluted net earnings per common share for the year from core operations were $2.61 per share.
On a sequential quarter comparison, net sales for the fourth quarter of 2017 were $301.3 million versus $292 million during the third quarter of 2017.
Copper unit volume decreased 1.7% on a sequential quarter comparison, in line with the fact that the fourth quarter is generally a slightly slower quarter in the construction and building wire industries.
The unit volume decrease was more than offset by the 5.7% increase in the average selling price of wire per copper pound sold.
Net income for the fourth quarter of 2017 increased to $28.5 million versus $14 million in the third quarter of 2017.
Fully diluted net income per common share was $1.36 in the fourth quarter of 2017 versus $0.67 in the third quarter of 2017.
Our balance sheet remains very strong.
We have no long-term debt and our revolving line of credit is paid to 0.
In addition, we had $123.4 million in cash at the end of the quarter.
We also declared another cash dividend during the quarter.
This conference call will be available for replay after the conclusion of this session.
If you wish to hear the taped replay, please call (888) 843-7419 and enter the conference reference number 8977327 and the pound sign, or you can visit our website.
I'll now turn the floor back over to <UNK> <UNK>, our Chairman, President and CEO.
<UNK>.
Thank you, <UNK>.
As we highlighted, Encore performed well in the past quarter, and we believe we're well positioned for the future.
Maddie, we'll now take questions from listeners.
If you're speaking specifically to '17 and Q4, that was the most expensive quarter in 2017 for copper.
I think the average was over $3 in the fourth quarter, something of that nature.
And the second quarter was the low at $2.57 or $2.58.
From that perspective, typically in the past, Bill, what's happened in our industry is we tend to make a little more money when there is a slow methodical increase in copper, which we have not had in quite a while.
We're getting quite a bit of volatility.
But in the same category, the volatility itself has led to, and we've had enough of it over time, to where the jobs and the business that are coming out are moving forward.
So the ---+ regardless of interest rates or financial influences of really any magnitude, there is ---+ the cycle continues.
And when our product delivers into that building wire cycle, it's typically shielded from those financial influences, including sometimes the price of the metal swing one way or the other.
Most of the deals are done and shipping out pretty quickly.
The lead time from a purchase order to delivery has shortened, which helps with the volatility of the metal.
As far as adding things to stock because of the volatility, the reverse is true.
From what we see, most of our distributors are keeping inventories as lean as possible because of the volatility, which kind of feeds into our model a little bit better with our fill rates and short lead times into 50 states.
There's a lot of thoughts on them, but supposition and whatever, but our guess is that Prysmian had a really good, well-thought-out plan, and they're most likely in the process of evaluating what they have and what they've bought and sorting out different people's responsibilities and what have you, like anybody would be.
And once those lines are clear on who's going to be responsible for what product categories, I think we'll have a better picture.
But overall, without ---+ I don't want to get into naming names or anything, but in that process, my personality thinks it has to be better with Prysmian watching the bottom line versus what we were going through for the few years there that they clearly were for sale ---+ where General was for sale in the market.
Yes.
Chris, we're supposed to stick to Q4 and 2017, but I don't mind answering that question at all.
What we're looking at is several options.
We literally just had a board meeting this past Monday.
And we're considering a few options there, and hopefully, something will come from that pretty quickly.
As you know, if you followed our story very much, depending on what copper does or what copper doesn't, the demand on the cash is pretty extreme.
The majority of any type of exposure that we have as far as a bank line or any of the debt service that we need to take on, for that matter, would be relative to copper.
So as we're sitting, it looks like a lot of cash.
We have some ideas of what we want to do with it.
And hopefully, restating I think we'll have something come off it here pretty quickly.
Are you wanting questions, or is your question relative to '18 or is it about '17 announcement and Q4 announcement.
Got you.
We saw a really active market in the fourth quarter.
And again, the lead time from a quote to a purchase order shortened a little bit, which is a good sign.
The size of the average order that we take in increased a little bit toward the end of the year, which was a great sign.
Everybody is paying their bills on time.
All the things that we watch, <UNK>, wrapping up 2017, ended on an uptick as far as the indicators that we try to watch.
Yes.
We're running all of the plants currently 5 to 5.5 days.
Occasionally, we'll run 6 days on a cleanup basis.
The flexibility that we have here manufacturing-wise, it's hard to give you just a straight utilization rate that would be pertinent.
But in that sense, we're running 24 hours a day, 5, 5.5 days a week, maintaining our order fill rates, growing the business and growing it with the existing customer base that we have.
5.5 days would be the easy answer to give you.
As far as a percentage on that, it depends on the product mix from commercial to industrial to residential, because that does change.
We had a really good 2017 in the residential area.
All 3 areas were up pretty good.
So in an overall generic answer to your question, I would say we're running about 65% to 70% at the current product mix.
We can do some things here differently if we need to.
We can swap machines over and run this for that and we can share plant time.
And there's quite a few things we can do.
And I would love to stress the plant and see how many pounds we could put through in a month.
All said and done, it just ---+ it feels like right now that we're really busy.
You only look up and you still have 1.5 days or so to catch up and fill in some orders.
So right now, it's good, not great, but good.
Well, after almost 30 years in the industry, there is not an answer to your question.
If you're looking at '17, it'd be restating the press release if I told you what the spreads were.
But in general, over a cup of coffee, if you and I were speaking about my opinion on spreads going forward, I think if business is similar in '18 to what it was in '17 and the metals numbers are similar, I think the spreads will be similar.
I'll be honest with you.
I don't know what the price of copper is going to be 2 to 4 years out.
But I'm very bullish on copper.
I've only been bearish twice, maybe 3 times, and I was wrong both for 3 ---+ all 3 times.
So I'm super-bullish on copper and aluminum going forward.
Again though, in that vein, we're not betting our inventory or purchasing or whatever.
I think copper is going to go up, but I'm not buying a bunch of extra in anticipation of my opinion coming true.
So it's just a real tough question to give you what will happen when 65% of our cost is copper.
And as you know, there was a difference of about $0.50 a pound in just 2017 from one quarter to the next.
From second quarter to fourth quarter, it was right at $0.50 difference.
So it's tough.
I mean, I'm not trying to evade your question at all.
It's just I'm bullish on the future as far as copper goes.
Well, let me break that down into 2 pieces, if I could, Bob.
And let's go historically, pre the Trump tax reform act.
And so if we look at what we were trending through 3 quarters, it was right in the 31% to 32% range.
And that was basically coming off of, on a federal basis, the 35% statutory rate, which was reduced by the Jobs Creation Act or Section 199, as they refer to it, which really favored Encore Wire.
And we were able to get a 3% to 4% break of the 35%, because we do manufacture all of our product right here in McKinney, Texas.
And that act was designed to incentivize people to produce in the United States.
On top of that, we had about 2% at most state tax rate in all the municipalities and jurisdictions we sell in, in the United States.
So it came out to about a blended 33%, 34%.
The Trump tax rate eliminates the Section 199 deduction.
However, it takes the rate from 35% to 21%.
So for the full year, we pull down our deferred tax liability, which we had been building plants and equipment, we had been taking accelerated depreciation on those for taxes as allowed with bonus depreciation and had been deferring paying income tax into the future.
To that extent, when the law came effective, we were able to reduce that future liability from a 35% rate to a 21% rate.
And therefore, our effective tax rate for the year, having said all of that, wound up being 16%, that's with the big adjustment.
Right.
You will look at basically coming down from a federal rate of, let's just say, 32%, 33% to 21%, a solid 10%.
Yes.
CapEx for last year clocked in net of a few little proceeds of assets at $20.7 million net CapEx.
The current schedule we have for projects that are either on the books with POs issued or contemplated and a few projects that <UNK> and the board and our manufacturing people are working on.
Right now, our projection is we'll spend, in '18, somewhere in the neighborhood of $25 million to $30 million.
Yes, sir.
We've been very loyal over the years to a pretty good group of vendors and what have you.
So we could not be more pleased with the service and the people that we deal with and so forth on the copper.
We do very well on our sourcing.
We've got probably the best team from a purchasing standpoint, reputation-wise and so forth in the industry, headed up by Janet.
They all do a great job.
The planning for the volatility is a little easier than it would appear to be because the way things are done on an average basis.
But things are a little bit tighter, as you know, Bill.
And then I'm sure that it's no secret, every publication that you read today has some article or comment about the trucking industry.
Trucks are tight, but they're tight for everyone.
So we've dealt with that over the years as well.
But for the most part, the service and the quality that we receive from our vendors, we blend our own plastic on site here.
We compound.
So we buy the raw materials.
And they're world-class vendors.
They do a great job for us.
Again, like I've stated, the copper folks do a phenomenal job for us.
Their office folks as well as their outside sales folks do a great job for us.
We're very well taken care of.
The trucking thing is tight inbound.
It's tight outbound.
It's going to continue, I believe, to be tight.
A lot of changes went into effect, as most industry folks know, from a trucking standpoint back in December about the drivers' requirements.
And then equipment is tight.
It feels like we're super busy, Bill, and things are going along pretty well.
We came out the other side of some of those devastating hurricanes that hit the Gulf where most of the world's PVC supply ---+ at least there's a presence down there for most of the world's supply.
But in that vein, we've not had supply disruptions from the raw material standpoint.
And I think that's a testament not only to the folks that we've chosen to buy from, but the reputation of our purchasing department is pretty solid.
So pallets are tight.
Stretch film can be tight.
I mean, everything that you buy today as a consumable item on the shipping dock is a little bit tighter.
So people are busy.
People are ramping up to catch up.
And we're rolling along, but we've not experienced any outages of anything, but it is tighter for sure.
Yes, sir, yes.
We're very proud to be in Texas and also McKinney.
We think it's a great spot to be.
We didn't announce anything in the fourth quarter nor in 2017, [<UNK>].
And other than the response that I gave the earlier caller from Hilltop, Chris, we're working on some things.
We just haven't announced anything yet.
Right.
That's a great question.
There is discrepancies in pricing in different markets for whatever reason.
And some of it does make business sense.
Some of it doesn't.
The only thing I can figure is, it's not their money or they wouldn't be spending it that way.
The other side of it would be, though, specific to your market share questions.
We have a pretty good idea of our market share along with one of our larger competitors.
It's easier to lump those 2 together than it would be to split those 2 out in a specific market versus the other.
But being the only publicly traded company in the area, there's no real public numbers as far as that goes.
So we're going on some anecdotal stuff that we pick up and experience in time.
And we feel really good about our market share in some areas.
And there's other areas where there's a lot of room for improvement.
Again, though, we only specifically do the 50 states.
Outside of that, I really couldn't comment.
We don't compete outside of the 50 states.
We have had ---+ over the years, [<UNK>], we probably had 25 or 30 competitors way back.
And we're down to just 6 or 7 maybe.
And competitively speaking, in 2017, there was some disruption from imported materials and imported wires in some product categories that was super-disruptive.
But in spite of that, as you saw in the earnings, we had a really good year.
So I don't know if that answered your questions.
I just have to be super careful on being really specific on market share stuff.
And I think 4 out of the 6 competitors are on the call.
Yes, sir.
We made some voluntary changes on the increase in pay.
It was our choice.
We started to earn more, so we pay more, in that sense.
So overall, our labor was up a little bit.
We ---+ the availability of people, there are some holes that we'd like to see filled.
But rather than sit back and wait for someone else to do that, we've established some of our own in-house training.
And we've partnered with some local colleges and formed some classes that we're teaching.
And we also have departmentally set up over the last 12 to 18 months ways for folks to earn a GED or hospital equivalent here.
There's just a lot of things we're doing as far as projects.
But in the big picture, we could use 35 or 40 good people today.
We will probably hire half of that and continue to search for the other half.
And by that time, we'll need another 15 or 20 folks.
So we're constantly hiring and upgrading and trying to doing the things as most companies are doing, I would think.
And I do think that there's some unemployment in this area that we're in.
So we're getting some really pretty good applicants.
And the volume, again, is not great, but it's good.
And most of the folks that we're hiring in, they want to work.
You've just got to be careful not to hire them in June and July in Texas, because August, it's going to be hot.
And there's things that we try to do to adjust for that.
And in '17, and the fourth quarter specifically, we did hire quite a few people and we also upped their pay scale across the board.
I couldn't decide ---+ I could give you our management incentive programs without speaking to specifically.
But we did change up a few of them in 2017, not significantly.
There's quite a few that come to mind specifically, but I really don't want to go too far into the personnel side of what we're doing specifically on the call.
As I mentioned, 4 of our 6 major competitors are on the line.
And there's a pretty good competition for people in our industry.
So I'd rather not go too far into that.
Not ---+ in broad terms.
Yes, not specifically to any one specific person or area, but they are in broad terms, yes.
Yes.
It's tough to give you an exact number, <UNK>.
What ends up happening is, it's not one specific lump that comes in.
It's over time.
It's not an immediate kick.
However, as you would think, nonmetallic, which is a residential product, has paper inside the jacket.
And if that gets wet, it can grow bacteria and decompose.
So residential product has to be removed anywhere you saw water that would encroach on someone's residential property.
So in that vein, we did ship a significant amount of residential product into those geographical areas that were hit.
There was also some pretty heavy-duty industrial cable that goes in as an emergency power type cable.
But outside of that, <UNK>, it's a pretty long, drawn out, slow process to decide if they're going to rebuild, if they're going to completely tear down, if they're going to refurbish, whatever the decision is going to be.
The Houston market was somewhat different than other areas in the past.
They went against the grain and rebuilt a lot of those neighborhoods pretty quickly.
And so we did see a bump in that area.
But again, it's more a little slower and longer over time than it would be within a particular month or particular quarter.
Other than, the caveat being Houston was pretty quick and a nice little uptick in that market.
But the rejuvenation part of it continues on and then they'll decide to tear down and rebuild and the whole timing of insurance payments, and there's still quite a few vehicles that were flooded sitting in fields that were leased out.
And they're still hauling trash and debris and whatever out of a lot of those areas.
So it's a long drawn out process.
We still are seeing recovery effort type construction things in New Orleans from several years back.
So as tragic as it is for a lot of people and it is awful, it's a long drawn out ---+ we do get to ship some material into those areas.
Yes.
We saw some photographs and actually talked to some folks that were on the ground.
I guess, I should have qualified saying a long, slow, drawn out.
That's truly a longer, slower, more drawn out scenario.
But look, the material is starting to flow into those areas and basic supply-demand takes over, and there'll be some positive stuff business-wise that comes out of that for sure.
Okay.
Well, Maddie, thank you so much for handling the call.
And we appreciate the callers and look forward to speaking to you after the release of Q1 '18.
Thank you very much.
| 2018_WIRE |
2016 | HIBB | HIBB
#Sure.
So as <UNK> mentioned, <UNK>, we are in pilot with the Phase 1 of the new POS.
And so it is still early; it has been a week and a half or so, but they are ringing sales in that pilot store and just working through just the normal course of a roll out.
But so far so good.
And so, we are encouraged by just the very early read.
As we kind of look at the remainder of Phase 1 we are still looking, probably in the third quarter is when we will finish that roll out.
The bigger inflexion point we think is the store to home capability where we are able to send an item to a customer's home.
And so, for that capability we are looking for Q4 of this year to bring that to life.
So we are excited about that.
And then next year we are looking to go online with our new digital platform and we are looking at the second half of the year for that launch.
Yes, I think what we have been hampered with really for the last year has been a price/value relationship that has not been there on some of the signature product.
When you look at the price/value that is there from a Curry perspective and a [Ki're] perspective the sales have continued to be very robust.
But on some of the higher-priced Lebron KD product the price/value relationship was not there and it wasn't as trend relevant from a color perspective.
So based off what we have seen coming with the new KD shoe coming in about another month we feel like the price/value relationship will be much more attainable from a customer perspective.
And we will see value in the product at the price and we do believe it is more trend relevant.
So we feel like the basketball business can have some sort of a recovery, but we are very focused on just ensuring we have the right shoes overall no matter what category they are in.
So we do see, again, a balance hopefully in the back half with regard to basketball.
But our focus right now is more on the lifestyle products.
Yes, we got very significant help from our vendors.
I mean the partnership level that we are getting from our vendors is really unprecedented at this point for us.
We are certainly an integral part of their wholesale strategy is where the primary distribution point in a small market.
So very pleased, very happy and very appreciative of the levels of support that we are getting from our vendors.
No, I would think as we go through the second quarter there is definitely a favorable launch calendar as we go throughout the second half of the quarter.
I said we weren't going to give out any guidance before that.
But we feel very good about the products, the way they are lining up for the back half of the second quarter and through back-to-school and holiday.
So feel like we are in good shape.
Not really.
I mean I think the low-single ---+ there are not really many peaks and valleys that we are looking at from a forecast standpoint.
So, there will be some of that but we don't see any major ups and downs.
Yes, I mean, I can start off.
I Mean, it is difficult and I am sure for you guys it is hard to get a read on it, it is for us too because there are so many moving parts out there just based on what is happening in the macro environment, the launch schedules, the tax-free weekends, all of that does cause quite a bit of volatility in our business.
So, we recognize that volatility, but at the same time we try to make sure we are doing what is right for the long-term because that volatility does seem to level out in the long run.
And so, we don't get too really excited about the ups and downs as long as we know that we are doing good things internally for the business.
Yes, we definitely are seeing an uptick in the service level and in-stock levels.
I mean our inventory management group is doing a fantastic job with that.
So, we still see upside there as well as we see very significant upside with our [save the sale] initiatives as we start rolling those out through the balance of this year.
So many, many opportunities still to enhance our conversion at this point.
It is footwear and apparel primarily, but there's opportunities in every category.
We do expect to get the most significant gains from a revenue perspective out of the footwear category, without question.
Yes, that is still what I am seeing, <UNK>.
Next year should be about the same and, if not, a slightly reduced impact.
So that outlook has not changed.
Yes, from our perspective, I think one of the advantages of having less players out there, we become more important with our vendors.
And I think that definitely has helped.
There will be some categories that will get affected a little bit in the second half of the year, that there will be maybe a little bit too much product out there.
But we feel overall it will be a strength to us as we become more important.
Overall lap of going against a lot of those, we don't have that many stores that we would completely compete against.
But it may give us some opportunities as we look at some of our real estate portfolio to expand in some markets in the future.
Thank you.
Yes, sure, <UNK>.
So as we kind of look at our geographies, we really had a lot of strength in kind of the core Southeast states that we do business in.
As I look at the weaker areas, the Southwest did show some weakness.
If you look at Texas, Oklahoma, Louisiana, New Mexico, that was a little bit weaker.
And then kind of the Northern Tier was kind of in the middle.
And I think if you look at the Southwest, it is kind of a continuing trend that we have seen over the last few quarters with the oil patch activity and things like that, I think that does have some effect.
So longer-term I think that will be a very strong region for us as it has been in the past.
I think we just have to lap some of this oil patch activity.
We really saw that decline starting in about midyear last year and that has continued.
Over the last couple quarters we have seen it stabilize, but it is still below our average run rate.
I would say it would be a little bit more than that, especially with [new] investments that we are making.
So it would be a little bit more than that for this second quarter.
Yes, I think from an apparel standpoint I think we are planning a successful formula on the men's side of the business.
Now it is a question of taking that formula and improving the store distribution with that as far as getting to more stores with that correct formula of men's apparel.
So, we do see that getting better quickly as we head into the summer season and back-to-school season.
On the women's side we've been very focused on more of the lifestyle consumer as well, (inaudible) lifestyle product.
And where we put that focus in play we have seen very nice results.
We are still not at a level yet where it is a meaningful part of our assortment.
So as we go through the year we will see that become more meaningful and get that into additional stores as well.
And our kid's business seems to be a little bit more impacted and trends similarly to the team sports business.
So we still have some work to do in kid's on developing more of these lifestyle relevant assortments.
But overall I definitely feel like we are making progress, I definitely feel like we are finding the successful formulas.
Now it is just to get those formulas into additional stores where we can really take advantage of it.
No, we are absolutely shifting to the casual lifestyle piece and have been for the last few at least 12-month period.
We continue to see very significant opportunity there.
We are hopeful that pieces of the basketball business that aren't performing have an opportunity to get better.
But we are looking at both of them and needing both of them to continue to improve and to continue to grow to offset the running business.
That is our most challenging category currently in looking (technical difficulty) influencer the product that is there in the core running business is not resonating with that consumer.
So, we do feel like there is some improved product coming throughout this year that could help us a little bit in running.
But we absolutely are investing in the casual lifestyle and just trying to ensure that we have the coolest shoes across our different store types.
I mean, it is very possible.
I think right now that there is a lot of strong sneakers that are selling across all categories (technical difficulty) and just ensure we have the ones that the consumers are asking for no matter what category that they fall into.
So, I think currently there are, without question, more cool sneakers that are coming out of that casual lifestyle area.
And definitely see that continuing.
But there are also very cool sneakers coming out at the basketball category.
So we see that as well.
So, our focus is just to ensure that we have got the coolest sneakers in as many stores as we can.
I think if we continue to execute to that no matter what category they fall in we should see nice growth.
We are still seeing the ASPs grow on the footwear side.
And while the signature basketball piece may not be as relevant or as robust as it was, it was not at the levels of our overall business where it impacts the total.
We still have significant AUR growth opportunities across all other categories that will offset it.
Yes, <UNK>, this is <UNK>.
First and foremost the priorities for the cash will be to build new stores and remodel existing stores, invest in our major initiatives including the omni-channel initiative and then after that free cash flow will be targeted towards stock buybacks.
Last year we finished the year at about $32 million in cash.
We should be at or slightly above that number for this year.
So, we still have quite a bit of a availability under our authorization and our cash flow to execute a significant buyback for the year.
Keep in mind that the first quarter typically is our high water mark in cash.
But I would totally expect a fairly sizable buyback for the total year.
<UNK>, really that real estate out in the marketplace, there is plenty of markets to go.
We still feel that we are going to hit net 40 to 50 new stores.
There is a lot of markets still out there, there is still a lot of small towns that we can put stores in.
So still getting the same type deals.
Sometimes a little bit less, sometimes a little bit more.
But we still see that there is a lot of space out there for us to grow for a significant number of years.
As we look to the West, California is a state that we are looking at that is a huge state, has lots of small towns that fit in exactly what we are doing, especially as <UNK> talks about that 17-year-old customer and the lifestyle and that it fits right up to what we are doing.
And we see that there is some opportunity as we continue to look West.
Yes, <UNK> (technical difficulty) somewhere October/November time period to start putting stores out there.
Correct, <UNK>.
It is the performance business.
Yes, <UNK>, definitely.
Bill Quinn came on board and the has really hit the ground running.
And so he is giving us the opportunity to move it up a bit.
It is ---+.
Yes, it is, and we will definitely have more color on the next call as we go forward.
I think, <UNK>, the way you have to look at it, that millennial customer has really kind of shifted on priorities.
They are not really ---+ they like to go to a gym, they like to do CrossFit they are not running like the traditional runners.
And I think more and more of our customers want a shoe that looks trend right and that they could use for multiple purposes.
They could wear it out or they could wear it to the gym.
So, I think you are seeing more of that because people aren't running long distances.
Most of these kids today, they want to go to a gym, be done in 30 to 45 minutes or go do some CrossFit.
So, I think that performance running piece right now, I think that is what you are starting to see a lot more of.
And it is really about having trend right running looking shoes so the kids can use them for multi purposes.
I think it is a combination of things all of which we are working on.
From a merchandising standpoint, as we have talked we feel like we are making very good traction there, markdown optimization starting to provide some benefits later this year as we look to go store to home.
As we have said, that will significantly help our conversion rate for existing customers coming in.
Then we get into our digital online business.
So we have a lot of things that we are working on right now and in the near future that we think will help us get back on that trend.
And <UNK>, for us, all these investment, I know the last couple years has really built a great foundation.
And as we have been able to utilize the DC, utilize markdown optimization, be able to send stuff to the customer's home, we should be able to get back there with all the tools.
We were just fighting sometimes with one hand behind our back in not having those tools.
And we are about to embark on having all the tools.
So, we feel very good about where we sit today.
And I mean we feel like investments that we are making does cause a temporary dip, but definitely an investment for a better future as we kind of look at our strategy and starting with the store's first, enabling them to fulfill product once we get online.
One of the reasons we are doing that is just from a customer experience standpoint.
But as we scale up that online business that will give us very good leverage on a fixed cost base that will help us in the out years.
Yes, I want to thank everyone for being on the call today.
We look forward to having you join us again at the end of the second quarter, but we appreciate all your support.
| 2016_HIBB |
2015 | OSPN | OSPN
#Okay.
That's a good question.
It's a concept that I don't understand myself.
I have always been one that invest my money in stories that I like, instead of the opposite.
And certainly shorting is legitimate, there is nothing against the law at it.
So it's there and so the way we combat shorts, the only way we can do it, is we don't get angry, I don't get angry at anybody that's shorting our stock, as I said it's legitimate.
The only thing we can do is perform.
So, that's what we focus on is building the business, managing the business well, and making very good profits and very good cash flow.
<UNK> I would offer the interpretation that we haven't been widely successful in creating term licenses or recurring revenue.
With those products I think those do provide good opportunities for moving from a sales and license model, to a recurring revenue model but a lot of the customers we have talked to, have been existing customers and they are more familiar with sales and licensing than they are term revenue.
So the deferred revenue balances that you're seeing today are primarily due to maintenance and items that didn't meet revenue recognition criteria at the end of the quarter.
That's right.
Well I think when we first captured that phrase, sustainable repeatable revenue, and started describing that after three to five years, they would do something different.
I think it's extended just a little bit because when we first started describing this 10 years ago or so, we talked about three to five years and a fairly long refresh cycle.
Rabobank is an example, is doing a very large refresh cycle in a relatively short period of time and it's because they have done it several times, they know what they are doing and so.
Yes <UNK>, I would say that the cycle hasn't changed a lot may be increasing slightly but the speed with which they do the rollout has accelerated.
So when they do a major rollout, Rabo being a prime example, are doing it very quickly especially considering the volume of units that they're deploying to their customer base.
I would think they started more than five years ago and probably went over six to eight quarters instead of four.
Again, those are subjective numbers, those are off the top of my head, I don't have that hard data in front of me.
I don't have any particular update on that, <UNK>, sorry.
Please remember that one of the misconcepts is that, or maybe a misconcept, so I'll try to clear it up is that when one of our banks does a refresh like this, perhaps they take two years to replace what they had before, perhaps they take six quarters, five quarters, it is really a daunting thing to distribute that many 1 million, 2 million, 5 million DIGIPASS devices, that's a daunting task.
And so as you look at the business and how it grows, we have a lot of opportunities where like for DIGIPASS for Apps, IDENTIKEY Risk Manager, these are incremental to what the companies already have.
So it offers the potential of another multiple refresh cycle.
If you think about all the banks we have, they don't all get together and have a meeting and decide that they want to refresh and replace what they have.
They all have their own time frames, they all their own plans, so as we add more banks to our portfolio of customers, by definition it's going to smooth out, as we add more products that are subscription based or a time based, term license based, that's going to introduce more predictability in our model.
As we look for companies that we think can be additive to what we sell to that banking channel, many of the products that are out there today are all subscription or term license, so over time our model is going to change, our revenue model is going to change.
Yes.
I'd like to speak about that anecdotally, because in all the cases of these refresh cycles, it's not like they refresh everything and then stop, there always seems to be a tail because the banks add more customers, so there's always a stream of orders, not nearly as big of course as the major refresh, but there is always a stream of additional orders.
HSBC is an example, was a 10% customers for many years, than they had that major roll out over about six quarters in around 2011.
HSBC U.K. participated for the first time with a purchase of 4.5 million units and HSBC continues to be a meaningful customer because of the tail continuing to order products for new customers.
I think part of the answer there <UNK> is, we don't know what the follow on orders would be.
With Rabobank, they continue to order the old technology that they had, at the same time they're ordering the new technology.
Then the other way they were rolling it out was new technology to existing customers, their most important customers, the old technology to new customers that were coming on, only with the idea that in a short time they were going to replace that old technology with the new but they just needed to buy more.
So it's very common as <UNK> was saying for them to have a base level of purchases that continue year-after-year after that initial roll out.
Well, in the prepared remarks we said that it was a decline in the second quarter, and we said it was a decline of less than 10% on a year-to-date basis it was still an increase but an increase of less than 5%.
The issues surrounding that particular disclosure are that it's also obviously impacted by currency exchange.
When we get to that number or when we talk about Rabo, Rabo is generally a dollar denominated transaction, but most of the currencies falls to that other group.
So if you were to put that $5 million or even the $2.5 million per quarter into the other group, it looks different.
So when you do consider that group, consider currency effects, also when you consider that group, consider the fact that we have different volumes of new customers coming on in each year and when you look at last year's results, you see the increase from Q1 to Q2, that was due to large part to new customers coming on, so the comp in Q2 is more difficult, it's also attributable to a significant degree to those new customers of which would not be buying more new product now.
So there is a number of factors that go into that other group and I think <UNK>'s comments in his prepared remarks are key that we've always got new customers coming onboard with different roll out cycles, we always have refresh that because of our sales and licensing model, the comparisons in any given quarter are quite difficult to understand to explain.
So for us that's why we give annual guidance, the annual number that includes all of the refreshes, all of the new customers, all of the maintenance makes more sense to us than a quarter-to-quarter comparison.
Sure, thanks <UNK>.
Well, as far as the U.S. is concerned, I think I've addressed this before.
The U.S. has a different attitude, a different culture about security and about the need for security.
Now that's kind of an old statement.
I think that the U.S. has finally awakened and they know that they have to do something to protect not only their employees but their customers, their corporate customers, their retail customers.
HSBC is an example, about nine months ago stood up, said that all of their retail customers in North America had to use a DIGIPASS 275, that's a model of our little DIGIPASS calculator, or the software equivalent, same functionality, that the customer could download to their smartphone as an App.
So, other banks are also doing the same thing.
Unfortunately I got something, I got a notice an email from one of my banks, I think I have three different banks personally, and they said that they are going to distribute this very strong security and they described that you have to pick out an emblem or a picture and you have to respond and answer questions like, what's your first car, and I looked at that and I thought how incredible.
So, we are still not here.
We are still not here in the United States although they are making the right moves.
Mobile is driving our business in the United States.
That's good because more and more of our current banks and we have a large number of banks, over 300 as clients.
But it's mostly for the corporate side.
The mobile banking is for the retail or the consumer.
So we are seeing many projects as I described before, the RFI, the proof-of-concepts and we're involved in a lot of them.
And as in the past we expect to win our fair share.
So that's what's going to change the nature of our business in United States.
All right.
Well, everybody thanks for attending as usual and have a good afternoon to all the people, all the VASCO people around the world.
Thanks as always for your hard efforts, your positive attitude and professionalism.
Good afternoon everybody.
| 2015_OSPN |
2016 | TJX | TJX
#Yes, let me give you what I can, <UNK>.
The loyalty program, domestically ---+ I think you're aware, we run ---+ and I think when you ask about the loyalty program, you're also asking about the credit card, which---+
The credit card part of it has been very successful.
We've talked many times ---+ <UNK> has actually given you some information on that a few times in the past.
We also run what's called an access program, which is ---+ you'd call it not a hard reward ---+ it's a soft reward loyalty program.
It's not tied in with a credit card but they get access to certain events and there's a constant flow of information.
It hooks you up more to be in the T.
J.
Maxx or HomeGoods or Marshalls customer.
Both have been growing.
And we are very, very happy with the growing of our credit card program, which we are adding more active, significantly more active, members, we can't give you the number, but significantly more every year, and obviously we get additional spending from those consumers.
When you go to Canada, they do not have a credit card loyalty program, but they do have a non-credit card loyalty program, which is also doing very, very well.
In the UK, we are testing a loyalty program as we speak.
So that's very early in the process.
And when you ask what is our ---+ our vision is to continue to do this in the model of our business because we don't want to do anything that gets, how would I put it, gimmicky or promotional, out of the loyalty program, which some retailers use it to every now and then do coupons, et cetera.
That is not a route we will take, but the way we do it, we feel like has brought tremendous communication between us and the consumer and loyalty and additional spending from those customers.
<UNK>, you want to add anything.
Again, we're talking we have millions on our credit-based program and we don't give the facts, but close to adding a seven-figure number almost every year.
These are our most loyal, as <UNK> said, most loyal customers.
They cross-shop more than our other customers.
<UNK> said it right, we will add ---+ we would love to add things to our other countries, but we have to do it within the confines of our business model and our partners, what's available for both ---+ works for both us and them.
One of the things we didn't ---+ we just mentioned earlier when <UNK> was talking about stores and our sales is that our customer satisfaction scores have been going up in all of our divisions.
Some of it obviously happens to do with they're pleased with what they find with their overall shopping experience in finding the goods.
But part has to do with the store presentation folks and doing a better job and our store standards, the friendliness of our store associates, hiring better folks, training better.
That's certainly highly correlated to our having positive sales.
Again, our customer satisfaction scores have been going up at all of our divisions.
One other thing failed to note, talking about loyalty, in Canada, we have a non-credit based loyalty program that is extremely very successful in terms of the penetration, more so there than in the US, the total penetration, and again, they are just highly engaged.
Obviously, as we've talked about, we're very well known in Canada, so that is a piece of our business and why we're doing, as well, better there in terms of our comp sales.
Thank you, <UNK>.
I'll start addressing a few of those points.
Again, we haven't been giving out the 10% to 13% because both last year and this year, the three things we've been talking about still exist and that's why we did portend some of them.
We're not saying they're going to be at the same---+
Exchange rate fluctuation.
Right.
We aren't going to say they are going to be at the same level but the three major pieces being, wage being the biggest one, which is similar.
We're not saying it's not going down in future years, which if nothing happens, it might moderate going past next year, but at the moment, we just called it out because it's approximately at the same rate at this year.
The second piece being foreign exchange and that's why we called out again.
At the moment, it would not be at the impact of this year's impact of 3%, but it still would be low single-digits, so we just wanted to call that out.
Again, hopefully that will moderate, and at some point will be a tailwind.
Right now, it's a headwind.
The third piece is the investment to support our growth, again, primarily the distribution centers, which has been a bit lumpy as we've tried to explain before, because we did not plan the high level of comps we've experienced in some of our businesses, forcing us to move forward, make sure we could continue to gain all of the market share we've gained.
So those will still impact us going forward but we think will moderate those systems and our distribution spend as we move forward in future years, but still going to impact us at least going forward for next year at a similar rate.
So there's those three big components.
I don't think anything has changed, hopefully, they will start to moderate going forward.
It's in and around 3%.
Thank you.
Okay.
I would like to thank you all for joining us today.
We look forward to updating you on our third-quarter earnings call in November.
Thank you, everybody.
| 2016_TJX |
2016 | 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.
George Joseph, Chairman; and Robert Houlihan, Vice President and Chief Product Officer.
On the phone we have Chris Graves, Vice President and Chief Investment Officer.
Our Chief Financial Officer, Ted Stalick is traveling and is, therefore, unable to be on the call.
Before we take questions, we will make a few comments regarding the quarter.
Our second quarter operating earnings were $0.35 per share compared to $0.64 per share in the second quarter of 2015.
The deterioration in operating earnings was primarily due to an increase in the combined ratio from 98.5% in the second quarter of 2015 to 101.7% in the second quarter of 2016.
Our results in the quarter were negatively impacted by $22 million of unfavorable reserve development on prior accident years, $11 million of catastrophe losses and $2 million in severance payments related to a previously announced reduction in force.
The majority of the unfavorable reserve development in the quarter came from our California bodily injury coverage.
The development occurred across multiple accident years with about $10 million relating to accident year 2015 and the remainder to older years.
Catastrophe losses in the quarter were primarily from severe storms in Texas.
Excluding the impact of unfavorable reserve development on prior accident years, catastrophe losses and severance payments, the combined ratio is 97.2% in the quarter.
In California, we recorded an increase in personal auto severity in the high single-digit range during the quarter as compared to the second quarter of 2015.
California private passenger auto frequency was up slightly in the quarter as compared to the second quarter of 2015.
This year for our personal auto business in California, we implemented a 5% rate increase in late March 2016 for Mercury Insurance Company and a 6.9% rate increase in June 2016 for California Automobile 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 15% of our company-wide premiums earned.
Outside of California, our results were negatively impacted during the quarter by catastrophe losses primarily related to severe storms in Texas.
Increasing loss cost trends and higher loss ratios that come with an increase in new business also negatively impacted our results in the quarter.
To address possibility outside of California, we are increasing rates and tightening our underwriting.
Excluding the impact of catastrophe losses, the combined ratio outside of California was about 100.3% in the quarter compared to 99.8% in the second quarter of 2015.
The expense ratio in the quarter declined to 25.4% from 27.3% in the second quarter 2015.
The decrease in the expense ratio was primarily due to lower advertising expenses, lower average commission and a reduction in profitability-related accruals.
Net advertising expense in the quarter was $8.6 million compared to $12.1 million in the second quarter of 2015.
Premiums written grew 6.6% in the quarter primarily due to higher average premiums per policy.
Company-wide, private passenger auto new business applications submitted to the Company decreased 7.9% in the second quarter of 2016 as we focus on improving profitability in our private passenger auto line.
Company-wide, homeowners applications increased 1.4% in the second quarter 2016.
In California, we posted a premiums written growth of 7.8%.
Outside of California, premiums written grew 1.3% in the quarter.
With that brief background, we will now take questions.
We still haven't made a decision on Mercury Insurance Company.
We believe our rates, even after the second quarter, are in line.
But we're going to be following the trends very closely, and there is a possibility that we may be filing for a small rate increase in Mercury Insurance Company.
In Cal Auto we have filed for a 6.9% rate increase.
That's already been filed.
That's right.
And keep in mind that the 6.9% rate increase in Cal Auto has not earned in at all.
The MIC rate increase this quarter probably earned 25%-30%.
I expect about 75% earned in the third quarter and 100% in the fourth quarter for the MIT rate increase that went into effect in March.
That's correct.
No.
I don't recall what we said, but definitely it's high single digits now.
And if you take a look at the fast-track trends in California, as an example, for the 12-month period ending March, severity for bodily injury increased 7.2% in California for BI.
And pure premium, which is frequency and severity combined, increased 9.9%, almost 10%.
So we're definitely seeing it in the industry as well.
Property damage liability, severity up for the full-month period 6.3% for the industry, with pure premium up 8.1%.
On the collision side, you're seeing 3.8% severity increases in the industry, with pure premium up 7%.
So the industry is also seeing severity and some frequency increasing, so pure premium is going up quite a bit in California.
Well actually the $22 million ---+ we increased our 2015 tax, so that increased the development about $10 million for the 15-year, Company-wide.
About $3 million went to 2014 and about $4.5 million or so to 2013 and 2012.
And what we're seeing ---+ our data showing ---+ is that the speed of closing on our older liability claims has increased.
And we're also seeing some case reserve strengthening in our book of business.
But while some of this increase case reserve and [pain loss] development was undoubtedly due to the speed up in settlements, when we take a look at one of our models, which neutralizes these changes, it basically said that we were still short.
So we ended up increasing our ultimate estimate as a result.
Yes, they have.
They certainly have.
And that's why our 2016 accident year right now, when you take out ---+ hopefully there's no further development and you take out some of the noise, you're running at around 97% and change when you take that out.
But that's correct.
We have increased our picks for 2016 as well.
It has a domino effect.
When you increase an older accident year and you increase the next one, the next one, the next one, it has a pretty big impact in the quarter on the calendar year results.
I think that's our number one focus.
And I tell you, that's ---+ our combined ratio is going to improve.
And our target is 95% combined ratio, and the whole organization is focused on that right now.
And over the course of the next 12 to 24 months, you're going to see a big improvement.
You're welcome.
Well, I'd like to thank everyone for joining us this morning.
And we look forward to talking to you next quarter with better results.
Thank you very much.
| 2016_MCY |
2016 | AJG | AJG
#Our wholesale business is awesome.
It is just awesome.
To me, it's a corporate gem.
I would say, <UNK>, remember again, we said on the front, property can be a little weak in the second quarter with the property market right now.
But wholesale still was nicely in the upper 2%s when it comes to organic growth this quarter.
So it's performing well, even in the kind of a seasonal property quarter that they have.
Let me back up my earlier comments, <UNK>, first of all, we started this thing from scratch about 15 years ago, from dead scratch de novo startup.
Today, we're the largest MGA in the United States.
We're one of the strongest open market brokerage operations.
When we started it, we had hoped that our own domestic PC branches would utilize RPS, but we also started it as a true wholesaler, open to our competitors throughout the United States.
They've captured 50% of our go-forward wholesale business out of our retail branch network in the United States.
That's because they perform.
The commission levels on the small accounts are a struggle.
I think that we see that with the mandated loss ratios in the smaller area, that they're squeezed.
But remember, our benefits business is a consulting business.
Yes, we get commissions, but it's negotiated as a fee.
So if we're not receiving commissions on an account and we need a fee to do the work, we charge it as a fee.
We're very, very successful at getting the remuneration we deserve in that business.
Honestly, it grew the same this quarter.
In the front-end of the comments, we said it grew about 3% this quarter, which is the same as our domestic retail.
We also said in the commentary, it tends to grow a little better in the second half of year, which is natural, as customers look at for their year-end benefit planning.
Also, I'd point out that an awful lot of activity on the M&A side there, <UNK>.
We've got really, really good M&A pipeline in the benefits business, and for all the reasons you would imagine.
The ACA is extremely complicated.
The brokers that have really nice accounts, 500 lives to 1,000 lives, right in our sweet spot, are lining up to join our enterprise for all kinds of reasons, a lot of which is just the ACA is too difficult to deal with.
Really good.
Very pleased.
Organic ---+ it's a little softer market up there, so organic around 2%.
But we had seven separate brands when we bought Noraxis.
Those brands are all <UNK> now.
I was up there in May for a better part of a week, had a chance to interact with a whole bunch of the team.
I will tell you that the interaction between those brands together and then their relations with their brethren in the United States and the UK is outstanding.
Thanks, <UNK>
Primarily, workers compensation in the United States, which by the way is a good ---+ you can't sit and complain about slower claim growth, right.
For our customers, that's a good thing.
It can be an indicator that the economy is slowing a bit, because typically when you're putting on more shifts there is more claim activity.
But this is not unusual ---+ from time to time, <UNK> Bassett will see loss control works better, clients are working very hard to cut the number of claims, and we're helping them do that.
We've seen ---+ it's interesting, because <UNK>une was kind of the month that looked like a little bit of out of pattern number of new horizons.
We went back and take a look and there are some times, we're just ---+ once every 22 months or something, you get a slow month.
So I wouldn't consider it a trend necessarily, but it is something we'll keep an eye out in.
As <UNK>uly comes in and August comes in, we'll get together again and we do an investor event in September.
We'll update you on it.
But we've had these patterns before, where just some months, the claims just don't show up.
I've got to tell you, I give a lot of credit to the management teams of our major insurance companies.
It's softer, as I said earlier, in New Zealand and Australia, Canada and the UK, especially in our specialty business in London.
Those markets are soft.
But here in the United States, we're coming up five, six years of what I would call flat.
When rates are down 1%, 2% or up 1%, 2%, in my experience, that's a flat market.
In a typical hard market, rates are jumping 15%, 25%, 30%, 40%, 50%.
In a typical soft market, they're dropping 12%, 15%, could be 16%, 17%.
We're five or six years now, where that band is 1.5% to 2% up, to 1.5% to 2% down.
I know that's driven by the lack of investment returns in the investment market, but it's pretty darn good discipline by the underwriting community.
We saw that again in the quarter, soft on the property side.
I've said this in past quarters, I think our clients deserve that softness.
They will pay a price when the wind blows.
It hasn't for a number of years.
So the property market is soft, but casualty, rate and exposures contributed less than 1% negative to our results this quarter, domestically.
That's pretty good.
By the way, that's a great environment.
That's a great environment for our clients.
It's also a great environment for our producers.
When rates are dropping 15% to 20%, anybody can throw a quote out there and catch you off guard, with a number that's so low that lose your client.
Today, it's all around how creative can you be.
And how helpful can you be to your client in helping them deal with their risk management costs.
Thanks, <UNK>.
No.
I think what's happening in comp, which is interesting, is that medical costs are escalating a level faster than the indemnity side.
So what you've got is kind of a shift.
Severity is remaining about the same.
Return to work is really, really critical.
But it's all about the medical costs including pharma that is something that everybody's concerned about.
No, we've seen it on the ground.
We've seen it ---+ I'm not going to mention any specific carriers by name at all.
But no, we're seeing disruption.
The good news is, there's plenty of market.
So where there's disruption we're able to move business.
But there are major companies that are undergoing underwriting reviews.
They're making the moves that they believe ---+ again, I give them credit.
I think we're looking at domestic US pretty darned disciplined senior management.
Thanks, Chuck.
Yes.
It says that ---+ if you look at the CFO commentary, it says almost no impact on EPS as a result of that.
Yes, listen, let me just say it this way, I think that first of all, in integration ---+ for our integration teams out there that are listening, I know you got got a lot of hard work left, but financially we're ---+ it's not going to cost us that much between now and the end of the year.
So I'd like to say, it's all done.
But maybe towards ---+ maybe on our <UNK>anuary call, we'll declare that.
When it comes to CapEx, the spending that we've done on the home office build ---+ recall that we have an opportunity for a lot of tax credits that come through on that, that will improve future cash flow on it.
That's about $125 million to $150 million this year, that we won't have next year.
Integration, we spent well over $100 million in 2015.
We're running somewhere in that $50 million range right now, half, maybe less than that.
So you're going to free up $200 million next year just in those two numbers alone.
So that's ---+ I don't see a lot of big real estate moves.
We moved a big piece of our real estate in the UK this year.
We won't have those costs.
That was probably in that $150 million of building costs: there was $125 million in the US and $25 million in the UK.
So I just don't see a lot of those big cash needs coming in 2017.
So that's a nice pot of money to have.
I think you need to think about $750 million again next year, because we just wouldn't borrow quite as much money next year at this point.
So that $200 million ---+ if we have an extra $250 million, $200 million, we'll still be in the $750 million ability to buy companies next year ---+ of funds available to buy companies.
Actually, what's interesting is the account that we didn't pick up the performance bonus income has actually rehired us for the next five years.
Actually, we've picked up a large piece of business that flows through that program.
So we didn't lose any account on the risk management, rather we just didn't hit a couple metrics that have clip metrics in it.
We didn't get the performance bonus.
But we'll be back after it in ---+ in this next fiscal year that ends in 2017.
Thanks.
Bye, <UNK>.
Thanks, Donna.
Yes, I've got a bit of a wrap up.
Thank you again for being with us this morning.
We appreciate it.
Our teams are focused and energized.
We will continue to execute on the four components of our value creation: we will grow organically; we will grow through acquiring the best brokers; we will continue to improve our quality and productivity; and we will invest in our culture.
I'm very pleased with the first-half results of 2016.
I remain excited about the remainder of the year and beyond.
So thank you all for being with us.
| 2016_AJG |
2016 | NKE | NKE
#Yes.
Hi, <UNK>.
It's <UNK>.
I'll start on that one.
Overall we feel great about the progress that we're making from an inventory or, maybe more broadly, a supply and demand management perspective.
As I noted, our overall enterprise inventory growth was driven by only 3 percentage point increase in units and, actually, we saw a decline in North America in particular, in inventory, both in the value of that inventory as well as the units actually declining even greater.
So while I noted that in margin off-price sales had a negative mix impact, that was versus the prior year in the first quarter.
We're actually continuing to see those off-price sales tighten up as we make the progress we told you we would in terms of returning to a healthy pull market in North America.
Maybe just to give a broader context around the inventory of the marketplace, I would say really around the world, our in-line channels are very healthy, really across the board.
So we feel that we've made great progress in North America to make sure that we have obviously cleared the excess inventory and we're bringing in new products into the marketplace and we're seeing the result of that.
Going forward, we will continue to manage the supply into the marketplace proactively to make sure that we maintain a pull market.
If you look across to Western Europe, their inventory is actually in line with revenue growth, maybe the only difference would be on the value side you're certainly seeing foreign exchange have some impact.
Then in China, we're certainly seeing inventories are very healthy there and you're seeing some inventory build as we prepare for Singles' Day, which is obviously a big impact.
And so we're excited about that.
So across the board, we feel very of confident about our ---+ the marketplace and the inventory position that we're in today and we're just excited about the pipeline of products that are coming through.
Thanks, <UNK>.
We'll take the next question, please.
Yes, I would say the two biggest drivers of the margin contraction versus prior year were the bucket of discrete or temporary items that we referenced and foreign exchange.
So those items most notably included the shift of operating overhead expenses into cost of goods sold, so that is a movement within our P&L versus a change in trajectory.
And as I mentioned, it's not always that evident to those on the call or otherwise that included in gross margin or in cost of goods sold is not just the product cost but also the investments in the teams and resources that we deploy against innovation and manufacturing revolution and otherwise.
Golf, as you highlighted, was another factor within gross margin, both some charges that we took as well as the impact of exiting the Golf Equipment business.
Frankly, it's a great example of the Edit to Amplify approach that we've talked about in the past and we've talked about on this call increasingly being applied to operating overhead.
That is having an impact on our margin in the short term and will over the balance of the year.
It's not reported as a discontinued operation.
It's in our numbers.
But we are making those decisions because we believe our long-term focus, in other words, what we will amplify as our focus on footwear and apparel and drive greater growth and profitability there, and we think we'll see the benefits in margin and return on invested capital from the decision we made to edit.
Yes.
There's always been a shift back and forth from a consumer standpoint.
I'll just back up and say, though, that Sport in general and innovation have always been, and I think always will be, two of the most powerful drivers of culture and style.
Nike's always ---+ we've always started with the athlete.
It's how we create the insights that drive the innovative product and then we amplify that across the portfolio.
And Sportswear is a really important means of doing that.
We see tremendous growth in all areas.
Specifically in both dimensions of Performance and Sportswear.
We just had our most successful quarter ever for Performance Running and our Sportswear business at the same time continues to be a massive growth driver for the Company.
So it's really, for us it's the balance between the two and the relationship between the two.
That intersection between performance and style I think is stronger than ever.
And by the way, innovation is a huge part of creating a new aesthetic.
And lifestyle product does prioritize, I think, at this stage with the consumer comfort and lightweight and breathability.
So performance is really an element of Sportswear for Nike and that's what helps to separate and distinguish Nike in the marketplace.
I would maybe just add and say, been there, done that.
Certainly around, as you approach the idea around Sportswear, and certainly the Lifestyle, the life cycle that we go through, we continue to believe that our performance business is actually ---+ is at the root of what drives continued innovation in the marketplace.
We then leverage that point of view to create sports style innovation and I think we're in the best position where we can actually do both.
We can serve the consumer who wants a performance product to wear as a lifestyle product, but also something he can wear to compete, he or she can wear to compete in.
And again, this current environment is great for us.
This is when we are at our best and that's why I said been there, done that.
And we'll do it again, just only bigger and certainly it's a great opportunity for us.
Thanks, <UNK>.
We'll take the next question, please.
We'll go to the next question, please.
Well, we're actually starting to take some of this innovation to scale.
I think that's the short answer.
For us, this is about getting product to the consumer faster.
It's about lowering our product costs, as we talked about, really trying to drive greater labor productivity, less waste in the system, new design capabilities.
These are all parts of man rev.
I think though, the difference, the inflection point that you mentioned, is really more about taking it to scale.
With partners like Flex, but then across our whole manufacturing partner base.
So we're really modernizing, not just with any one partner, but using that innovation to drive it across the whole base.
So we talked about Flex and footwear, Apollo is a more recent focus for us on the apparel side.
Our investment in the advanced product creation center here on the Nike campus, some amazing innovations in looking at disruptive methods of make.
Obviously, we're aware of Flyknit.
3D printing I think has got a lot of potential for scale.
So we're starting to see the impact at a greater level as we get quarter-to-quarter and I think that's going to continue to grow.
<UNK>, I'd just add, today we're seeing gains in the tens of millions of dollars per quarter.
We certainly expect to see that expand over the long term.
The tangible results that we're seeing today are primarily driven by automation and being closer to market.
In terms of automation specifically, we're seeing greater yield in terms of our use of materials.
So less waste means lower cost.
And we're also improving the throughput in our manufacturing lines.
In other words, improving labor productivity.
I guess in short, I'd say we're increasingly confident the manufacturing revolution, now across both Footwear and Apparel, will have a significant impact on both revenue and margin long term.
And as you know, as you start to see returns on your investment, that starts to build momentum.
So we remain bullish on that opportunity.
B.
Absolutely.
It's sort of a gateway into a whole new era of what we call personalized performance, and that's not just in terms of fit.
It's in terms of cushioning, support, real-time.
That's what's exciting about it.
There's a lot I'd love to talk about, as I sometimes say, but I really can't.
But I'll suffice to say at least at this stage, that the HyperAdapt or the adaptive performance technology is not just centered on fit.
We've got so many other opportunities from a complete performance standpoint.
And what you'll see coming out very soon in Q2 will be the tip of an iceberg that I think is actually quite compelling.
Thanks, <UNK>.
Operator, we have time for one more question, please.
Sure, <UNK>.
I think the key driver to keep in mind is sell-through to consumers.
We're seeing much tighter supply and demand and stronger sell-through to consumers.
So in the same vein as some of the comments that I made around futures, futures are not really a proxy for revenue.
In fact, you don't need a proxy for revenue guidance because we provide that guidance.
Really futures are one of the drivers.
There are other dimensions of the business, be that what we call at once or prop business.
Obviously, our factory stores.
There are a number of other dimensions but one of the primary drivers of that greater growth on the revenue line, as compared to futures in any given period, is that strong sell-through.
And as <UNK>, I think spoke about in a fair amount of detail, we're seeing a return to a strong, healthy pull market.
And again, that's also evidenced or corroborated by the declining inventory in North America.
Yes, as you know, <UNK>, we don't give geography-by-geography quarterly revenue guidance.
What I would tell you is precisely what we told you on the call, which is we do see revenue outpacing futures.
And I'd reiterate our view on North America as a geography that we shared at our Investor Day in October.
We see North America as a high single-digit growth geography out to 2020.
We don't manage in a strict way to those measures in any given quarter, but we're as confident as ever in that trajectory, driven by our brand and our product.
I'd just say, the brand in North America remains incredibly strong and we're seeing really just great momentum across the business.
As we obviously launched a lot of new products into the marketplace, certainly the Soldier 10, the KD 9, 31, the Epic Low.
I could continue nicknaming a few, but the point there would be that the marketplace just continues to see very great response to those items so we feel very good about North America and its continued growth.
And the brand is as strong as ever.
And we're just seeing momentum in the market place and we're excited about the pipeline of great products that we have coming.
Again, we just look forward to it.
So it's all good.
Thank you, <UNK>.
That's all the time we have for today.
Thank you all for joining us.
We look forward to speaking with you next quarter.
| 2016_NKE |
2017 | LGND | LGND
#Good afternoon, and thanks for joining the call.
The first quarter of 2017 was a very solid quarter, financially, coming in line with our expectations and setting us on a path to achieve our core revenue outlook of at least $130 million for the year.
We signed a few important new licensing deals during the quarter; and the OmniAb business, our antibiotic discovery technology, continues to perform very well.
Now of note, royalty revenue was especially strong, coming in just over $24 million for the quarter.
That\
Thanks, <UNK>.
I'll start today by reviewing recent developments for some of our partner programs, and I'll also provide updates on our Captisol and OmniAb platforms and related licensing activities.
And I'll discuss our Phase II clinical trial for our glucagon receptor antagonist or GRA diabetes program.
We're continuing to see late-stage positive progression by a growing number of our partners.
Our partners at Melinta Therapeutics presented data from the Baxdela clinical program at the European Congress of Clinical Microbiology and Infectious Diseases or ECCMID conference in late April.
Baxdela has completed Phase III testing and it is the subject of a new drug application that is currently under review at the FDA for the treatment of patients with serious hospital-treated skin infections.
The presentations at ECCMID included data from the Phase III program and demonstrated that Baxdela is comparable to vancomycin as treatment in combo therapy in the treatment of patients with acute bacterial skin and skin structure infections.
Importantly, this was demonstrated not only in the global study population, but in 3 key subgroups: patients with diabetes, patients with renal impairment and obese patients.
The action date for the Baxdela NDA is June 19, so about 5 weeks from now.
If approved, Ligand will earn a $1.5 million payment, given Captisol's use in the IV form of the drug.
Melinta also recently announced the execution of a license agreement with the Menarini Group for exclusive rights to commercialize Baxdela in 68 countries in the EU, Asia-Pacific and other ex U.S. regions.
Menarini is a global, leading pharmaceutical company, with over 16,000 employees worldwide and with a presence in more than 100 countries, including a direct presence in more than 70 countries.
As a general reminder, Ligand has a 2.5% royalty on global net sales of Baxdela IV.
Additionally, our partners at Eli Lilly indicated on their recent Q1 earnings call that they continue to be excited about Prexasertib, which is a small molecule inhibitor of checkpoint kinase 1 or CHK1 and, to a lesser extent, CHK2.
Prexasertib utilizes our Captisol technology in its formulation.
Just for some foundational background, CHK1 is a global regulator of the cell cycle, and in addition to the regulating DNA damage checkpoints, CHK1 plays essential role in the normal DNA replication, resolving replication stress, progression to mitosis and cytokinesis.
Inhibition of CHK1, in the absence of DNA damage, can cause impaired DNA replication, loss of DNA damage checkpoints, premature entry into mitosis with highly fragmented DNA in cell death in what's called replication catastrophe.
Prexasertib is being investigated by Lilly in Phase II clinical trials in patients with head and neck cancer as well as small cell lung cancer.
And Lilly indicated on their recent earnings call that we should see more data on Prexasertib over the coming next few months, along with updates from them on future development plans.
Switching now to Sparsentan.
Our partners at Retrophin met with FDA in the first quarter and received agreement on a path to approval with a single Phase III trial that is to include an internal readout.
Retrophin have indicated that they expect to finalize the Phase III protocol with the FDA in the second half of this year and start the Phase III near the end of the year.
Additionally, Retrophin has indicated that they are working with the European regulatory authorities to position the Phase III trial for European registration as well.
We look forward to further update from this high-profile program and also look forward to more dialogue around the asset at upcoming renal scientific meetings.
Our partners at Aldeyra Therapeutics recently announced the start of a Phase III clinical trial of Captisol-enabled topical ocular ADX-102 for the treatment of non-infectious anterior uveitis or NAU.
They started the trial following positive results from a Phase II trial that was announced last year.
ADX-102 is a novel aldehyde trap and is being developed for a rare and potentially blinding ocular disorder that affects approximately 150,000 patients in the U.S. In contrast to corticosteroids, which are often used to treat NAU, ADX-102 does not appear to cause increases in intraocular pressure, which is a precursor to glaucoma.
And according to our partners and Aldeyra, ADX-102 may represent a safer therapeutic option than the current standard of care.
The Phase III clinical trial that was recently started is expected to enroll up to 100 NAU patients with active disease, randomized equally to receive either a topical ocular ADX-102 or vehicle for 4 weeks.
Consistent with the successful Phase II trial, the primary endpoint will be the resolution of inflammation.
Results from that Phase III trial are expected in the second half of 2018.
As announced previously, in the first quarter, Vertex announced that it licensed rights to Captisol-enabled VX-970 to Merck KGaA, also known as EMD Serono.
Now that the program has been brought into the clinical pipeline at Merck KGaA, it has been renamed as M66207, and we look forward to future progression and to discussing the program at next month's ASCO meeting.
Switching now to Licensing.
Both our Captisol and OmniAb technologies continue to bring significant value to partners and are facilitating growth and progression of our partner pipeline.
We continue to be pleased with the progression of the OmniAb technology and with the feedback we get relating to the technology from current and prospective partners.
Our OmniAb team is coming off at very successful Protein Engineering Summit or PEGS conference last week in Boston, which is one of the premier annual globally attended event in the antibody discovery space.
Dr.
Christel Iffland of Ligand presented the technical details and benefits of the OmniAb platform to a full room of over 130 PEGS attendees during an oral session at the meeting.
Our existing OmniAb partners are showing significant intangible progression of OmniAb antibodies.
One of the latest example of this is the Janssen J&J, who filed an IND for an OmniAb antibody in Q1 that resulted in a $1 million milestone payment to Ligand.
At PEGS last week, our partners at Aptevo, who formed via a spinoff from Emergent Biosciences, (sic) [Emergent BioSolutions] presented positive preclinical data for their OmniMouse-derived anti-CD123 antibody, showing strong in vitro efficacy and picomole arranges and favorable manufacturability properties when formatted as a bi-specific antibody along with and anti-CD3 for key cell engagement.
Aptevo refers to the drug as APVO436, and we look forward to watching the progression of this new OmniAb preclinical program.
We also recently completed a worldwide OmniAb platform license agreement with bluebird bio.
Under the terms of the deal, bluebird will be able to use the OmniRat, OmniMouse and OmniFlic platforms to discover fully human mono- and bispecific antibodies as well as antibody fragments targeted to the CAR field.
For Captisol.
In Q1, we entered into new Captisol license agreement with Eisai, and we expanded our clinical-stage relationship with Marinus for Captisol-enabled IV ganaxolone to a full commercialization and supply relationship.
Merck also added an additional novel compound to their Captisol platform license agreement with us in Q1.
And I'll conclude with a brief remark about our internal pipelines, specifically our glucagon receptor antagonist or GRA program, also known as LGD-6972.
We completed enrollment into our Phase II trial in February, and are on track to have data in September.
We've been pleased with the conduct and progression of the trial thus far, as we initiated this trial ---+ this Phase II trial in September of last year, and are on track to have the data within a year from when we started the trial.
We're excited about the program and believe we have what could be a first-in-class and/or best-in-class molecule for a novel mechanism of treating diabetes.
I note that the landscape in the GRA space continues to evolve.
Lilly and Pfizer have attempted to develop small molecules, and glucagon also remains a target of interest in diabetes with other therapeutic approaches, too, with Ionis progressing an antisense program; and Pfizer beginning early work on a Phase I-stage antibody targeted at the glucagon receptor.
We believe that we may have a best-in-class and highly differentiated small molecule compared to prior molecules that were tested clinically.
We're excited to see our Phase II data in September and expect to talk more about the various differentiating technical features of LGD-6972 at the right time.
And with that, I'll turn the call over to Matt <UNK> to discuss the financials.
Thanks, Matt.
I'll start my remarks today with financial highlights from our earnings release.
Total revenues for the first quarter of 2017 were $29.3 million and included royalty revenue of $24.2 million.
Royalty revenue increase to 68% versus the year-ago period reflects higher Promacta and Kyprolis royalties as well as the addition of the EVOMELA and CorMatrix royalties.
Captisol material sales for Q1 were $1.1 million, and license fees and milestones for Q1 $3.9 million.
As <UNK> mentioned, our corporate gross margins were almost 99% this quarter.
Our royalty revenue and our license and milestone fees are reported net on the revenue line with a 100% gross margins.
For the year, we continue to expect overall corporate gross margins in the mid-'90s, as we look for material sales to be a larger portion of revenue mix for the balance of the year as compared to Q1.
On the expense side, our cash, R&D and G&A expense came right in line with our expectations at just under $10 million this quarter.
This quarter was expected to be heavier compared to the balance of the year, due primarily to the ongoing GRA trial and completion of enrollment.
For the full year, we continue to be on track for $28 million to $30 million of cash expenses.
Turning to cash flow.
Our cash flow from operations for the quarter was $24.2 million, and we continue to track towards $96 million of EBITDA, assuming our guidance for core revenue of $130 million as achieved.
And we continue to pay less than 1% cash taxes.
But for both GAAP and adjusted income purposes, we show a fully taxed net income.
For the quarter, we reported adjusted net income of $12.6 million or $0.57 per diluted share, and we had GAAP net income of $5.1 million or $0.22 per diluted share.
One quick comment on the GAAP earnings.
This quarter will (technical difficulty) one of the larger items that impacted GAAP earnings related to stock-based comp associated with the OMT transaction.
As previously disclosed, as part of our transaction to acquire OMT and the OmniAb technology, we issued a sizable equity-retention package to the OmniAb scientific founder and employees that we brought into the Ligand fold.
We're pleased to report that the OmniAb business continues to outperform our former expectations and, as such, the employees of OMT earned a portion of their equity rents this past quarter by achieving performance goals.
Specifically, there was a $2.5 million charge for the vesting of those shares that was booked to R&D in Q1.
With the transaction having closed in early 2016, these type of incentive payments were structured to run 2 years and should end in 2017.
On the balance sheet, we ended the quarter with just over $159 million of cash and investments.
And now turning to guidance.
We continue to see solid revenue growth for 2017 and our guidance is unchanged.
Our core revenue estimate continues to assume about $87 million of royalties, about $23 million of material sales and at least $20 million of milestones and license fees.
With respect to the upside on milestones, we still see $24 million of potential upside for the balance of the year, in addition to the $20 million of core milestone revenue.
This range of upside's tied to over 20 events, mostly of a clinical and regulatory nature that are impossible to predict the outcomes of until more information comes in.
Adjusted earnings per diluted share, at the $130 million level, is still projected to be $2.70, and each additional million dollars of revenue generates about $0.025 to $0.03 a share in EPS.
Lastly, I'll address a few other accounting topics.
Regarding ASC 606, the new revenue recognition guidance that will be widely implemented by all companies in 2018, we continue to make good progress in evaluating the potential impact to Ligand.
We're continuing to go through each of our contracts with our partners in determining the change, if any, under the new guidance.
As mentioned in our previous disclosures, we expect the primary impact for Ligand to involve an acceleration in timing of the recognition of our royalty revenue by 1 quarter.
We do not expect the guidance to have much impact to our materials revenue on our milestone and license fee revenue.
The other accounting topic I wanted to comment on relates to our CyDex CVR payments.
As investors in Ligand well are aware, we acquired CyDex and their Captisol technology in 2011, and since that time, we've shared a portion of CyDex-related revenue over certain thresholds with the former CyDex shareholders.
We made our last revenue sharing payment to CyDex in the first quarter and, going forward, will benefit from 100% of the revenue related to CyDex, other than specific CVR payments tied to our clopidogrel and topiramate programs.
As a result, starting in 2017, we'll benefit from improved cash flow from our Captisol material sales and other CyDex-related revenue streams.
Finally, as a reminder, our adjusted diluted EPS guidance excludes stock-based compensation expense, noncash debt-related costs, changes in contingent liabilities, transactions related ---+ transaction-related purchase price amortization, pro rata net losses of Viking Therapeutics as well as fair value adjustments to our holdings in our common stock, convertible note receivable and warrants, and mark-to-market adjustments for amounts owed to licensors, and the excess convert shares covered by bond hedge and certain one-time non-recurring items.
With that, I'll turn the call back over to the operator and open it up for questions.
<UNK>, it's Matt.
Generally speaking, Captisol has traditionally been a Q4-heavily weighted business, and similar to last year, we continue to expect second half to be heavier than the first half and Q4 to be heavier than Q3.
So I think our assumption is we'll see sort of a steady growth over the next couple of quarters and then a bigger Q4.
Matt, do you want to comment on other Captisol dynamics.
Yes ---+ no, there are elements, Drew, to the second part of your question, for some contracts that will have binding and non-binding windows when people graduate to commercial stage.
But on the clinical stage, obviously, the orders can be lumpy as people start-up trials or have meetings with the FDA that define the design of their preclinical or clinical trial, so there's still little a lumpy element to it.
Yes.
So the total trial was $8 million to $10 million over the course of ---+ from we started it and through the balance of this year.
So most of that will happen in this year, but some of it was last year.
The R&D number really will be more heavily weighted as it relates to the trial for Q1, and that's really the bulk of the budget in terms of ---+ or certainly the biggest line item in the budget for the year.
And so if you're talking about quarter-over-quarter this year, I'd expect the balance of the year to be roughly similar for the ---+ each of the remaining 3 quarters, so spread evenly for the rest of the 3 quarters.
Yes, <UNK>, I can comment on that.
Matt can probably add a little more color.
There is a milestone payment associated with Phase III initiation, so that was disclosed recently.
So there is a milestone payment associated with Phase III start of the Retrophin Sparsentan trial.
Yes.
And in terms of milestone pacing for the year, it's the same answer.
We don't have as much control or visibility into when the timing of those milestones are going to happen, but we do expect a bit more in Q4 this year than we do in the other quarters, sort of similar to last year.
Yes.
The milestone itself is $1.6 million to Ligand.
There's a portion that we owe to BMS, given their heritage with the program, but it's $1.6 million to Ligand.
<UNK>, thanks, it's <UNK>.
I'll add a comment.
Then Matt <UNK> can remark as well.
Clearly, a lot of interest on a program you just asked about, Sparsentan and also SAGE's program.
They're developing SAGE-547 for SRSE.
Both of these programs are very interesting.
There's good data out.
I think, a lot of clinical and regulatory momentum with the programs.
With Sparsentan, it's a 9% royalty.
It's a significant royalty, and it's an indication that has been described to have a potential for a fairly large market size.
So that's the data we saw the first time last fall and, obviously, we're monitoring closely, Retrophin's messaging about timing for when the next trial will start, but that is one ---+ SAGE-547, again, is very interesting.
It's being developed by a highly capable team at SAGE.
Tremendous amount of clinical data has come out of it for SRSE, a coma-related indication, and also PTD.
Those are 2 that have garnered a lot of interest from institutional investors.
We have highlighted a few recent developments for their OmniAb program, and this is a substantial developing story.
We have over 23 partners.
Each one has numerous antibodies in various stages of development.
This year, we're seeing several move into human testing.
And the eventual potential for any one of these programs, plus the royalty rate, makes these assets a really attractive and growing narrative for Ligand.
Although, they are still earlier stage.
So those are the 2 headlines, and I'll just turn it over to Matt to add a little more color.
Yes, just as ---+ you were asking about kind of looking across the pipeline, and I'll say that the pipeline grows and progresses and it has been over the recent quarters.
It's really the diversity that starts to stand out, in many ways, too.
There are, obviously, a number of programs.
<UNK> highlighted a couple that are exciting and there are a number of other ones emerging as well.
But as you look across the portfolio, the diversity of underlying technologies between Captisol, OmniAb, those that have underlying intellectual property associated with the NCE, as is the case with Sparsentan, those that came by way of the Selexis transactions, you really start to get a sense of that element of diversity, but also the diversity of therapy area as well and oncology and cardiometabolic, specialty Pharma as well as biosimilars, now that are starting to emerge and graduate and start to get a lot more attention as they become late stage.
I'll mention the Coherus program as an example.
So a number of those are starting to become more visible as well as, I'll say, the Lilly programs that utilize Captisol; the Prexasertib as well as merestinib, which is the small molecule MEK kinase inhibitor at Lilly, these are ones that we're starting to pay more attention to, internally.
Yes.
Thanks, <UNK>.
We ---+ as we said, we still see Captisol right in line with where we did at Analyst Day when last week we gave our sort of our core revenue estimate, and also that the pattern that we see every year is sort of a back-end half of the year Q4 heavier buying from our customers, and so we expect to see that again this year as well.
So we're still right on track with Captisol.
Yes, thank you.
This is Matt <UNK>.
The folks at J&J Janssen have moved a Phase I candidate into the clinic.
So that ---+ we are obviously pleased with that progression.
We also have a couple of others that are in the clinic now through a Chinese partner, so those are in the clinic in China.
Genentech also has a Phase I program that entered into the clinic in recent months as well.
I'll note, on that program that Genentech actually did an early deal with OMT prior to our acquisition of them, so they have a fully paid license.
But from a technical perspective, it's been very good to see that program progressing well and began being highlighted at Genentech.
Also, I'll just briefly mention Aptevo, which is the newest named Captisol ---+ or sorry, named OmniAb antibody that is now progressing its preclinical at this point, but they highlighted some very impressive data on an antibody that was pulled out of OmniMouse at the PEGS conference last week in Boston.
Yes.
Thanks, <UNK>.
Obviously, we talked a little bit about Sparsentan in prepared remarks and the folks at Retrophin gave an update that they are finalizing the Phase III protocol right now with the FDA.
We'll be doing that in the second half of the year and they expect to start Phase III near the end of the year.
You're going to bring up ---+ at the ---+ it's a good point.
At their call last week, they talked about ---+ the folks at Retrophin talked about other potential indications for Sparsentan downstream of FSGS.
We really don't have a lot more information on what those indications are.
I think it's safe to say there are a number of glomerular nephropathies where Sparsentan could play an important role.
So we'll keep an eye and ear out on Retrophin's disclosures there as they explore other indications.
So I heard CorMatrix.
On CorMatrix, the ---+ they're right on expectations.
They continue to commercialize the business in a way that is right in line with our expectations.
And on Carnexiv, I'll turn it over to Matt.
Yes, so Carnexiv, a drug that's approved, Captisol-enabled drug.
Lundbeck got approval in October of last year.
We're still awaiting an update from them on launch.
They were getting some supply chain elements ready prior to launch.
So that's still pending launch.
Thank you.
Well, we appreciate the people's turnout and interest in our call today.
Apologize, we'll work with the operator.
Not sure what happened in the early minutes of the call, and just want to acknowledge those who were disrupted by that.
We'll look into it.
We have a couple of conferences coming up.
May 31, we'll be at the Craig-Hallum conference in Minneapolis with investors.
And then, a week later we'll be in New York City presenting at the Jefferies conference on June 8 ---+ I'm sorry, June 7 ---+ June 8th.
The conference is the 7th and 8th.
Anyhow, we do appreciate your interest and turnout, and we look forward to keeping you updated as the year progresses.
Thank you very much.
| 2017_LGND |
2017 | BELFB | BELFB
#Thank you, [April].
Joining me on the call today is <UNK> <UNK>, our Vice President of Finance; and <UNK> <UNK>, our Director of Financial Reporting.
Before we begin the call I'd like <UNK> to go over the safe harbor statement.
<UNK>.
Thank you, <UNK>.
Before going through the financials, I would like to provide a brief update on how the businesses did from an operation standpoint this quarter, and how we see things going forward.
Overall, we are pleased with the year-over-year growth with our Connectivity Solutions and Magnetic Solution product groups this quarter, which allowed us to maintain a strong gross profit margin on slightly lower consolidated sales.
On a consolidated basis, our backlog at the end of the third quarter was $144 million, which is up 20% compared to the same time last year.
Revenue of Connectivity Solutions grew up almost 3% in the third quarter compared to last year, despite a $1.3 million decline in passive connectors sales.
The growth was led by Cinch sales to the military and aerospace markets, as well as sales growth within our distribution channels.
Our Connector products continue to find applications in the U.S. defense program, such as Joint Strike Fighter and the Patriot Missile.
With anticipated increase in military spend in 2018, we see this segment as an area growth in future periods.
On the commercial aerospace side, where the major customers has recently increased the aircraft build rates and we strengthened the revenue stream in this market for us.
With our connectivity distribution channels increased order volumes through our catalog distribution in recent quarters has translated into growth with our broad line distributors in the third quarter.
A healthy flow of orders booked during the quarter, at least this grew well positioned as we enter the fourth quarter.
Sales in our Magnetic group increased by 6.2% from last year's third quarter reaching a new 2-year high quarterly sales.
This was due in a large part to a new product introduction at one of our large OEM customers earlier this year.
We continue to be a share leader for our integrated connector modules and are actively participating in opportunities with new ICM development and products with major customers.
Within our Power Solutions and Protection Group, continue year-over-year declines in the acquired Power Solution business have overshadowed positive growth that we've seen in other areas.
AC to DC converter sales at our Power group in Italy were up $1.7 million in the third quarter compared to last year, and also has been steady growth within our circuit protection group for 4 consecutive quarters, as they gain traction in our distribution channels.
If you recall, we sold our Network Power Solutions business in 2015 for $9 million and has since been operating under a manufacturing service agreement, as this service agreement comes to an end, we continue to see year-over-year sales decline related to this product line as further detailed in our press release.
However, this should have no ---+ however, this should have a positive effect on our gross margins.
Our Power Solutions business had many recent design wins, but currently it remains challenging at the top line.
It's difficult to predict the timing of when these products will move into production.
In the meantime, we are faced with evaluating our core structure as low level revenues, while being mindful of the future anticipated sales growth.
Today, we have implementing measures that result [analyze] core savings to approximately $1 million.
We are confident that we are taking appropriate steps within the Power Solution business, which enable this group to improve its conditions to our bottom line, while remaining well position for future growth.
As we approach 2018, we are encouraged by a healthy backlog and positive book-to-bill ratio for our major product lines and we'll continue our efforts to build up our pipeline on future sales.
And with that, I'd like to turn the call over to <UNK> to go over the financials.
<UNK>.
Thanks, Dan.
Starting with sales, our third quarter net sales were $126.4 million, down 1.9% from the third quarter of 2016.
On product basis, sales of our Connectivity Solutions products were $42.8 million in the third quarter of 2017, an increase of 2.8% as compared to the third quarter of 2016.
Sales of our Power Solutions and Protection products were $39.5 million in the third quarter of 2017, a decrease of 13.5% as compared with the third quarter of 2016.
Sales of Magnetic Solutions products were $44 million in the third quarter of 2017, an increase of 6.2% as compared with the third quarter of 2016.
On a regional basis, sales in Europe increased $2.6 million or 14.3% in the third quarter of 2017 as compared with the same quarter of last year.
Sales in North America were down by $3.8 million or 6%, and sales in Asia were lower by $1.3 million or 2.7%.
Gross profit margin increased to 21.9% in the third quarter of 2017 as compared with 20.6% in the third quarter of 2016, due to several factors.
The shift in product mix towards higher margin connector and magnetic products had a favorable impact on our margins during the third quarter of 2017.
We also recognized a $500,000 gain on the sale of our interest in a Chinese joint venture during the third quarter, which had a favorable impact on our gross margin.
Our selling, general and administrative expenses were $20.9 million or 16.5% of sales as compared with $19.4 million or 15% of sales on the third quarter of 2016.
The $1.5 million increase in SG&A costs from last year's third quarter resulted from several factors.
We incurred $400,000 in consulting cost related to our ERP implementation in the third quarter of 2017, and legal and professional fees were $600,000 higher due to the timing of our annual audit work and consulting activities incurred later ---+ incurred related to the implementation of a new revenue recognition standard.
Foreign exchange losses in the third quarter of 2017 were just under $600,000 up from $200,000 the same quarter last year.
Lastly, the shift in product mix resulted in higher overall sales commissions, as commissions vary by product group.
On a go-forward basis, we would expect SG&A to run between $20 million and $21 million per quarter in the near term [barring] any significant fluctuations in foreign currencies.
As a result of these factors, we generated income from operations of $6.5 million in the third quarter of 2017 as compared to $9.3 million in the third quarter of 2016.
Income from operations in the third quarter of 2016 included a $2.1 million gain on the sale of property in Hong Kong, which had a favorable effect on last year's operating income.
Interest expense was $1.5 million in the third quarter of 2017, down slightly from the same period last year to a lower debt balance in 2017, partially offset by an increase in interest rates.
Our effective tax rate for the third quarter of 2017 was a provision of 1.2% compared to a benefit of 21.2% during last year's third quarter.
The change in effective tax rate was primarily attributable to higher foreign taxes compared to the prior year.
In 2016, we were able to utilize NOL carryforwards that had valuation allowances on them.
There was also an increase in accruals related to uncertain tax position in the third quarter of 2017 as compared to the same period of 2016.
Earnings per share for Class A common shares was $0.40 per share in the third quarter of 2017 as compared with $0.78 per share in the third quarter of 2016.
Earnings per share of a Class B common shares was $0.42 per share in the third quarter of 2017 as compared with $0.82 per share in the third quarter of 2016.
On a non-GAAP basis, which excludes certain unusual or other non-recurring items, EPS for Class A shares was $0.42 per share in the third quarter of 2017 as compared with $0.63 per share in the third quarter of 2016.
On a non-GAAP basis, EPS for Class B shares was $0.44 per share in the third quarter of 2017 as compared with $0.66 per share in the third quarter of 2016.
And now, I'd like to go through some balance sheet and cash flow items.
Our cash and cash equivalents balance at September 30, 2017 was $62.1 million, a decrease of $11.3 million from December 31, 2016.
During the first 9 months of 2017, we've made net payments of $21.2 million towards our outstanding debt balance.
We also used cash for capital expenditures of $3.8 million, dividend payments of $2.3 million and interest payments of $3.5 million.
Accounts receivable was $83.6 million at September 30, 2017 as compared with $74.4 million at December 31, 2016.
Days sales outstanding increased to 60 days at September 30, 2017.
The increase in our cash receivable balance was largely due to higher sales volume in the third quarter of 2017 as compared to the fourth quarter of 2016.
The increase in DSO was primarily a function of higher sales in our Asia segment in the third quarter of 2017 where payment terms are longer than our other regions.
Inventories were $104.5 million at September 30, 2017, up $5.7 million from December 31, 2016.
The increase was seen mostly work in progress and finished goods to accommodate the increase in bookings during 2017.
Accounts payable was $45.5 million at September 30, 2017, down $1.7 million from December 31, 2016 due to timing of payments.
Bel's total outstanding debt as of September 30, 2017 was $122.6 million excluding deferred financing costs.
This represents a net decrease of $21.2 million from our year-end debt level.
Book value per share, which is calculated as stockholders' equity divided by our combined A and B classes of stock, was $14.80 per share at September 30, 2017, up from $13.17 per share at December 31, 2016.
And now, let's turn the call back to Dan and open the call for questions.
Dan.
Hey, [April], can you please open up the call for questions.
Okay.
I think about your point, we are extremely disappointed since the acquisition of the sales of the Power group.
And historically, we thought we have this thing uptick 18 months ago, and we haven't been able to do it.
And every time we think we've got a one step forward, we get two steps back either from a quality problem or a design push out, so at this point, we just are taking a very ---+ we will say pessimistic view than more of a latency view.
Our focus has been in the data centers going forward, our focus has been on HEV and industrial, and we see some nice in-roads.
Again, one of our major customers, which we thought we can have a run rate of $4 million a quarter, just incurred a quality problem.
So now again [dinged] on that.
We don't know when that's going to be back up and running.
So at this point in time, we realized that we had to cut back, get the cost in line.
We took out another [$1] million of cost this quarter.
However, really not touching the R&D centers we have throughout the world.
But I feel like when it comes to Power [the boy that cried wolf].
So until we really get some positive signs from more than 3 or 4 customers, I think at this time, we're just going to be wait and see.
The quality issue was tied to us and it was a software glitch.
Hey, <UNK>, our sales are so low, it's not going to take too much to move the needle.
You know what I'm saying.
So again, we have projects now ---+ some of these projects could be ---+ it could be $8 million or $10 million in a year.
But again, it will be nothing.
Again, you look at ---+ people that building their own data centers, like in Amazon or Google or Facebook, they probably all spending about $40 million or $50 million on power supplies in a year.
Now, if we can tap into that market, you're talking again $5 million or $10 million.
So there is some big opportunities, we're working on.
And the [Modular] group were working on an opportunity in the lighting that just got released ---+ [people used to run that].
So yes, there is a lot of these products are not singles alone, it could be doubles and triples.
Well.
The problem was we had Stewart Connector, which is a passive connector group that really supports in housing market and there has been consolidation of 2 major customers, and we lost a good chunk of business there about $4 million, $5 million.
However, when we look at Cinch to military aerospace side of it, that's very strong.
And so, in this last quarter, we've done a great job with the military and we still haven't seen the upsurge and what Boeing is predicting out there.
Boeing [slightly] go from 42 ---+ 737's up to 52, and we have a good portion of the connector business on the 737's.
So that's why we are very optimistic and we see strong growth in that area.
But on the Stewart side we get [dinged] on that.
So maybe we should move Stewart over to the downside.
Again, it's just that the Stewart [connector] sales affecting the positive sales in the military, aerospace and so forth.
<UNK>, you would add something.
And I think ---+ on the military side of things, military specifically I think we are seeing increases in the volumes of the releases of certain programs that we're involved in, so we are fairly optimistic that the military side of that business will grow a bit in the next few quarters.
But <UNK>, what's the problem with the military, it's very ---+ the way they book orders, the way they ship orders really it's ---+ whether or not (inaudible) that might drive a reason, when these programs (inaudible) when they shipped.
So for example we have one sales ---+ we had 300% growth for the quarter in sales, but a net of 300 bookings.
So you just, it's very difficult to really get a hand on how these programs come and when they shipped and so forth.
While most of our other product ---+ non military is a lot easier to come up with better projections about things move forward.
I think again ---+ that I'm happy, because we are still very profitable in my eyes, we're still making good profits.
Again, when I think this company is really going to take off is when we can get consistent sales growth out of the Power group.
And once we can do that, if and when we can do that then I mean dancing in the streets until then there's a battle for us to get what we want to have to be.
Judgment of the inventory for our major OEM customers, they kind of get inventory as low as possible during the fourth quarter.
Over the next couple of quarters we project it to be about $2 million.
And that's just really have one business that we're manufacturing for a company that we spun-off the group from.
Okay.
So the NPS on a year-on-year basis we know that, that's kind of working down and moving away, but on a quarter-on-quarter basis, marginally down shouldn't be necessarily all that disruptive at least coming off of where the September results were.
Thanks, <UNK>.
These sales level, <UNK>, I'm not sure it's going to move much.
I mean, the mix element will be the driver, if we see our (inaudible) sales outpaced for Magnetic sales, then you might see a little uptick, but it's not going to move that much at these levels.
I think it's true, because the material costs for power supply is substantially greater than anything else we're manufacturing.
Yeah.
I think that's true, <UNK>.
You'll see the margin percentage probably go down a little bit, but obviously will be absorbing fixed costs on the increased volumes.
So I think you've seen the overall percentage go, but the dollars will improve.
I think that's fair.
Yes.
Thank you and appreciate everybody joining the call, and hope you have a nice weekend.
| 2017_BELFB |
2015 | ECPG | ECPG
#Afternoon.
Hi, <UNK>.
I'll just say that the CFPB has a greater interest in this part of the market, and that's probably all I can say.
$35 million wouldn't negatively impact our covenants, nor would it materially impact our liquidity and change our plans for capital deployment in 2015.
We could, but we wouldn't need to tap into the accordion for this or to execute our plans for 2015.
There's nothing I'm going ---+ I can't touch that question.
Sorry.
Now, I would have given a shorter answer and just said that we only have 45 to 50 people collecting right now.
So, that operation is still evolving as we continue to learn the UK market and continue to get comfortable with both the regulatory environment there and how you collect, and then the behavioral environment, which is what the folks in India also have to learn.
So, that continues to get better and better for us, and over time we will put more and more people into India.
But, I don't think it's a real meaningful number today, and nothing we ---+ nothing I don't think you should worry about.
Sorry, we put our decks to the side here for a moment.
Should be---+.
---+Yes, the overall cost to collect was 39.8%.
That what you're looking for, cost in the quarter.
For the fourth quarter, correct.
Oh, last year.
Last year was fourth ---+ well, fourth quarter last year ---+ let me put it this way, full year it ended about 39% last year.
It actually rose during the course of the year specifically in the US because we did some acquisitions like, for example, Atlantic Credit came on at the tail end of the third quarter into the fourth quarter, and it takes us a while to work down the redundancy and operations at Atlantic, and also in the other parts of our domestic operations.
And for 2013 in Q4, it was 42.1%.
Thanks.
So, I think nothing has changed from the last time we've chatted, which is we see the higher returns in Latin America, and we are starting to increase our deployment there as we begin to find interesting opportunities and get comfortable with the performance of those opportunities.
From there, I'd probably move over to the UK that has probably the next best set of returns, followed very closely by Spain, and then by the US.
Yes.
So, that's <UNK>'s ---+ one of <UNK>'s major responsibilities, is how do we continue to expand in Europe or in Latin America, and we're going to be agnostic to where we go first, but we will be very much in tune where the best returns are.
We think that some of those best returns may very well be in Latin America before other parts of Europe, but again it's always a question of who's selling and when, and then who's also showing up at the table to buy.
So, we're looking at different things in Europe.
We would buy them through Cabot in probably the ---+ probably the way we'd do it is buy it through Cabot, and then we're looking at different things in Latin America.
And I've said this several times, too.
We have, every quarter, three to five deals we're working on at all times.
And we haven't done anything over the last two quarters.
We've been executing against our plans to ensure that everything has been ---+ that we've bought has been assimilated, and it has.
But also, at certain points, we just don't like price, and then we're not going to buy for the sake of buying.
Yes.
Certainly in the UK, it's taken a step up.
There are three competitors that I think one is already sold, and the other two are in the process of being sold.
So, you're beginning to see the same consolidation in the UK that you saw in the US, so that's beginning to happen.
And pricing has risen, which we expected that it would, as you would start to begin to see some consolidation in the country.
Well, in the UK, Cabot does third-party collections.
They have that as part of their operations.
In Refinancia, which is in Colombia and Peru, they have a debt collection company that's part of their company.
And we have said that we like debt collections, and we haven't found the right company to step ---+ to work a deal with at the moment.
But, we do like debt collections as an ongoing business, and as a nice business expansion or adjunct to what we currently do.
Not at this time.
I think we're saving that for Investor Day.
We've got some ---+ we're early stages in some of these countries, and if they work out right, then I want to get a little bit of a first mover advantage.
But, we'll talk more about it we think on Investor Day in June.
So, some of the increased scrutiny from the regulatory side we mapped out early on.
And we said in the US, that's going to happen, as well as we saw supply constraints, and we saw pricing increasing.
So, we tried to, as I said, move with the purchase of Cabot, with Marlin, with Grove and Refinancia, and then other things we're looking in Mexico to augment the US, so we're not US dependent for our long-term growth rate.
So, that's how we take a ---+ that's the holistic approach.
Anything else other than that, I really can't make any comments about.
But, we have a holistic approach here to continuing to grow.
I'm going to just come back to the standard line.
I just don't think we have the ability to get into detail about that at this time.
When everything is ---+ dust settles, we're happy to talk about it in greater detail, but not now, sorry.
Bye.
Well, thank you all.
We think we had a good quarter.
And as I said to the Board, I think our expansion strategy has transformed our business.
Our diversification makes us a flexible debt buyer to deploy capital in different asset classes and geographies to maximize our expected returns.
And I like what we're doing on our operational improvements to improve liquidation and also address costs, and then reinvest that cost savings back into future MPV actions that will drive more value to the Company.
So, thank you all for attending, and we'll speak to you all soon.
| 2015_ECPG |
2016 | OLLI | OLLI
#<UNK>, I don't think that's probably changed.
But I think that with the magnitude of the calls that are coming in, I think that it's still, I think we probably would've told you 8 out of 10.
This is not a metric that we actually measure on a reporting basis.
It's more of a heartbeat.
And as far as why are we able to be more selective, I think that maybe we are able to, perhaps with our scale and our visibility, we are able to drive a little bit harder bargain, and we are able to get some better deals and that's translating into better sales because we are offering the consumer a better deal.
Sure, <UNK>.
Right now, currently today we have three stores in the State of Florida.
We are pleased with the initial results in the state.
As we said previously, they're in line or slightly above our expectations.
And right now we are very excited to continue to add the stores and we hope to have six to eight stores in the State of Florida by the end of the fiscal year.
<UNK>, I think we've talked about this before when we've all been together.
I think what everybody has to understand about the closeout business is that the traditional and the real retailers ---+ what I call the real retailers ---+ they set the cornerstone and then we set the discount off the cornerstone.
So, if the real retailers are reacting and lowering their prices, while we might get closer to not as big a discount in the near term, in the long term ours is strictly a reaction to what the real stores are selling it for.
And then we buy into that.
So, what can we sell off of what we call the real stores.
So, we don't feel any pressure whatsoever in that regard.
<UNK>, I will take the first question with regards to the components of the benefit of the 120 basis point improvement on the overall gross margin.
30 basis points came out of the merchandise margin and 90 basis points came out of the distribution and transportation side of the business.
As we had said earlier in our last call, that we expected to still see some benefits from the higher freight costs and fuel costs from 2015 in Q2.
We expect to not see such a large benefit in Q3 and Q4 of this year on a year-over-year basis from the distribution and transportation side of the business.
And the margin side, as we've always said, we are shooting to get back to the 40% gross margin.
We are feeling a lot better that we're going to be able to get pretty close to the 40% gross margin in FY16, which is a little bit ahead of our expectations.
But, as we've always said, too, we will evaluate and probably give that upside to the customer in order to continue to drive the sales volumes and the benefits of the Company.
With regards to the imports on the back half of the year, there's definitely some price competition going on from the transportation side on the import side of the business, keeping in mind that's not a material part of our business as it is for a lot of the larger other retailers that are out there in the marketplace.
We do get some benefit from that and we are hoping to continue to see some slight benefits in the margins related to the import side of the business for the remainder of the year.
Curt, this is <UNK>.
With regards to our cash balance is about $30.7 million at the end of the second quarter.
We will have some more usage on the cash coming down here during Q3 as we continue to build inventory for the holiday season.
At this point in time I don't believe we will actually go into the revolver for the remainder of the year, and we'll actually generate a significant amount of cash right before the end of the holiday period.
With regards to our capital allocation or our fiscal policy, we are still in the process of evaluating that with the Board, and haven't made any decisions on what we're going to do from a capital allocation perspective.
But we hope to have a little more color on that here in the next six months or so.
Curt, I will take that one, as well.
With regards to the overall Ollie's Army members' activity, very consistent.
We are now over 7 million strong in the Army.
They continue to spend about 40% more than a non-Ollie's Army member that we have, which has been consistent for a long period of time that we've been doing this program.
The Ollie's Army member, as we had said before, spends close to $33 to $34 per transaction, and non-Ollie's Army members spends about $23 to $24, and our overall basket is about $29 a basket when we blend everything together.
And that's been consistent for the last couple of years, as well.
Probably the color that we would like to talk about would be, we are seeing a little stronger activity in the Florida stores, which are outpacing our expectations slightly ---+ and they were good expectations.
And the other new stores are absolutely either meeting or exceeding.
But we are absolutely seeing a common denominator of strong activity in Florida.
We are not expecting such a large benefit.
We have a 36% effective tax rate for the quarter.
We would not expect as large of a benefit going forward.
We expect the full-year effective tax rate to come in at about 38.2% versus our original guidance of 38.8%.
So, we expect to see a slight reduction but not as significant as Q2
This is Mark.
No different than anything we've ever done.
They are part and parcel.
Now, would there be an item or maybe we had a little bit more.
Certainly.
But there was no exception to the rule on any markdown whatsoever.
Our coffee business has been just fine.
We are comping the comp.
We are very, very pleased.
And we offer a very, very strong value for the quality of the product.
And we have developed an incredibly loyal following.
So, I'm really pleased with our results.
Mike, this is <UNK>.
With regards to our visibility in terms of how we buy and how we go to market, we don't have a lot of visibility into future quarters the way we secure our product.
In certain categories, we may have a little bit of visibility, but that's not the crux of our business.
We are not able to really give you a real good feeling in terms of how far out we're going to be able to see and give guidance and confidence of the overall future quarters.
But we can tell you, and as you guys have seen over the last year and a half, our comps have been performing very well.
Our momentum in our business has been very strong.
We feel pretty comfortable with the trends and how things are working today, and we believe we'll continue to move forward in a positive fashion.
I'm not sure we're baking into our figures like real tangible effect on the comps next year, although we got a long time to think about that yet.
But what we are doing is testing individual communication with the Ollie's Army members, so that after, if you, <UNK>, bought something and used your Ollie's Army card, we will know exactly what you did, that you reacted to whatever promotion or email or whatever we did.
We will know exactly that and be able to communicate with it.
It is customized serialization.
And we expect to really get into that testing ---+ when I say testing, the first effort, which is going to be probably painful in our results in trying to get it and trying to massage everything, that will be in the November-December period when we do a lot with Ollie's Army.
Yes, I'll give you the categories and then <UNK> can give you whatever detail he can share.
The categories that led the way for us ---+ and, once again, keeping in mind that more than half of our departments were very, very strong ---+ but health and beauty aids, housewares and candy, those were the three big drivers for us.
Stephanie, this is <UNK>.
We don't normally provide too much color on our overall category margins.
We just internally don't do that a lot.
But overall our blended margin came in pretty favorable, as I said, 30 bps better than our prior-year number on the merchandise margin side.
Sure.
We're not able, obviously, to tell you the non-members frequency because we don't have that information available.
But the Ollie's Army member that comes into our stores, their frequency on an aggregate basis, on an annual basis, is about 3.5 times on an annual basis.
Our best-performing members, which we say shop over two times per year, runs about eight times per year on a visit perspective.
Thank you, operator.
And thank you, everyone, for listening to our second-quarter earnings call.
We are pleased with our results and the underlying trends in the business, and we look forward to speaking to you again on our third-quarter call in early December.
Thank you very much and have a good day.
| 2016_OLLI |
2018 | FRED | FRED
#Thank you, <UNK>, and good morning, everyone.
I'm happy to report that we made progress in Q1 against our 2 main goals of eliminating our debt balance and generating significant positive EBITDA and free cash flow by Q4 of 2018.
However, there is still more work to be done.
The reset at Fred's is moving forward rapidly, and I'd like to give an update on the key focus areas we discussed during our last earnings call: strategic transactions, optimizing cost structure and capital allocation, talent acquisition, revenue and margin initiatives and assortment optimization.
On strategic transactions, we have engaged PJ Solomon & Company to analyze the value of our retail pharmacy script portfolio and engage with potential strategic buyers for that piece of our business.
That process is well underway, and we will provide updates as appropriate.
Additionally, we are engaged in sale processes for various properties within our real estate portfolio and expect to have multiple transactions closed over the course of this fiscal year.
On the expense side, we are aggressively reducing expense in every part of the business, and this trend will continue throughout the year.
We are on track to hit our $30 million to $40 million target for operating expense reductions for fiscal year 2018.
Additionally, expenses should continue to decrease into fiscal 2019 as we invest in a new ERP system, which will help to automate processes that are currently very manual within our business.
From a talent perspective, we continue to recruit new people into all parts of the organization and are aggressively recruiting and hiring for key positions in merchandising, IT, data analytics and finance.
Our corporate office headcount currently stands at approximately 274 people, down from 440 people this same time last year.
And we are continuing to optimize headcount in every part of the organization.
From a revenue and gross margin perspective, we are making great progress across a number of key initiatives.
In private brands, we have identified approximately 200 items we are adding to our assortment by the end of the fiscal year and are working with an agency to redesign packaging and branding for our private brands in all categories over the coming months.
We've also created a dedicated closeouts group within merchandising, focused solely on sourcing great deals across all categories.
We will be introducing our first wave of these deals to a group of test stores over the course of July, and we'll have the ability to rapidly expand to the rest of the chain once we analyze initial results.
Additionally, we have identified over 250 near-term opportunities to direct import items within our assortment and are working with overseas suppliers to secure the best pricing on these items and place orders.
This will have a meaningful impact on our gross margins, and we are working to identify many more opportunities for direct importing over the coming months.
In terms of assortment optimization, we are continuing to rationalize our SKU count and are also working on various initiatives to optimize product pricing and procurement across all categories.
We are using data analytics to guide our decision-making in these areas, and we see tremendous opportunities to increase both revenue and gross margin as a result of more systematic pricing and procurement strategies.
Regarding new categories, our beer and wine initiative is continuing to progress, and we are in the process now of optimizing the assortment in beer and wine as well as determining the critical success factors for our beer and wine store, which will inform our choices for the next group of stores to introduce these products into over the rest of the year.
Currently, we have approximately 251 stores selling beer and 81 stores selling wine.
I am encouraged by the progress our team is making in resetting the business and ultimately providing better value and a better experience for our customers.
I'll now turn to the numbers and will address the first quarter results and trends on a year-over-year basis.
And as a reminder, all of these current and prior year results reflect the fact that our Specialty Pharmacy business has been classified as a discontinued operation.
For the first quarter of 2018, net sales decreased 6% to $437.1 million from $464.2 million for the first quarter of 2017.
Comparable store sales for the quarter decreased 3.9% compared to a 4.2% decrease in comparable store sales in the first quarter of last year.
Gross profit in the first quarter decreased 13% to $111.6 million from $128.6 million in the prior year period.
Gross margin decreased 220 basis points to 25.5% from 27.7% in the same quarter last year.
As discussed on our fourth quarter call, our gross margins continue to be negatively impacted in the Front Store by the mix of sales and in the pharmacy by pressure on reimbursement rates and increasing DIR fees.
Lower gross margin in the Front Store is being driven primarily by the increased percentage of consumables we are selling relative to higher-margin general merchandise.
We are confident that the initiatives we discussed earlier in the call will help offset the margin decline we are seeing in the Front Store.
SG&A expense is continuing to decline as first quarter selling, general, administrative expenses, including depreciation and amortization, improved year-over-year by 560 basis points to 29.7% of sales from 35.3% last year.
The improvement in expenses was largely attributable to reduction in professional, legal and banking fees related to the attempt to acquire Rite Aid stores and expenses related to the closing of 43 stores in the first quarter of 2017.
Selling, general and administrative expenses, including depreciation and amortization, adjusted for nonrecurring items such as those previously mentioned, improved by $7.5 million for the first quarter of 2018 compared to the same period last year.
Net loss from continuing operations for the first quarter totaled approximately $19.9 million or $0.54 per share compared to a net loss from continuing operations of $37.8 million or $1.02 per share for the first quarter of 2017.
For the first quarter of 2018, adjusted EBITDA, which further excludes items management does not consider to be indicative of our core operating performance, was negative $3.3 million compared to positive $6.2 million in the first quarter of 2017.
Free cash flow, which management views as net cash provided by operating activities, less capital expenditures, was negative $11.4 million for the first quarter of 2018 compared to negative $23.9 million in the same period of last year.
Turning to our balance sheet.
We ended the quarter with $6.1 million in cash compared to $6.6 million at the end of fiscal 2017.
Inventory at the end of the first quarter was $293 million, up from $279 million at the end of fiscal year 2017.
Total debt stood at $175.5 million compared to $167.1 million at the end of fiscal year 2017.
As of June 12, our ABL balance stood at $135 million compared to $162 million at the end of the fiscal quarter, primarily as a result of the sale of our Specialty Pharmacy business.
We expect this balance to come down over the coming weeks as we collect the outstanding receivables associated with the Specialty Pharmacy business.
In terms of capital deployment, in the first quarter, our CapEx was $2.5 million compared to $2.1 million a year ago.
While capital expenditures were slightly higher in the first quarter compared to the same period last year, we are monitoring CapEx very closely and expect capital expenditures to be down for fiscal year 2018 versus 2017.
Before I end the call, I'd like to reiterate a couple of things.
The team here at Fred's is energized and excited by the prospects for this company and our ability to achieve our 2 main goals of eliminating our debt balance and generating significant EBITDA and free cash flow by Q4 of 2018.
We are confident in our plan and look forward to updating folks as we have new developments to share.
Thank you for participating today, and we look forward to addressing you when we report our second quarter results in September.
| 2018_FRED |
2018 | INGN | INGN
#Thanks, <UNK>.
Good afternoon, and thank you for joining our fourth quarter 2017 conference call.
Looking at the fourth quarter of 2017, I'm very proud to say we generated strong total revenue of $63.8 million, reflecting record results in our domestic direct-to-consumer sales channel and great results in our domestic business-to-business sales channel.
As we've seen in prior quarters, the expected decline in rental revenue, which represented less than 10% of total revenue in the quarter, was more than offset by the increases in revenue from our sales channels.
Our record direct-to-consumer sales of $24.5 million in the fourth quarter of 2017 exceeded our expectations, as we steadily added new inside sales representatives, with most located in our new Cleveland facility.
Our direct-to-consumer sales team consisted of 263 inside sales reps as of December 31, 2017, which represented an increase of 86 reps over our 2016 year-end total of 177.
Our strategy is to steadily hire additional sales representatives throughout 2018 and continue to invest in marketing activities to increase consumer awareness as we believe this is still our most effective means to drive growth of direct-to-consumer sales.
As we've done in the past, we also plan to execute a direct-to-consumer pricing trial in 2018 to ensure our products are optimally priced.
Fourth quarter domestic business-to-business sales of $21.9 million also exceeded our expectations with growth in this channel primarily driven by purchases from our private label partner and traditional home medical equipment providers.
We continued to see traditional HME providers turn to portable oxygen concentrators to lower their operating costs in the face of insurance reimbursement reductions, and they are turning to Inogen as the leader in the space.
While off its mid-teens growth trajectory through the first 3 quarters of 2017, international sales in the fourth quarter were flat over the same period last year, primarily due to strong third quarter 2017 results and a lack of any major European tenders awarded to our provider partners in 2017, which limited growth in the fourth quarter.
Lastly, the fourth quarter of 2016 included sizable unit orders from South Korea that didn't repeat in the fourth quarter of 2017, creating a difficult comparable.
As we have communicated in the past, business-to-business sales, especially international, can be lumpy quarter-to-quarter.
That said, our outlook for European sales in 2018 remains optimistic as we expect tender activity increase and our partners to continue to adopt portable oxygen concentrators as a patient preferred product offering a low total cost of ownership.
We believe we remain the preferred provider of portable oxygen concentrators in Europe, and we expect to see a large long-term opportunity ahead as that market transitions from tank and liquid oxygen systems to nondelivery solutions.
In support of our European customers, we began production of our Inogen One G3 concentrators in the fourth quarter of 2017 using a contract manufacturer, Foxconn, located in the Czech Republic.
In 2018, we expect Foxconn to produce the vast majority of the Inogen One G3 concentrators required to support our European demand, and we are very pleased with their productivity, cost, service and quality at this stage.
We expect to maintain our assembly operations for our Inogen One concentrators and Inogen At Home concentrators at our facility in Richardson, Texas and continue compressor and sieve bed column assembly at our facility in Goleta, California.
The Foxconn production will allow us to expand our manufacturing capacity and redirect our U.S. manufacturing activities to focus on growth domestically and on our latest product, the Inogen One G4.
While still early in our relationship with Foxconn, we are already delivering improved service levels and lower costs.
Turning to reimbursement updates.
In December 2017, CMS released its 2018 Medicare fee schedule that went into effect on January 1, 2018.
When comparing 2018 and 2017 rates for the top 25 HME items, the only item that saw a change was stationary concentrators, built under HCPCS code E1390.
For suppliers in both rural and other non-bid areas, the indicated decrease for E1390 in 2018 will be, on average, 1.2% compared to 2017 rates.
As a reminder, this does not impact pricing in the competitive bidding areas, and there's an adjustment that CMS has instituted due to increased utilization of portable oxygen concentrators and applying a budget neutrality provision to the stationary oxygen concentrator rate.
The rate change will also impact our rental revenue in these areas since POCs are dual coded to include billing code E1390.
We believe that the rate change will put additional pressure on HME providers to continue to convert to nondelivery solutions as the additional rate cut applies to all Medicare patients in these areas who receive stationary oxygen concentrators.
With regards to the interim final rule, we still await a decision.
As a reminder, if approved, the interim final rule would provide retroactive relief to noncompetitive bid areas from August 1, 2017 to December 31, 2017, while also extending for 2018.
Independent of the interim final rule, there's also a bill in the House of Representatives, Bill H.
R.
4229, titled the Protecting HOME Access Act of 2017, which would provide retroactive relief to noncompetitive bid areas from January 1, 2017 to December 31, 2017, and extend through 2018.
This bill has bipartisan support with 122 cosponsors.
There is no known timeline for voting on this bill.
On the topic of competitive bidding around 2019, we have nothing new to report and await information from CMS on the next round of competitive bidding.
That said, on February 12, President Trump sent Congress a 2019 budget proposal that included language on competitive bidding.
Specifically, the proposal eliminates the requirement under the competitive bidding program that CMS pay a single payment amount based on the medium bid price, instead paying winning suppliers at their own bid amounts.
Additionally, this proposal expands competitive bidding to all areas of the country, including rural areas, which will be based on competition in those areas rather than competition in urban areas.
The specific proposal is estimated to save the government $6.5 billion over 10 years.
Even though this is only a proposal, we believe it provides context into this administration's view on competitive bidding.
While it is still unclear if these provisions will be included in the final 2019 budget, or if it will impact the pending competitive bidding around 2019, we still believe significant reductions in oxygen reimbursement rates will continue to drive providers to nondelivery solutions like portable oxygen concentrators.
Finally, we wanted to provide an update on the legal proceedings with CAIRE.
As a reminder, CAIRE filed a lawsuit against Inogen in September 2016 alleging infringement on one patent.
We're happy to announce Inogen recently settled out of court with CAIRE for an all-in value of $1 million.
The agreed upon settlement amount was paid in full to CAIRE in the first quarter of 2018 and covers both alleged past damages and future rights to be free from all litigation with respect to the patent in suit.
Although we maintain we committed no wrongdoing, we believe a timely settlement agreement was in the best interest of the company and our shareholders to remove the uncertainty, expense and distraction of a prolonged litigation.
As a POC market and technology leader, we plan to defend our patent portfolio and invest in R&D to maintain our position in the market with patient-preferred oxygen products.
Looking ahead, I'm really proud of our Inogen associates and our progress this quarter, especially during a time when we ramped up a new European contract manufacturer and significantly expanded our direct-to-consumer sales team.
While we've been engaged in these exciting initiatives to fuel future growth, we've also maintained our current growth momentum, especially in the domestic direct-to-consumer and business-to-business sales channels.
And I am very pleased with the increased adoption in these markets with our best-in-class and patient-preferred products.
Looking at 2018, we're increasing our full year revenue guidance range from $295 million to $305 million to $298 million to $308 million, and expect to continue to invest heavily in our sales force, marketing efforts and operations in order to drive POC adoption worldwide.
With that, I will now turn the call over to our CFO, Ali <UNK>.
Ali.
Thanks, <UNK>, and good afternoon, everyone.
During my prepared remarks, I will review our fourth quarter of 2017 financial performance and then provide details on our updated 2018 guidance.
As <UNK> noted, total revenue for the fourth quarter of 2017 was $63.8 million, representing 25.4% growth over the fourth quarter of 2016.
Looking at each of our revenue streams and turning first to our sales revenue.
Total sales revenue of $58.4 million represented 91.5% of total revenue in the fourth quarter of 2017 and reflected 37% growth over the same quarter of the prior year.
Total units sold increased to 34,000 in Q4 2017, up 45.9% from 23,300 in, Q4 2016.
Direct-to-consumer sales for the fourth quarter of 2017 were a record $24.5 million, representing 57.5% growth over the fourth quarter of 2016, primarily due to increased sales representative headcount, increased marketing expenditures and increased productivity.
Domestic business-to-business sales of $21.9 million in Q4 2017 reflected 46.1% growth over Q4 2016, with strong demand from our private label partner and traditional HME providers.
International business-to-business sales of $12 million in Q4 2017 declined 0.8% from Q4 2016.
While off its mid-teens growth trajectory seen in the first 3 quarters of 2017, international sales were flat compared to the same period in the prior year, primarily due to strong third quarter 2017 results and a lack of any major European tenders awarded to our provider partners in 2017, which limited growth opportunities in the fourth quarter.
Lastly, the fourth quarter of 2016 included a large South Korean order that did not repeat in the fourth quarter of 2017, creating a difficult comparable.
Sales in Europe represented 84.3% of international sales in the fourth quarter of 2017, up from 83.3% in the fourth quarter of 2016.
With robust business-to-business sales again in the fourth quarter of 2017, average business-to-business selling prices declined over the same period in the prior year, primarily due to the shift in sales towards traditional home medical equipment providers and private label sales and additional discounts associated with the increased sales volumes worldwide.
Rental revenue represented 8.5% of total revenue in the fourth quarter of 2017 versus 16.2% in the fourth quarter of 2016.
Rental revenue in the fourth quarter of 2017 was $5.4 million compared to $8.2 million in the fourth quarter of 2016, representing a decline of 34.1% from the same period in the prior year.
We saw the expected decline of rental revenue from the comparative period, primarily due to the $2 million rental benefit in the fourth quarter of 2016 associated with the 21st Century Cures Act, which increased reimbursement rates retrospectively for some Medicare beneficiaries.
Turning to gross margin.
For the fourth quarter of 2017, total gross margin was 48.2% compared to 48.5% in the fourth quarter of 2016.
The decrease in total gross margin was primarily due to the $2 million Cures Act benefit recorded in the fourth quarter of 2016, which contributed 2.1% to total gross margin in the fourth quarter of 2016.
Our sales gross margin improved to 50.5% in the fourth quarter of 2017 versus 49.9% in the fourth quarter of 2016.
The sales gross margin percentage improvement was primarily associated with increased mix towards direct-to-consumer sales and lower cost of goods sold per unit, mostly due to lower material costs, partially offset by declining average selling prices.
Rental gross margin was 23.2% in the fourth quarter of 2017 versus 41.4% in the fourth quarter of 2016.
The decrease in rental gross margin was primarily due to the $2 million Cures Act benefit recorded in the fourth quarter of 2016, which contributed 19.2% to rental gross margin in the fourth quarter of 2016.
As for operating expense, total operating expense increased to $25.6 million in the fourth quarter of 2017 or 40.1% of revenue versus $18.5 million or 36.4% of revenue in the fourth quarter of 2016.
Research and development expense was $1.4 million in the fourth quarter of 2017 compared to $1.2 million recorded in the fourth quarter of 2016, primarily due to increased product development expenses.
Sales and marketing expense increased to $15.2 million in the fourth quarter of 2017 versus $9.3 million in the comparative period in 2016, primarily due to higher advertising expense and sales force personnel-related expenses as we hired the majority of the full year 2017 net sales rep additions after opening the Cleveland facility in August of 2017.
In the fourth quarter of 2017, we spent $4.4 million in marketing and advertising as compared to $1.7 million in Q4 2016.
General and administrative expense increased to $9 million in the fourth quarter of 2017 versus $8 million in the fourth quarter of 2016, primarily due to increased personnel-related expenses.
While we've reported $100,000 patent litigation settlement expenses associated with the CAIRE litigation settlement in the fourth quarter of 2017, we spent less on total legal expense when compared to our original forecast, given the timing and that amount of settlement with CAIRE.
The remaining $900,000 is expected to be amortized over the next 5 years.
In the fourth quarter of 2017, our provision for income taxes totaled $6.4 million, representing an effective tax rate of 110.5%.
In the fourth quarter of 2016, our provision for income taxes totaled $0.6 million, representing an effective tax rate of 9.8%.
The increase in effective tax rate was primarily due to the $7.6 million noncash income tax provision expense associated with the revaluation of the deferred tax asset.
Our effective tax rate in the fourth quarter of 2017 also included a $3.5 million decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation compared to $1.7 million in the fourth quarter of 2016.
Excluding both the deferred tax asset revaluation expense and the stock-based compensation benefit, our non-GAAP effective tax rate in the fourth quarter of 2017 was 40% compared to 39.7% in the fourth quarter of 2016.
In the fourth quarter of 2017, we reported a net loss of $0.6 million compared to net income of $5.3 million in the fourth quarter of 2016.
Our reported net loss in the quarter was primarily due to the $7.6 million expense associated with the revaluation of our deferred tax asset.
Loss per diluted common share was negative $0.03 in the fourth quarter of 2017 versus positive $0.25 in the fourth quarter of 2016, a decrease of 112%.
Excluding the $7.6 million noncash deferred tax asset revaluation expense, we delivered non-GAAP net income of $7 million in the fourth quarter of 2017, which represented a 10.9% return on revenue.
Non-GAAP net income increased 32.5% in the fourth quarter of 2017 versus the fourth quarter of 2016, where non-GAAP net income was $5.3 million or a 10.3% return on revenue.
Adjusted EBITDA in the fourth quarter of 2017 was $11.6 million, which represented an 18.1% return on revenue.
Adjusted EBITDA increased 5.8% in the fourth quarter of 2017 versus the fourth quarter of 2016, where adjusted EBITDA was $10.9 million or a 21.5% return on revenue.
Cash, cash equivalents and marketable securities were $173.9 million, an increase of $10.9 million compared to $163.1 million as of September 30, 2017.
Turning to guidance.
We are increasing our full year 2018 guidance range for total revenue from $295 million to $305 million to $298 million to $308 million, representing growth of 19.5% to 23.5% versus 2017 full year results.
We expect direct-to-consumer sales to be our fastest-growing channel, domestic business-to-business sales to have a significant growth rate and international business-to-business sales to have a modest growth rate, where the strategy will still be focused on the European market.
We expect rental revenue to be relatively flat, meaning plus or minus 5% in 2018 compared to 2017, due to our continued focus on sales versus rentals.
As stated previously, the only known changes to Medicare reimbursement rates in 2018 are roughly 1.2% decline in monthly stationary rates in noncompetitive bidding areas due to the fee schedule adjustment.
Given changes to the U.S. corporate tax code, we are increasing our full year 2018 GAAP net income and non-GAAP net income guidance range to $36 million to $39 million, up from $31 million to $35 million, representing growth of 71.4% to 85.7% compared to 2017 GAAP net income of $21 million and growth of 26% to 36.5% compared to 2017 non-GAAP net income of $28.6 million.
We are maintaining a guidance range for full year 2018 adjusted EBITDA of $60 million to $64 million, representing growth of 18% to 25.9% versus 2017 full year results.
We estimate that the decrease in provision for income taxes related to excess tax benefits recognized from stock-based compensation will lead to a decrease in provision for income taxes of approximately $8 million in 2018 based on forecasted stock activity, which would lower our effective tax rate as compared to the U.S. statutory rate.
Excluding the $8 million decrease in provision for income taxes expected in 2018, we expect an effective tax rate of approximately 25%, down from our previous estimate of 37% due to changes in the U.S. corporate tax code.
We expect our effective tax rate, including stock compensation deductions, to vary quarter-to-quarter depending on the amount of pretax net income and on the timing and size of stock option exercises.
Lastly, we're not impacted by the reinstatement of the U.S. medical device excise tax given our retail exception.
We also expect net positive cash flow for 2018 with no additional equity capital required to meet our current operating plan.
With that, <UNK> and I will be happy to take your questions.
Yes, Robbie, this is <UNK>, I'll take that one to start.
And if Ali wants to add something, she'll dive right in.
But you're right, we did hire a little more heavily once we had the Cleveland office opened than we have done in the past.
It's been a good market for us.
As you might imagine, we are new to a community.
There's a lot of excitement.
And then the early going, it's a little easier to hire.
We saw the same thing when we opened the Texas facility.
Our traditional approach is that we want to hire in as linear fashion as possible.
So that's still our approach, but we were kind of the beneficiary of the new office.
As Ali mentioned in her comments, more than half of the folks that we had hired throughout the year were hired in the Cleveland office in the last 4 months of the year.
So it was a little back end loaded.
As far as how that stacks up to drive growth, it's 4 to 6 months for a sales rep ---+ an inside sales rep to get to what we call steady state or kind of their end of curve.
Now they will contribute some before that.
They ---+ basically, we see contributions in month 2 and 3, but end of curve is 4 to 6 months.
So we feel like we're in a good spot, and that's reflected in our guidance this year.
So it has closely correlated with, over time, the sales growth in that direct-to-consumer sales channel.
So we would expect that as we've added this additional sales capacity outside of that first 4- to 6-month investment that you have for new hires, that you will see that growth on the direct-to-consumer side associated with us increasing that sales capacity.
Because as you know, our limit to growth in creating additional consumer awareness is really tied to how much sales capacity we have.
So as we add that additional sales capacity, we spend more in marketing to drive more leads to fill that sales capacity.
And that's our plan going forward as well.
And we do plan to continue to add reps going into 2018 as well as we still think we're a long way from full saturation on the direct-to-consumer sales side of the business.
Yes, Robbie, I'll handle that one as well.
I mean, you're right in the past as we've kind of, all of the providers and Inogen included, has taken a hit on competitive bidding with the rate reductions.
We've had to grow through that in our other channels, and we've done a pretty good job with that.
This year, as Ali said, there are no significant rate reductions, so we don't have the headwinds this year that we've had in the past.
But there will be competitive bidding rounds in the future.
Still don't have clarity on it, but we'll see rate reductions as we go forward.
So it'll continue to be challenged.
As you know, we've deemphasized that, but we haven't given up on it or set it aside.
What it does from a strategic standpoint, is it opens up access to our product to patients, because there are still some patients that do want to use their benefit, and we don't want to completely screen them out.
It does set us up to continue to walk in the other providers' footsteps, so we'd better understand their business.
And I think that we become a better resource to help them through navigation of conversion to a nondelivery model.
It sets us up to build partnerships for those that want to work with us because of our expertise.
And if you think about it, if you go way out into the future and we talk about a conversion to POCs, which we believe will happen, although it's going to take ---+ we've always quoted that 7 to 10 years, if everybody is able to get a POC from their traditional home care provider for 10 years out, it will be more difficult to sell somebody a POC from a retail standpoint.
So we do see rental as still our long-term future, at least in oxygen therapy.
Now what that does is that sets up ---+ once we hit a conversion point with POCs, then we'll need to backfill with other disruptive products that we can leverage the expertise of that sales force and still drive growth.
But long term, we still see rental as an important strategic opportunity for the company.
But you're right, in the short term, it's probably ---+ it hasn't been a positive contributor other than the knowledge and the partnerships that we've been able to forge.
Yes, that's a good question, Margaret.
I mean, our share gain is clearly coming from other competitors.
Now our overall growth is coming from market growth as well as share gain.
But if you look at ---+ and you said that correctly, we estimate that we've moved from low 40s to about 50% over the last couple of years.
That's gain and share from other POC manufacturers.
Yes, and just to add to that.
I think that we've also had a great partnership with our private label partner and creating relationships with DMEs of all sizes and really showing the benefits of nondelivery.
But we also have that the strong consumer demand.
And as we've been ramping up our inside sales team by 50%, or almost 50% in the last year, that really has allowed us to invest more in consumer awareness.
So you have both sides, both the consumers being more and more aware of POCs and demanding an Inogen POC and then you also have providers who are working with both us and our private label partner to figure out how to convert their business.
And that marriage has really worked well in driving overall market penetration for us with what we see as the best-in-class product on the market.
Yes, so I'll take that one.
Really, what we're assuming is continued adoption from the HME community at the levels that we've been seeing.
So we aren't assuming a major acceleration of POC adoption.
While we've said over time, we do expect that to accelerate and it has to in order to reach full penetration in 7 to 10 years inherent in guidance is us continuing to incrementally that 100 million to 150-basis-point increase in penetration of POCs of the category.
And we're not assuming any material change in our market share penetration or percent at that 50% or so level.
As we've said in the past, when we look at our guidance, particularly on the B2B side, we want to make sure that we don't get out ahead of the market conversion.
And while we very passionately believe where the market will get to, we also know that there's a lot of challenges for providers to get from where they are today with a tank-based system and to actually implement a nondelivery system.
So inherent in guidance just as it's been for the many years that we've been public now, we don't want to get out ahead of that market conversion.
And so we're more cautious on the B2B side.
Although as you said, we still do expect solid growth just because it does seem like there are many players where the conversion has started to nondelivery base system.
When we said that our short-term focus will continue to be on Europe, it's still the largest market today outside the United States, we did a couple of things last year to improve our position in Europe.
One is we bought one of our key distributors, if you recall back in May, MedSupport Systems.
That was something to really shore up, frankly, our support and service of the customers that we already have.
As these customers continued to scale their business with POCs and it became a bigger part of their budget, their expectations for service also continued to increase.
So we said, all right, we're going to ---+ one way or another, we're going to set up shop on European soil so that we can do the repairs there that people can call, talk to people in their own language, in their own time zone, and we executed that through that acquisition.
And I will tell you that our key direct customers are very pleased with that.
They have expressed appreciation.
I think that's one of the things that keeps us in the preferred provider position for the key big customers in Europe.
Later in the year, we started our contract manufacturing partnership with Foxconn.
So that cuts the lead time from a shipment basis.
It also gives us an opportunity to drive down some costs.
It's a relatively small amount, but we avoid considerable shipping expense, shipping across the pond and the Europeans are grateful for the shorter lead time.
So again, we've improved our competitive and service position there.
And that's the focus short term.
If you look, way out long term, and I mean way out like a 10-year horizon, then China.
We said China should be theoretically a huge market.
You've got a large population, a large percentage of smokers and poor quality issues, so as that country continues to develop, usually health care systems will improve as countries develop.
Today, there's no reimbursement for portable oxygen therapy in China.
But long term, we expect that, that would be established.
In the short term, there could be a retail opportunity.
So we are, right now, working on registration for China, but that is a long-term growth opportunity.
That's not something that's going to change our growth trajectory over the next couple of years.
So it's a longer-term play.
So hopefully that answers your question of kind of the short-term versus long-term focus.
Do you want to do this pricing.
Yes.
And then I'll talk ResMed.
Sure.
So starting with the pricing side, as we've seen over the last couple of years, we do expect average selling prices to decline over time, particularly in the B2B side of the business.
As we see volumes increase, this is a price-sensitive industry and with the competitive bidding pricing continuing reimbursement pressures, we expect that to translate into manufacturing pricing pressure as well.
That is already built into guidance that we would expect that to continue.
And when we look at competitive approaches, price is a very common point for us to compete on.
And we have been able to maintain a small premium versus the competition because our product is perceived to be of higher value both from patient preference side as well as a reliability standpoint.
So we would expect to be able to maintain that going into 2018, but we have continued to build ASP pressure into our model and into our guidance.
We also continue to expect to be able to take costs out.
As we continue to add volume here, we expect to be able to leverage that into lower materials and labor costs and to offset that ASP pressure.
Yes, on the ResMed Mobi, we still don't know anything about their specifications.
So we're just as anxious as all of you to understand the product better.
It's hard to comment on how it's going to compete until you can actually lock down the specs and get one in our hands, so we're not there yet.
What we do is any time there's a new product launch by anybody, whether it's ResMed or any other competitor, we go out and buy a few of those and test them, and we'll do that this time around.
I think whether it's ResMed or one of the other players, I mean, we expect people are going to continue to launch new products, and we're going to do that as well.
We are hard at work on our G5, and we haven't really said much about it.
And I don't really plan to tell you much about it today other than that development of the product started about the day after we launched G4, because product innovation and staying at the forefront of patient preference is key to our success.
It's what's put us in the driver's seat now and we believe that's what we will keep us there.
I will say, though, for ResMed, they're a great blue-chip company.
I think they continue to add credibility to our thinking that the future in oxygen therapy is POCs and they could actually, with a decent product, could help convert the market at a faster rate and that could benefit us as well as the market leader.
Right now the real opportunity is in converting tanks to POCs, not in going out and converting one POC to another.
Now we get down to the end of the road and the market is converted, then that dynamic changes.
But for the foreseeable future, tanks are who we really see as our primary competition as well as opportunity for growth.
Yes.
It's a good question, <UNK>.
Let me answer it first in the context of oxygen therapy, because I think in the big picture, it's a little different.
But if you look at just oxygen therapy, as we said, when we get to a market conversion point where the providers are all using POCs, we think that our retail POC business would be, I'll call it, less robust.
Right now, there's a lot of opportunity as there's so many patients that are dragging tanks around.
It's frankly relatively easy to sell somebody a unit if they have the money, because it's hard to put a price on freedom.
But that will change over time when they're all holding POCs from their current provider.
So it will swing from an oxygen therapy standpoint, rental can play a more prominent role in the future.
And certainly, again, in the context of oxygen therapy, the providers would play a bigger role.
Now in our overall business, what that means is we've built and are continuing to build this outstanding sales force that is very adept.
It's selling products to patients that have unique needs.
So we've got a backfill product with more unique solutions, so that we can continue to have a strong retail sales component to our business.
But that won't be necessarily in portable oxygen concentrators.
It may not even be necessarily in respiratory, but it does need to be unique and disruptive products that offer unique solutions to people, products that we can use to serve in people's homes.
We're not an acute care focused company today.
Products that we can easily deliver using our delivery partners, which are FedEx and UPS. A unique solution that takes a flatbed truck to deliver, probably doesn't fit our model.
So I think it will change with respect to oxygen, but what that does is it frees up sales time for us to have other disruptive products.
And we're looking at that all the time.
I think we're in a great spot when you look at our balance sheet to either form partnerships or make acquisitions to add those products.
But right now, I will say, as I've said over the last year, 1.5 years, we're very careful about that because there is a delicate balance between opportunity and distraction.
And so while I painted a picture of what the future will look like in 10 years, that's not where we are today.
The opportunity today is still using our sales team to convert oxygen patients, so that's what we're focused on.
Yes.
It's multiyear ---+ before, we think that our growth through POCs starts to slow down.
Right.
We still expect to be a long-term high-growth company.
And the oxygen therapy market is a very large and growing market.
So for the foreseeable future, we see POCs as being the primary market opportunity for us.
And if we added something, it would be more opportunistic in nature if the right thing came along at the right time.
And just getting back to your first question on the margin side, <UNK>, as the mix in the business changes, it could impact the difference between gross profit and operating margins.
But on a net basis, the B2B side and the direct-to-consumer business are very similar operating margin profiles.
So that's why we don't necessarily give any gross profit guidance and more focused on making sure that if there is a sales opportunity that we are the market leader in that sales opportunity, and that we capture as many of those as we can and where it shakes out on the P&L between gross margin and operating expenses kind of we'll work out depending on the channel.
And we are looking to continue to grow the top line and also have ---+ show nice profits in the business.
But very similar operating margin profile.
Yes, sure.
So I'll take that one.
The growth rate is basically the same expectations we had when we put out guidance initially.
So at the low and high end of guidance, it was before 20% to 24%, now it's 19.5% to 23.5%.
So to us, that's materially the same.
It's just where the rounding came in.
So still, we expect to see 20-plus percent growth.
And think that we've set ourselves up nicely with the investments that we made on the direct-to-consumer side of the business and then also the success we've seen on the B2B side.
So I wouldn't say that there is any difference in a conservatism level.
However, I also want to say that we still are very early in the year.
And the earlier we are in the year, the more cautious we are just because you haven't yet seen enough of the history.
So while we feel very good about the guidance range and the guidance philosophy that we've used, we use a very bottoms up approach to budgeting and making sure we really understand that potential pluses and minuses to our growth rates.
With direct-to-consumer, we're much more in control of our success there.
So we tend to be able to have greater visibility there than we do on the business-to-business side where we tend to be more cautious in putting out numbers.
And we do think it's important to put out the guidance that is achievable, and we still think that this guidance range is very achievable for us for 2018.
Yes.
So we have said that of the 86 net hires, over half of them were in the Cleveland facility.
So that means at least 43 of them were in the Cleveland facility in the first 4 months of us putting that facility up in place.
And we have said, over time, we want to add about 240 people in that facility, with over half of those being sales reps.
So we have gotten off to a very solid start with putting over 35% of that sales force together.
Now that number may increase depending on how ---+ where we get on the sales capacity side and results.
If there is continued ---+ our ability to hire there, we may look to hire more over time.
But we first need to get through this first 120 or so for us to see ---+ really understand the productivity of that sales force and understand what the additional market capacity is.
But we still feel like there is a lot of room for us to add sales capacity over time.
Sure, I'd be happy to.
Yes, we ---+ one of the things that we've done right out of the gate is we don't assign territories to the inside reps.
We've got leads coming in every day from all over the USA, and they are distributed more or less evenly across the sales force.
So the way we manage the sales team is every rep is going to get x number of new leads every month.
By not assigning territories, it's made it really easy for us to scale, because if you think about it, if we did have more territories, then you've got to rebalance and recut your sales territories really almost every month the way we've scaled the sales team.
So every inside rep, their territory is the USA.
And they're getting leads all month from all over the country.
It makes it easy to scale.
Yes, we do.
So as you saw in the fourth quarter, we did see an increase in advertising expense up to $4.4 million.
And what I do want to highlight there is that when we have a high number of new reps in that pool, when they're in that 4- to 6-month productivity ramp, they actually use more leads.
So investing in more media in that time should be expected when we have a higher percent of new reps in the field.
So the main driver of that was increased sales capacity and the fact that you had such a high proportion of newer reps in the pool in the quarter.
And so given the fact that we are continuing to invest heavily in that team, we do expect the advertising spend to increase going in to 2018, both for the existing sales reps but also the new sales reps.
Yes, I'd like to close with a few comments on our strategy for 2018.
We expect to seek ways to accelerate the global adoption of portable oxygen concentrators.
We are working with providers worldwide to convert to a nondelivery model, increasing our direct-to-consumer investments in the United States and pursuing product registration in new and emerging markets.
At the same time, we are still focused on developing innovative oxygen concentrators to stay at the forefront of patient preference and reducing cost to manufacture our product as we gain additional scale.
We're excited about the future of oxygen therapy and where we see portable oxygen concentrators continuing to grow and becoming the standard of care for ambulatory patients in the next 7 to 10 years.
Thank you for your interest in Inogen.
| 2018_INGN |
2015 | AKAM | AKAM
#Certainly, we had another very, very strong quarter in our cloud security solutions.
They grew 44% in Q2; they grew 44% again in Q3.
You did see kind of a slight moderation in the other businesses that are in there, the largest of which is our Web performance business that ---+.
We've seen a bit of a deceleration in their product line for the last few quarters.
Bookings continue to be reasonable.
As I said before that there is a tremendous amount of excitement with our sales teams in selling the ---+ our new security offerings, and I think that there's a fair amount of focus in that area.
So, yes, we probably could do a little bit better in that segment.
We know that.
We're doing very strong security; maybe not as strong in the Web performance business, but I think it's ---+ we are keeping at it.
It's significant market opportunity for us to further penetrate in that space.
It's just a matter of continuing to execute and innovate.
Yes.
No, it's actually more ---+ these three accounts ---+ these big, big accounts do DIY.
And in a couple of these big accounts, Akamai is the exclusive CDN provider.
No, this slowdown is not so much a ---+ an increase in DIY.
As <UNK> tried to outline, which is overall traffic is lower.
And so what's happening is that they've continued to build on DIY, which they have been doing all along.
And their traffic has moderated overall.
They are serving more of the traffic themselves and less is going to us.
So if you generally look at it from a share perspective, that yes they are taking more of the share of the traffic, but it's because overall traffic in aggregate is less than expected.
That's tough to tell.
This is the nature of our business that we can't control how many people are doing a download, how many people are doing various things, so that's really an end-user thing.
So why it's slowing for customers is difficult for us to assess.
Yes, I think what I did say ---+ I provided guidance for the quarter.
Think we said that we'd be, call it, in the low 80s for CapEx.
So we're going to be a little bit above my long-term model of the 18% this year.
We ---+ again, we are going to strive to manage the Company call it around the 18% of revenue going forward.
That's the long-term model that I've highlighted all along.
There are going to be periods of time as we had before that you could be at 17%; there could be a period of time where we are at 19%.
I'm actually not going to quibble between a point here or there, to be honest with you.
We're going to make the investments that we think are the right investments of the business either on R&D innovation, which is around software capital ---+ or as <UNK> indicated, if we need to make more network CapEx investments because we think they are the right thing to do to support what we think is going to be coming demand, we will do that.
But generally speaking, we're going to strive to manage CapEx around 18% of revenue.
Well, it's largely from what we've talked about.
We have been building out CapEx really through the first three quarters in a year in a fairly substantive way.
If you take the year to date, CapEx as a percent of revenue has been well north of 20%.
We're not expecting that for the full year because you are seeing it moderate here in the fourth quarter.
So as you build up more CapEx and you deploy more service in the network, and you are incurring co-location costs, you are going to see kind of an uptick in cost of goods sold.
And certainly as we've talked about, we are building out what we did build out in anticipation of wanting to make sure that we have the capacity available.
We did signal that that may have near-term pressure on gross margins and that's what you're seeing.
No change in ---+ from a color perspective around in general the market for bandwidth or co-location spending.
As you can imagine, bandwidth in particular ---+ as your ---+ you have contracts in some cases that you have fixed-port arrangements that you're building out.
And if you are not filling those fixed ports with fixed cost that you are not monetizing.
But again, that's something that we signal that ---+ it was a bet we were willing to make.
If in fact we have built up more capacity than is needed, we will grow into it.
And so that's effectively what we're doing.
Okay, that was a bunch.
Let me try to take them kind of in order.
So I think we did signal in our guidance ---+ I'm certainly not providing guidance for 2016 on this call.
But we certainly did signal that we do expect that what we're seeing here in the fourth quarter is going to continue into 2016.
As you know, the nature of traffic is it spikes.
And as it goes up and it goes down, it's difficult to predict whether to your point it did a wraparound and you go through this for three quarters and then you see it again in Q4.
Tough to tell.
That is one possible scenario.
That's a scenario that these customers' overall traffic volumes continue to accelerate and our share then increases.
So these are customers that have planned to do DIY.
They have been doing it for a while.
It's very difficult to assess what's going happen next year.
But we do expect that there will be a moderation.
As you have seen in the past, we've been surprised at the upside.
As <UNK> mentioned, both in 2013 and 2014 we were talking about overachievements in media growth.
And we specifically talked about our large customers, and that's really what the driver was.
The same phenomena.
Also, it's fair to say that growth outside of these three customers in the media business is doing very well.
International growth is strong in the media business, and it's strong in other segments of our US market as well.
So again, we're going to go through a period here.
How much effect is has on growth rates in 2016 I think remains to be seen, but we do expect to see this persist into 2016.
And whether or not we are going to need M&A to hit our ambition for $5 billion ---+ if you think about the market that we are in, you look at the media market and you think about the amount of traffic that could move online that we would be poised to benefit from, that's a significant growth catalyst in the media business.
Our performance and security solutions by themselves have significant growth opportunities.
And then there's new emerging areas that we are just barely getting into in cloud networking that by themselves could be huge growth opportunities for the Company.
So there's enough catalysts across the portfolio to certainly achieve the ambitions that we have.
The challenge you have with the media business is sometimes the media business is in accelerating and aid you in your quest the kind of get ---+ the CAGR needs to be around 17% to get there.
Sometimes it's going to be lower.
But I think over time there's enough growth catalysts in the Company to be able to do that.
It's a matter of innovating and it's a matter of executing.
Well, no, M&A is ---+ I would say (multiple speakers) we talked about the fact that ---+ no, we don't have a specific number for M&A.
We have been doing M&A where we think it makes sense for the Company to either expand into an adjacent area.
There's been technology tuck-ins that we believe that will help secure an area that we want to do from an innovation perspective.
So we certainly did the acquisition of Prolexic which did contribute revenue.
Most of our acquisitions to date have not been revenue contributions; they've been more technology tuck-ins.
That's not to say that we are not actively searching and that there may be something that is a revenue contribution, but we don't have a specific target in mind for what M&A is going to be to deliver to the $5 billion ambition.
We don't really know of any dates in particular.
I think in terms of watching for signposts, you look for offers that come to the market.
You look for adoption rates of those services.
Is it being successful.
Are users watching more video content online.
And then we don't have any dates in mind that we are in a position to share around that.
We just ---+ we're going to be ready, and we're going to try to help enable it, and then we will see how things unfold next year.
That's generally in the ballpark, yes.
I think it's difficult to tell that it's ---+ certainly we can execute better in that area.
What share of it is driven by what drivers is tough to tell.
There's certainly still a significant market opportunity for it.
I think what we need to do is in particular the ---+ and our sales team is doing this ---+ that you've got to go through multiple go-to-market motions both direct and indirect in being able to build out effective channel relationships to be able to sell this and get better acceleration on it that's not just from your direct sales force.
It still is a product that requires a fair amount of handholding to be sold, so it's not an easily channeled, sellable product.
We are working on that.
And so there's probably an element of that that kind of is disruptive to being able to get that business back to where we need it to be.
We do think that with continued innovation on the product side as well as maybe continued focus from a go-to-market perspective around not just going deep and wide with our customers ---+ so the customers that we're going to try to upsell them to the higher-value ion offerings as well as getting new customers.
That's really the recipe.
It's about executing on the innovation side and executing on the go-to-market side.
Pricing steadily declines.
And I would say in the period we're in now, it's pretty normal.
Nothing unusual or no bad news there in terms of our revenues.
So ---+ now, when customers send more traffic to us, they often get a lower price.
So you have large volumes and traffic costs less per bit, then small volumes of traffic.
But if you look at a constant amount of traffic, through time pricing steadily decreases and there's really no fundamental change there.
Yes, we are very pleased with the growth in the international markets.
It accelerated over Q2.
I would say that we still think there's huge opportunity to continue to grow into the international markets faster than our US markets for sure.
But as far as the mix, actually the mix contribution between media performance and security services and support is roughly similar across all three geographies.
Admittedly, though, in the EMEA and ABGA geographies that there isn't any significant concentration from customers.
And so they call it the diversification of their customer base is a little bit broader, whereas in the US, we have very, very large US media customers that tend to have a pretty high share of some of our US media business.
And so obviously when you have a downturn there, it's notable both for the US market as well as the total companies.
But that just gives you maybe a little bit of color on the mix profile.
Yes, I really can't comment on adoption rates in 2016.
I wish I could, but I can't.
But the TAM of what hypothetically could be possible is very large.
Just think about all the people that watch TV and imagine if even a very small portion of them started watching TV online.
And you think about what quality they might do that at someday.
A ---+ the old DVD format ---+ I say old, but the DVD format is about 4 megabits per second.
Compressed, 4K, the next-gen format of 16 megabits a second.
The average of that is 10 megabits a second, and that's where we see the major broadcasters having an interest in targeting bandwidth rates for watching a single stream at 10 megabits a second.
As I mentioned earlier, if you had 5 million people doing that at the same time, that's 50 terabits a second and that's a heck of a lot of traffic.
And that's only 5 million people.
Now, you think farther into the future, either some people think that someday ---+ I don't know if it's by the end of the decade or not, but maybe most watching ---+ there's more watching online than on TV ---+ the traditional mechanisms.
And that's hundreds of millions of people.
And maybe 1 billion someday.
So when you think about the TAM, it's an enormous TAM.
And that's why I think there's so much interest ---+ not here but in the industry ---+ around OTT.
Now, I know you all are interested, as are we.
When does that start.
And we don't know.
We are to the point today where we can enable it from the technology perspective and from the financial perspective.
We can do it at a good quality; we can do it at scale.
Not 1 billion yet ---+ 1 billion viewers.
But certainly the scale where we would start out and we can do it at a reasonable price point that can enable that take place.
And from there, we are watching and working with the industry to try to facilitate that to happen.
But a lot of that is beyond our control.
And certainly the users at the end of the day, the subscribers, will dictate how much watching is done OTT.
We only see meaningful DIY in a handful of accounts, and it's not for live linear video.
That doesn't say that someday that people won't be doing DIY themselves for OTT broadcast content OTT, but we don't really see that today.
The DIY we see is a handful of very large media accounts, and it's focused on more static ---+ the delivery of static content.
And often where performance doesn't matter.
Obviously with paid subscription OTT, performance matters a lot or the subscriber is not going to pay.
They're not going to be happy.
And as we look across the major broadcasters today, I really don't see DIY as being a factor there, at least for now.
Obviously we're building out based on discussions that we have with folks in the ecosystem.
We certainly ---+ what is a lot of uncertainty about what is going to get introduced, when it's going to get introduced, what the adoption rates are going to be.
So as <UNK> indicated, yes we've done buildout.
And the buildout means that we have available capacity.
It is an infinite capacity obviously.
This would be ---+ call it ---+ we've built out capacity for what could be the first wave of some level of over-the-top.
I think we certainly did signal that we do expect generally traffic moderation going into 2016.
And I do believe ---+ just to be clear, I do believe that there are ---+ the biggest catalyst that's going to cause traffic growth to re-accelerate is going to be continued movement of premium content online.
The rate case of that is very, very difficult to assess.
Some of it's being done now, so it's not like it's not being done now.
It's just being done now in a very kind of ---+ much smaller scale.
The question is when does it start to get hold in a more fulsome scale.
And I think that will be a catalyst.
But I think without that, I think there are certainly headwinds that we have going into 2016 on traffic.
Just to be very clear, I think <UNK> asked earlier that it's tough to tell for these large three customers what their traffic volumes are going to do, whether their traffic volumes accelerate or not.
So there's a bunch of dynamics that will have an impact on the media business in the near term.
So I just want to make sure we're clear that we think that they are ---+ there are certainly catalysts to grow this business in the medium term to long term.
We're not calling out guidance here for 2016.
But it's just important to be clear with you that certainly we do see deceleration in traffic.
We do think that there are going to be catalysts for traffic growth.
The question is rate, pace and timing.
Well I think the math is the same.
Could be very significant.
There are obviously a lot more TV watchers and people online outside of the United States than here.
Many countries are better connected with their Internet than here.
So in the long run, I would say it's a larger market ---+ potential market outside the US than inside the US.
I would hope it would have a positive benefit to both our media business and our performance business and our ---+ for that matter, our security business.
That Microsoft will be selling all of our services.
And in terms of the basic Azure CDN capability, you'll be able to automatically take advantage of Akamai's base-level CDN capabilities.
Certainly, when we guided for the quarter for Q3, we did guide that OpEx expense was going to slow.
We certainly have better visibility of what we thought was going to be happening going into Q4 as the quarter progressed.
And so we did moderate hiring as the quarter progressed.
Okay.
Well, thank you.
I appreciate there's a few more in the queue, but we are well over time.
So I apologize if we weren't able to answer your questions today.
But in closing, we want to thank you for joining us.
We will be participating in a number of investor conferences and events in November and December.
Details of these can be found in the event section on the investor relations website at Akamai.com.
We look forward to seeing you at those events.
Thank you again for joining us, and have a nice evening.
| 2015_AKAM |
2017 | WEX | WEX
#What I would say to you is, in the last know now that we overlapped two quarters of EFS and the [effeco] was $1.26 in Q3 and $1.23 in Q4, you should be expecting those numbers going forward.
Obviously considering that the fuel prices don't change dramatically.
Sure.
It's <UNK>.
So same-store sales, if you look at the fourth quarter, it was actually only down 2%.
So it's a little bit better than what we had seen in the rest of the year.
I think some of that is, if you look at the segment that we were getting hit the hardest on related to oil and gas, and that's becoming a smaller part of the business and so some of that is just a lapping effect.
But on the positive side, there was actually growth in the construction trades, which had dropped to a negative number over the first even couple of quarters.
And so I think that's a good sign if you look at the overall economy.
Many of the other SIC codes were negative, but you're starting to see a few of them go into the positive category.
And in terms of how we thought about it when we put together 2017, we look at that as being a slight headwind for us as we factored in guidance for 2017, similar to what we would've experienced in this last quarter.
Yes, so we actually did add an extended relationship with Exxon so that we're doing more services in Canada with them.
In addition to that, we have agreed to ramp up our investment in sales and marketing in the relationship with them because of what we see is a good opportunity in the marketplace based on the history of what we have.
So whenever we do that, you have a year that you have an investment associated with that, but we typically see a pretty quick return.
Yes.
So let me give you, according to 2016, we already had a positive operating income for the [west] portfolio.
And as I said during the call, for 2017, we're going to continue having improvements both from the back office consolidation and some pricing modernization, and we're going to have as well for 2017 this positive trend on the margin side.
What you also have to think is obviously, as we move ahead for the future, one of the things that's important is that this is a ---+ the margins should be like a private-label portfolio.
Yes, we feel great about our organic growth.
If you look at 2016, if you exclude the impact of FX and fuel prices, we grew 13% organically.
So, really strong year in 2016 that sets us up well going into 2017.
And we talked about the fact we're going to have some geography issues within the virtual business, which will have a little bit of a softening impact of that going into 2017.
But across the rest of the business, we've got really good trajectory and bringing in volume in every part of our business.
We are continuing to get benefits from the pricing changes that we have made, not just within Fleet domestically, but what we're doing internationally; and we have got some great contract signings that are ramping into the business.
So we feel good about the overall organic growth of the business.
So I'd say that we went through and effected our portfolios, the ones we directly control, and that's the portfolio that we have been monitoring.
We are also then engaging in conversations with some of our partners.
And I think ultimately we want to make sure that we are doing and making changes with our partners that are conducive to how they want their brand to be perceived in the marketplace as well.
So it's a balancing act and a conversation that we have with them.
But I think actually more importantly is we have set ourselves up more systematically to think about pricing.
We changed the underlying infrastructure to think about pricing in a much more strategic and systemized level so that we do anticipate we're going to have further benefit.
We do think that you've got this big pop of some of the changes that we have made, and will continue to get some tailwinds as that annualizes this year.
But if we do our longer-range planning, and as we have thought about the numbers we gave out for 2017, we do anticipate continued benefit from further pricing modernization over the next several years.
What I will add is for you is (inaudible) what <UNK> said, that we especially on the first half because of the tailwind of 2016, we should expect higher growth rates on the fees.
And then as we move to the second half, we will have these more tailor-made changes and be more systematic on how we do those new price increases.
Europe is interesting.
We talked a little more about Asia this time, because as we think about our international platform, we have had some really great success and winning business in the Asia marketplace.
Europe, I have said all along, it's a long play.
And it certainly has been rolling out that way this year, and so we still feel good about the market.
We still think of it as a long-term play for us, and we feel really good about the prospects that we have in that pipeline.
But I would say more broadly it's been just Europe that we have, also within Asia.
I think the really big ones are more known and just are taking time to, as you say, ripen.
If you look at within our US portfolio, we have a number of private-label contracts that aren't just major oils.
And so that part is less static, and as we're in the marketplace and developing the pipelines that we have.
And again, that's also true as you get outside of Europe into some of the other markets that some of the mid-size oil companies too are also prospects for us.
<UNK>, good morning, this is <UNK>.
So I would say to you, there is a couple of things.
Number one, interest rates, because we have been seeing now in the last few months there is a lot of volatility on the interest rates.
We have factored, as I said, 40 to 65 basis points on our guidance, so depending on how the strength, higher or lower, there could be some impact there.
The second thing is how quick we can implement and ramp up the resources now with Chevron and ExxonMobil that they may give us some benefit earlier than we expect.
That's another area where we should be focused.
And finally, being cautious on the credit loss guidance, which is between the [13] and 15 basis points range.
We had a good starting of the first, call it six weeks, but it's an area also to watch for 2017.
The only other thing I would add to that is, when we go to into any year, because we're growing our business organically, we always have a bogey in there of how much we have to ramp for new business.
So that's something that can cause a swing in any particular year.
Typically, the majority of the revenue is booked but you still have this variability that enters into, based on what you have for open business.
And so some of that depends on timing of when it ramps, which sometimes you control and sometimes you don't 100% control it.
<UNK>, let me answer for you.
So both revenue ex-FX or with the currency was over 100%.
So we had a very good quarter.
We have been ramping up since, I would say, Q3, as revenue started growing significantly faster, and it has accelerated in Q4.
But it's both with considering FX rates and the [efacto] rates too.
What I will say to you is that we expect a high growth from Brazil; I would say probably a bit more than on the high teens.
That's directionally where we should expect.
From a quarter revenue point of view, we have around ---+ in a full year it's around $20 million.
<UNK> gave a few of those numbers, and I always hesitate to give you very specific numbers
But we have said in the West Health business, organically we're still saying that it's a high-teen growth rate business.
And in the Fleet business, we have seen growth, double-digit growth, and I would say that business, as it gets ultimately more mature, it's typically more of a single-digit grower.
But we have been able to show much more growth in that.
We feel pretty good about that trajectory we're on in Fleet.
And then on the corporate payment side of the business, 2017 will be a little bit of an unusual year for us, but if you look at the longer-term growth trajectory we are still seeing spend volume growth in the high teens if not higher in that business.
I feel great about 2016.
And I think part of why I feel so strongly about 2016 is that it was coming literally from every part of the business and all over the world.
And so the pipeline development was very strong.
I feel like people stayed really disciplined and focused.
Some of the wins, I think, we're never going to talk about because they are smaller in size that are just being generated deep in the organization.
But we also had some really big marquee names that we added on in 2016.
So feel really good about that.
And I would say going into 2017, I feel equally bullish that we have a number of really great prospects in that pipeline and we will continue to stay disciplined.
We have got a great sales force globally that have been just knocking it down, as well as the relationship management groups that we have that have been doing contract renewals.
Let me tell you that the expense that you are talking about pertains to a resolution and clarification of a past obligation and an extension of an agreement with a long-term technology partner.
I also said on the call that we should see savings from 2018 and beyond, so directionally you can get that 2017 between some internal and this partner we're going to be more or less on the same pace.
Yes, so we talked about a number of contract wins that we had specifically in the over-the-road marketplace.
I would say that the market conditions are similar; that it's a competitive marketplace.
So there are contract takeaways that we're winning in that space, and part of why we win is the underlying technology.
The part that made EFS particularly attractive, among many things, was the underlying technology, the flexibility of the systems that they have; and so their ability to meet market needs and appear to be highly customizable to the customer set has been attractive in the marketplace.
And so we feel like we have really good momentum there.
And then as you mentioned, the ability to combine that with our bank and lending capability that we have is really great when you get into some of the smaller accounts, which is where we historically had played.
So there has been really good momentum, and I think the combining of the EFS business along with our Fleet One historical brand has been a good momentum shift for us.
Just want to say thank you, guys, for joining us again this quarter, and we'll look forward to speaking with you next quarter.
| 2017_WEX |
2017 | VIAB | VIAB
#Thanks, Bob
Good morning
We are pleased to report our financial results for the September quarter full-year fiscal 2017. The quarter and for the full-year, we saw revenue growth at both Media Networks and Filmed Entertainment as well as growth in operating free cash flow
First, I will discuss the consolidated results for the year
Viacom generated revenue of $13.3 billion, 6% increase over the prior year and adjusted operating income $2.7 billion that was flat with last year
Media Networks and Filmed Entertainment grew revenues
We generated adjusted earnings per share of $3.77, an increase of 2% over the prior year and we've generated $1.5 billion of operating free cash flow, which is up 26% over last year, demonstrating the durability of our cash flows
This represents operating free cash flow per share of $3.77, which translates to an operating free cash flow yield of 15%
Now moving to the results for the quarter
Viacom generated $3.3 billion of revenue and $578 million of adjusted operating income, up 3% and 7% respectively over the prior year
Both Media Networks and Filmed Entertainment grew revenues
Adjusted earnings per share of $0.77 for the quarter was up 12% year-over-year
As we previously announced, Paramount has secured a series of individual financing agreement, which replaces our prior slate financing deal and better aligned with the studio's new slate strategy, consisting of a mix of big broad audience films and more targeted flagship branded films
More flexible and tailored financing model will allow us to capture greater upside and more modestly budgeted titles were presently there is no third-party financing
Given the decision to end the slate financing deal with HuaHua and pursue alternative financing arrangement, we recorded a net $59 million negative impact on operating income in the quarter related to the write-off of amounts previously reported
Absent this impact, EPS would have been $0.88 in the quarter
Turning to our segments
Slide 4 of our web deck provides the financial overview of our Media Networks segment
Revenues for the quarter increased by 3% to $2.6 billion, worldwide advertising revenues increased 6%, and ancillary revenues were up 5%, while affiliate revenues declined 1%
Adjusted operating income declined by 8% to $693 million
Slide 5 of the web deck provides the breakdown of our Media Networks domestic and international revenue performance
Domestic revenues decreased 2% to $2 billion, while international revenues increased by 24% to $593 million
On organic basis, absent a four percentage point favorable foreign currency impact and 14 percentage point positive impact from the Telefe acquisition, international revenue would have grown 6% a quarter
At our Media Networks business, domestic advertising in the quarter improved sequentially to flat year-over-year, which exceeded our prior guidance
This compares to a year-over-year decline of 2% in the June quarter
In the quarter, ratings growth was largely offset by an overall decline in cable subscribers and our strategic reduction in unit load to improve the viewer experience
Domestic affiliate revenues decreased 3%
Decrease in the quarter was due to the lower revenues from SVOD and OTT agreement, decline in subscribers including continued flow through from Charter re-tiering and the transitional impact from rate resets associated with renewals
These factors were partially offset by mid single-digit contractual rate increases
12% decline in Media Networks domestic ancillary revenue to $76 million is principally due to lower consumer products revenues and lower revenues from our Teenage Mutant Ninja Turtles franchise ahead of its relaunch in 2018. Now turning to international
Advertising revenues increased 36% in the quarter
Absent a 3 percentage point favorable impact from foreign currency and a 26 percentage point favorable impact from the acquisition of Telefe, organic international advertising revenues would have been up 7%
The organic performance reflects strength in Europe
International affiliate revenues increased 12% including a 4 percentage point favorable impact from foreign currency and a 2 percentage point favorable impact from the acquisition of Telefe
Growth in the quarter reflects the impact of new channel launches, rate increases, and subscriber growth
21% increase in Media Networks international ancillary revenue to $105 million included a 7 percentage point favorable impact from foreign currency and a 7 percentage point benefit from Telefe
The organic growth benefited from our strategy to grow our off-network business driven by revenue from our recreational deals and higher consumer product license
Worldwide expenses increased 7% in the quarter and included a 4 percentage point impact from the acquisition of Telefe
In operating expenses, programming expense increased 12% driven primarily by the timing of original programming premieres and the acquisition of Telefe, while distribution and another expense declined 2%
SG&A expense increased 3% in the quarter which included a 3 percentage point impact from Telefe
Now turning to the studios results for the quarter
Filmed Entertainment revenues were up 2%, as increases in license fees and ancillary revenue were partially offset by decreases in Theatrical and Home Entertainment revenues
Slide 6 of the earnings presentation provides the breakdown of Filmed Entertainment revenues
Theatrical revenues decreased 43% to $115 million, principally reflecting lower revenue from our current quarter releases
Higher carryover revenues driven by Transformers, The Last Knight were more than offset by difficult comparison to the release of Star Trek Beyond in the September quarter of last year
License fees increased 30% to $423 million driven by higher Paramount Television production revenue as well as higher revenues from pay-TV and SVOD
Paramount Television continued its significant growth more than tripling its revenues in the fiscal year through breakout releases, including Shooter, 13 Reasons Why and Berlin Station, all of which were renewed for a second season
Ancillary revenues increased 33% to $61 million in the quarter
Filmed Entertainment generated an adjusted operating loss of $43 million in the quarter which included the $59 million negative impact related to our decision to end our prior slate financing arrangement
This compares to a loss of $137 million in the prior year, an improvement of $94 million
The improvement was driven by the increase in revenues and lower operating expenses
In term of taxes, the adjusted effective tax rate for the fiscal year was 30% as compared to 31.7% in the prior year
This was driven by the mix of domestic and international income
Components of free cash flow are broken out in Slide 11 of the earnings presentation
We generated $962 million of operating free cash flow in the quarter and 9% improvement versus the prior year
For the fiscal year, we generated $1.5 billion of operating free cash flow which is up 26% year-over-year
The increase in full-year operating free cash flow was principally driven by improvements in working capital at Filmed Entertainment, including lower film spend, partially offset by higher cash taxes
Turning to Slide 10. Since we announced our strategic plan on February 9 and our commitment to reducing leverage and maintaining investment-grade metrics, we have made meaningful progress, reducing gross debt by approximately $2 billion or 15%
In terms of our debt, at quarter end, it was principally fixed rate with a weighted-average cost of 4.9%
We had $11.1 billion of total debt outstanding cash equivalents increased $1.4 billion
If you take into consideration, the equity credit we received on our hybrid securities, our adjusted gross debt at quarter end was $10.5 billion
I want to echo Bob's commitment to strengthening our balance sheet and maintaining investment grade metrics
Over the course of fiscal 2018, we will continue to pursue opportunities to delever
Looking ahead to fiscal 2018 transitional impacts from our renewed distributor relationships will continue to flow through our results, particularly in the first half of the year
The near-term, we anticipate pressure on domestic affiliate revenues driven in large part by rate resets, lower SVOD revenues and the subscriber declines, which are amplified by a lag in the penetration improvement associated with our recent Charter renewal
Domestic affiliate revenues will show high single-digit declines in Q1 and Q2 with these declines improving in the second half, resulting in a mid single-digit decline for fiscal 2018. Importantly, we expect that the momentum we gained in the back half of 2018 will set us up to return to domestic growth as we get into fiscal 2019, we benefit from regaining Charter distribution, flat renewal rate resets and fully benefit from contractual rate increases
This guidance reflects the transitional impact of our successful efforts to stabilize the distributor base and position us to drive new opportunities for future growth with our distributor
As of international affiliate revenues in fiscal 2018, we anticipate continued growth
Turning to the ad sales, in the December quarter, we expect to see overall growth driven by continued strength of International, a low single-digit decline on the domestic side due to some ratings softness
We expect domestic performance to improve over the year with positive growth in the back half due to new original programming coming on air, as well as greater carriage benefits and contributions from digital initiatives
Turning to Media Networks fiscal 2018 programming expenses, we expect the growth rate will be in the low to mid single-digits and continue to invest in our flagship networks, while benefiting from a shift in mix to non-scripted programming
Network from our programming expense, we see the opportunity to reinvent our cost structure to drive margin and profitability
Based on the plan we have constructed, we project cost savings approximately $100 million in fiscal 2018, as well as hundreds of millions of dollars of additional run rate savings, most of which will be realized by fiscal 2019 and will drop to the bottom line
Accordingly, fiscal 2018 Media Networks SG&A expense will improve by low single-digits driven by these cost initiatives
Moving to the Studio, Paramount Pictures new management team has moved quickly to begin production on a 2019 slate and find cost efficiencies in production and marketing to enhance the bottom line
For fiscal 2018, we anticipate hundreds of millions of dollars operating income improvement
Finally, for fiscal 2018, we forecast a book tax rate of approximately 31%
We will refine this as we go through the year and get a better sense of the domestic versus international profitability
With that, I’d like to turn it back to Bob
And with respect to margins and growth for Media Networks, so as we said we're very focused on efficiency for the Media Networks business
Bob did highlight some of the headwinds we have in the first half of the year, but those headwinds are substantially unwinding in the second half of the year
We do expect to see significant margin enhancement in the second half of the year
And as it relates to overall OI growth for the year that’s largely going to be a function of the timing of some of the cost savings that we see come online, but you can expect it to be essentially flat or growing depending on the timing of that
But definitively the overall company will grow operating income
And as it relates to free cash flow, we had a very good year from a cash tax standpoint in 2017. So whether or not we will grow free cash flow in the aggregate, is going to be a function of cash taxes which obviously for everybody is a little bit up in the air in terms of tax reform and for us is going to be a function of domestic and international mix
But fundamentally the operating part of our business, Media Networks, corporate Filmed Entertainments, we will grow cash flow out of those areas
So whether or not overall free cash flow growth for the company is going to be a function of cash taxes but it will grow out of the operating elements of the business
Sure
So first I'd like say with respect to our strategy in changing the nature of our affiliate relationship, so we did announce in February that we’re focused on really reinventing the nature of these relationships to become much more multifaceted and allow us to strengthen the overall value proposition of the pay-TV echo system with our distribution partners
And so you saw that in our – you’ll see it again in Charter where in addition to the core content licensing
We've also introduced content co-production as well as an innovative approach to advertising an advanced data that allows both of us to grow our revenues associated in these two areas
As it relates to the co-production part, this is a great place where in the Charter, example we're creating value for both companies
Charter gets the first window for the exclusive content in their footprint and then we get a second window of exclusive airing nationally
And this is also going to be produced by Paramount, it’s going to grow revenue for Paramount TV, it’s going to grow library value for Paramount and continue to fuel this important area of growth for us
As it relates to ad sales, it’s a separate agreement between us and Charter outside of affiliate agreement to collaborate on advance data and advertising opportunities that are going to accelerate the penetration of dynamic ad insertion into the TV infrastructure
This creates new valuable and probably most important differentiated pools of inventory for both Charter and Viacom similar to Altice
And as far as we know we're the only company in the space that's kind of leading this transformation of the nature of these relationships to include these multiple facets
Over the course of 2017 we decreased the load about 7%
It’s among the factors that Bob indicated that are going to fuel the growth in domestic ad sales over the course of 2018 will be lapping that in addition to the other factors that Bob indicated
| 2017_VIAB |
2016 | INGN | INGN
#Thank you, <UNK>.
Good afternoon, everyone and thanks for joining our second quarter 2016 conference call.
On our call today I will start with the financial and business highlights, and then <UNK> will cover our recent operational developments, and finally <UNK> will review the financials and provide updates for 2016 guidance.
At that point, we will open the call up for any questions.
Our solid start to 2016 continued in the second quarter with quarterly revenues of $54.6 million, which represented 23.9% growth over the same period last year, despite the headwinds we are facing in our rental business.
Our rental revenue continues to represent a decreasing percentage of our total revenues.
Demand for our portfolio of innovative oxygen concentrators remain very strong across all of our sales channels, as sales revenue grew 40.7% in the second quarter of 2016 versus the comparative period in 2015, and represented 83.5% of total revenue.
As anticipated, we also saw the benefit of seasonality from the warmer months when patients are more likely to travel, and therefore see the advantages of our portable oxygen concentrators.
Domestic business-to-business sales were again our strongest growth channel, increasing 61.3% over the second quarter of 2015, primarily due to purchases from traditional home medical equipment providers, and strong private label demand.
As expected, in the face of re-imbursement reductions more HME businesses are turning to portable oxygen concentrators, and specifically to Inogen as the leader in the space, to improve their cost position when providing oxygen therapy.
Internationally we saw strong sales growth of 23.9% in the second quarter of 2016, compared to the second quarter of 2015, primarily due to strength in Europe with our distribution partners and key accounts.
Sales in Europe represented the majority of international sales at 92.1% of international sales in the second quarter of 2016.
Direct-to-consumer sales continued to be solid in the second quarter of 2016 increasing 38.5% over the second quarter of 2015.
Growth was primarily driven by increased sales headcount and marketing spend to drive consumer awareness.
With the Inogen One G4 launching on the last day of May, our sales force is now selling what we believe will be the most patient preferred portable oxygen concentrator on the market, and we remain very excited about the market opportunity ahead.
In the second quarter of 2016, we delivered a record setting net income of $5.1 million and adjusted EBITDA of $13.6 million, once again demonstrating that we can deliver solid bottom line results and leverage even in the face of rental reimbursement challenges.
I am thrilled to report that we are aiming to deliver on our strategic objectives for 2016.
On the first quarter call, we said that we were planning to launch the innovated Inogen One G4 before the end May and we did that.
In the second quarter, we continue to add sales staff and we are continuing to develop additional innovative products.
We have been able to offset the declines in our rental business with strength in our sales channels.
Notably, we have increased the revenue share of our direct-to-consumer sales and business-to-business sales.
We have also made marked improvements in our ongoing efforts to decrease the cost of goods sold per unit and improve operating efficiencies to further increase profitability, with the goal of offsetting most of the effects of the expected rental reimbursement reductions on an adjusted net income margin basis.
With that I'd now like to turn the call over to <UNK> <UNK> to cover our operational highlight.
<UNK>.
Thank you, <UNK>.
We achieved a significant milestone in the second quarter with the launch of the Inogen One G4 portable oxygen concentrator, which has been very well received.
As we've mentioned before, the Inogen One G4 is not only smaller and lighter than our current Inogen One G2 and G3 products, but it is also less expensive to manufacture.
Shipments of the Inogen One G4 in our direct-to-consumer sales channel began at the end of May and we expect to expand shipments to our domestic business-to-business channel in the third quarter of 2016.
Remember that as part of our sales strategy, we do not plan to make the Inogen One G4 available for rental and will use the Inogen One G3 product as the primary ambulatory solution deployed in our rental fleet at this time.
Our international channel remains focused on the Inogen One G3 and we expect a minimal if any sales of the Inogen One G4 in that channel in 2016.
We expect that international sales of the Inogen One G4 may begin in the fourth quarter of 2016 or early 2017, depending on the timing of product regulatory and reimbursement approvals and ramp-up in 2017.
We are currently pricing the Inogen One G4 at par with the Inogen One G3 in the direct-to-consumer channel.
We expect to initiate a pricing study starting in the third quarter of 2016 to determine our longer term pricing strategy and should be able to provide an update on our next quarterly call.
In the second quarter of 2016, we added sales representatives to increase our sales capacity and we plan to continue to with our sales rep additions and infrastructure building activities throughout the remainder of the year.
On the Medicare reimbursement front, we have not received any update on the results of the Round 1 recompete bidding process for contracts that begin in January 2017.
As we mentioned on our last call, bids have been submitted and we expect to receive the results by the end of the third quarter of 2016.
We estimate that these competitive bid areas cover less than 10% of the Medicare oxygen market.
As a reminder, additional cuts to certain Medicare regions were effective July 1, 2016.
In the Round 2 competitive bidding areas, the average single payment amounts are approximately 14% lower than the Round 2 average rates for oxygen therapy from the previous round.
The average amount billed under the E1390 Healthcare Common Procedure Coding System code, or HCPCS code, for stationary oxygen declined 17.4% from $93.07 per month to $76.84.
The average amount billed under the E1390 HCPCS code for oxygen generating portable equipment, which is the add-on code used for portable oxygen concentrator, declined 11.3% from $42.72 to $37.90.
Therefore, Inogen's average gross reimbursement for the typical ambulatory Medicare patient receiving a portable oxygen concentrator in areas covered by Round 2 Recompete would be $114.74 per month, versus $135.79 per month previously, or a reduction of 15.5%.
These rates are all averages, and as such are estimates that could vary widely when applied to our specific patient population.
We estimate that approximately 50% of the Medicare patient population is in the Round 2 Recompete area.
We maintain solid market access in these regions as we were awarded and accepted respiratory contracts in 93 of the 117 competitive bidding areas.
In addition, the second phase of cuts to Medicare areas not subject to the competitive bidding process, which we estimate is approximately 40% of the Medicare oxygen market, was also effective July 1, 2106.
We saw the first phase of these cuts on January 1 of 2016.
While there was significant effort by the industry to delay the additional reimbursement reductions to these areas effective July 1, 2016, and there were bills passed both in the House of Representatives and Senate that would have delayed these cuts in order to study the impact in rural areas, these efforts stalled and the delayed bills did not become law.
The industry is still hopeful that there will be a longer term rural relief bill passed in September when Congress resumes, and we at Inogen are supportive of such efforts.
However, our guidance assumes that there will not be any improvements or delays to the second phase of rate cuts that took effect in these areas on July 1, 2016.
We expect the average single payment amounts for our services to decline to approximately $120 to $125 per month, or a decline of 45% to 50% as of July 2016 compared to the average rates we received in 2015 in the Medicare and non-CBA areas.
This decline includes both the second reimbursement reduction for these regions, as well as the lower rates of the competitive bidding Round 2 areas.
We have also seen some private insurance payers reduce their rates for oxygen services in the second quarter of 2016 in response to the lower Medicare reimbursement rates.
We do expect these private payer rates to continue to decline in alignment with the new Medicare Round 2 Recompete competitive bidding pricing.
Looking ahead, in spite of these significant reimbursement changes, we believe we are well positioned to continue our total revenue growth in the oxygen therapy market with best-in-class and patient preferred products and services with a competitive total cost of ownership.
We have continued to execute our strategy and we believe we are seeing portable oxygen concentrators become more widely used throughout the oxygen therapy industry.
I will now turn the call over to <UNK> to cover our financial performance and guidance.
<UNK>.
Thanks, <UNK>, and good afternoon everyone.
During my prepared remarks, I will review the details of our second quarter financial performance and then I will review our updated guidance for 2016.
As <UNK> noted, total revenue for the second quarter of 2016 was $54.6 million, representing 23.9% growth over the second quarter of 2015.
Looking at each of our revenue streams and turning first to our sales revenue, total sales revenue was $45.6 million, reflecting 40.7% growth over the same quarter of the prior year, and representing 83.5% of total revenue.
Total units sold increased to 25,100 in the second quarter of 2016, up 53% from the 16,400 in the second quarter of 2015.
Domestic business-to-business sales of $60 million in the second quarter of 2016 exceeded our expectations with 61.3% growth over the same period in the prior year, reflecting significantly stronger demand from our traditional HME providers and our private label partner.
Traditional HME provider growth even outpaced the solid performance of private label and resale channels.
And in the second quarter of 2016, we saw traditional HME providers as the fastest growing portion within the domestic business-to-business channel.
These sales represented the majority of the increase over the second quarter of 2015 within the domestic business-to-business channel.
For the first time, revenue from resellers represented less than half of the domestic business-to-business channels total sales revenue in the second quarter of 2016.
International business-to-business sales were $13.1 million in the second quarter of 2016, representing 23.9% growth versus the same period in the prior year, primarily due to strong demand from our European partners.
Business-to-business average selling prices in the second quarter of 2016 declined over the same period in the prior year, primarily due to a shift in the sales towards tradition HME providers and private label sales, and additional discounts associated with the increased sales volumes worldwide.
Direct-to-consumer sales for the second quarter of 2016 were $16.5 million, representing 38.5% growth over the second quarter of 2015, primarily due to the increased internal sales headcount and increased marketing spend for media and advertising to drive consumer awareness.
The Inogen One G3 represented the majority of the concentrators sold in the second quarter of 2016, due to the timing and ramp of the Inogen One G4 product launch in May.
Turning to rental revenue, direct-to-consumer rental revenue in the second quarter was $9 million, representing a decline of 22.8% from the same period in the prior year, primarily due to the anticipated Medicare rental reimbursement cuts that took effect in the first quarter of 2016, and reductions in private payer rates as they followed the decrease in Medicare rates, and higher rental revenue adjustments.
Rental revenue represented 16.5% of total revenue in the second quarter of 2016 versus 26.4% in the second quarter of 2015.
At the end of the second quarter of 2016, we had 33,600 rental patients on service, a 1.2% increase over the 33,200 patients on service as of March 31, 2016, and a 6.3% increase over the number of patients on service as of June 30, 2015.
Turning to gross margin, for the second quarter of 2016 total gross margin was 48%, compared to 47.3% in the second quarter of 2015, up approximately 70 basis points.
Our sales gross margin was 49.4% in the second quarter of 2016 versus 44.8% in the second quarter of 2015, up approximately 460 basis points.
The improvement in sales gross margin percentage was primarily related to lower cost of goods sold per unit due to lower materials, labor and overhead costs associated with the upgraded Inogen One G3, and higher volume of units sold, partially offset by a higher sales mix of domestic business-to-business sales which have lower average selling prices.
Rental gross margin was 41% in the second quarter of 2016, versus 54.1% in the second quarter of 2015.
The decline in rental gross margin was primarily due to lower net revenue per rental patient, primarily driven by the previously discussed reimbursement rate reduction and an increase in provision for rental adjustments in the second quarter of 2016, partially offset by lower cost of rental revenues associated with lower depreciation and servicing costs per patient.
As for operating expense, we continue to make strategic investments in additional sales force headcount and support personnel, as well as in the launch of the Inogen One G4.
As a result, total operating expense increased to $18.2 million in the second quarter of 2016, versus $15.5 million in the second quarter of 2015.
However, operating expense as a percent of total revenue decreased to 33.3% in the second quarter of 2016, down from 35.2% in the second quarter of 2015.
Operating expense included a patent litigation settlement benefit of $1 million in the second quarter of 2016.
Non-GAAP operating expense, excluding the settlement, was $19.2 million in the second quarter of 2016, compared to $14.6 million in the second quarter of 2015, which excludes $0.9 million in audit committee investigation and related class action lawsuit costs.
Excluding the costs outlined above, non-GAAP operating expense was 35.2% of revenue in the second quarter of 2016, compared to 33.2% in the second of 2015.
Research and development expense was $1.4 million in the second quarter of 2016 versus $1 million in the second quarter of 2015.
The increase was primarily associated with additional personnel related expenses for engineering projects.
Sales and marketing expense was $9.6 million in the second quarter of 2016 versus $7.6 million in the comparative period in 2015, primarily due to increased sales force additions and media expense.
General and administrative expense was $7.2 million in the second quarter of 2016 versus $6.9 million in the second quarter of 2015, primarily due to increased personnel related expenses.
These increases were partially offset by lower general, legal and accounting expenses, primarily due to the costs of $0.9 million for the audit committee investigation that was incurred in the second quarter of 2015, and a $1 million patent litigation settlement benefit that was recognized in the second quarter of 2016.
In the second quarter of 2016, our effective tax rate was 36.1%, compared to 34.9% in the second quarter of 2015.
This increase was primarily due to an increase in stock compensation expense and an increase in the blended state tax rates, partially offset by research and development credits allowed in the second quarter of 2016, but not in the comparative period in 2015.
Our net income in the second quarter of 2016 was $5.1 million, compared to $3.5 million in the second quarter of 2015, a year-over-year increase of 48.7% and a return on revenue of 9.4%.
Earnings per diluted common share was $0.25 in the second quarter of 2016 versus $0.17 in the second quarter of 2015, an increase of 47.1%.
In addition, I'd like to cover some key non-GAAP financial measures.
Adjusted EBITDA for the second quarter of 2016 was $13.6 million, which was a 24.9% return on revenue.
Adjusted EBITDA increased 42.1% in the second quarter of 2016, versus the second quarter of 2015 were adjusted EBITDA was $9.6 million.
Since there were no tax adjustments in either period, adjusted net income in the second quarter of 2016 and the second quarter of 2015 were the same as net income in their respective period, and increased 48.7% to $5.1 million in the second quarter of 2016 from $3.5 million in the second quarter of 2015.
Moving to our balance sheet, cash, cash equivalents and short-term investments were $98.1 million as of June 30, 2016, an increase of $12 million compared to $86.1 million from March 31, 2016.
As of the end of the second quarter of 2016, we had no bank debt outstanding and our entire $15 million credit facility was available.
Turning to guidance, we are increasing our 2016 revenue guidance to a range of $190 million to $194 million, which represents year-over-year growth of 19.5% to 22%.
This compares to the previous revenue expectation of $187 million to $191 million.
We continue to expect total revenue headwind from competitive bidding rate reductions to be 3.5% to 4% in full year 2016.
However, we expect additional rental revenue headwinds, due to the additional private insurance rate reduction, higher provisions for rental revenue adjustments, and lower net patient additions as we focus on sales versus new rentals.
We currently expect total rental revenue to decline as a percent of total revenue and decrease approximately 25% in 2016 as compared to 2015.
We expect strong second half growth for our business-to-business channels versus the second half of 2015, which we expect will offset the additional rental revenue headwinds.
Net income guidance for 2016 is now expected to be in the range of $12.5 million to $14.5 million, representing an increase of 7.9% to 25.2% growth over the 2015, up from the prior range of $12 million to $14 million.
We're also increasing our 2016 adjusted EBITDA estimate to a range of $37.5 million to $39.5 million, representing an increase of 16.1% to 22.3% over 2015.
This is updated from prior guidance range of $37 million to $39 million.
Adjusted net income is now expected to be in the range of $12.5 million to $14.5 million, representing 24.8% to 44.8% growth over 2015.
This is updated from a prior range of $12 million to $14 million.
We continue to expect an effective tax rate in 2016 of approximately 35%, compared to 32% in 2015, excluding the tax benefit adjustments of $1.6 million experienced in 2015 that are not expected to recur in 2016.
We expect a higher effective tax rate, primarily due to lower tax deductions for equity compensations as a percentage of pretax income, which is expected to have a smaller percentage impact on the 2016 effective tax rate than it did on the 2015 effective tax rate.
Finally, we still expect net positive cash flow for 2016 with no additional equity capital required to meet our current operating plan.
With that <UNK>, <UNK>, and I would be happy to take your questions.
Hi, <UNK>.
Hi there.
Yes, in part you've started to answer the question yourself, <UNK>, in that we haven't had a lot of time in the pickle barrel yet.
As you recall, we started selling at the very end of May, so we had about a month of sales traction in the second quarter, but we did not do any G4 focused advertising in May ---+ or June, excuse me.
We just started to launch our G4 focused advertising in the third quarter and we will continue to scale that up throughout the third quarter.
So what that means is, the sales that you see in the second quarter, they are really based on our individual reps talking about that product to patients that initially responded to a G3.
So, in the past, where we've really seen an uptick when we launched G2 over G1, and G3 versus G2, it's really when we got the message out and led with the message on that new product, and people responded to that advanced product and the increased performance that we launched into the market.
So that's kind of a long winded way of saying it's still a little too early to tell if the sample side it is too small, and we are still a rollout ---+ in scale up phase that's going to take some more time for us to really know where we stand.
I think, again you know way too much about this market because you are kind of already taking my answers away.
I think it spans the spectrum.
We've seen a good indication that HMEs are beginning to consider non-delivery options with the success we had in the B2B channel domestically in the second quarter.
I have always said that this shift, when it happens in an event, it's more of a process that will likely take quite some time, possibly years.
But it does seem that more and more HME's are considering POCs as a way to reduce their overall operating cost, along with all the other things that you have mentioned like cutting back on service or dropping Medicare altogether.
But again, what we're looking at right now in terms of data is one quarter that suggests all that, and one quarter does not make a trend, but it certainly marks a departure from what we've seen in previous quarters.
Yes, so as we said, the domestic B2B strength that we saw in the second quarter is a combination of both traditional HME purchases, as well as the success of the private label product.
So both of those together were part of the very strong Q2 results that we saw in that channel.
So when we look at going forward and guidance and the increase in guidance and continuing to increase guidance in spite of seeing those additional rental revenue reimbursement reductions and declines year-over-year, it really is because the domestic B2B side continues to perform very nicely for the company.
And we continue to expect strength in those channels as more providers do switch towards non-delivery solutions like POCs, and particularly our POC.
And for the first time, in the second quarter in that domestic business-to-business segment of $16 million, over half of that was the private label plus traditional HMEs versus the resellers.
So we are seeing a lot of strength in that channel.
So last quarter we didn't provide it, but we did say that resellers were the majority of the Q1 2016 volumes.
So if it was the majority and it's $9.5 million, you're looking at at least $5 million was the resellers last quarter.
Thanks (multiple speakers).
Thank you.
Yes, sure.
I'll take that one <UNK>.
So, starting first with the rental side, you quickly picked up on the key message there.
So last year we had about $45.4 million of rental revenues and we said we expect rental revenues to decline now in 2016, 25% down off of that.
So that would be approximately $34 million in total rental revenue for the year.
It would be our current expectation and given what we've done year-to-date, that would put the next two quarters at approximately $7.5 million per quarter in rental revenues.
So that is a correct way of interpreting what we gave from a guidance perspective on rental revenue.
In terms of the fastest growing segment and what we expect on the back half of the year, we've already seen such strong growth on the domestic business-to-business side, compared to where we were last year, and we do expect that to continue.
So the increase on the guidance, as well as making up for the additional rental shortfall, it really falls into that domestic business-to-business channel more than the direct-to-consumer side.
Because we are still early in the G4 launch, we are not yet to a point where we would want to look at that direct-to-consumer guidance and increase associated with either different seasonality associated with G4 or looking at the productivity of the sales force.
So, but we have seen very strong domestic business-to-business success and we do expect that to continue for the next two quarters to round out 2016.
I'll take that one, <UNK>.
Really, I'm going to start with our coverage and our strategy on DTC, and that's national coverage, okay.
So, from a DTC standpoint, we've got a national presence.
We've got ---+ our competitive bidding contracts gives us pretty much access all across the country.
Our advertising drives awareness and demand all across the country.
But from a DTC standpoint, we've always kind of played ball with the HME providers, but they just really weren't ready to look at POC seriously in the past.
The reimbursement cuts seem to be driving at least some thinking that we've got to do something different, and we've covered our results here and talked about what we think is driving those results.
But on the B2B side, it's really the same thing, it's across the whole county.
The rates are now completely national.
You know with the rural areas going into play this year that took up the remaining 40% that was not under the competitive bid umbrella.
The Round 2 cuts hit half the country with another reimbursement reduction.
So, what we're seeing in terms of existing B2B customers that have bought a little bit more product, as well as new customers that we brought onboard in the second quarter, it's really all across the country, because the reimbursement cut, it hits everybody and it is going to drive everybody.
Okay,.
I'll answer the second one first.
And you know, we've always said that we feel we have a solid patent portfolio that covers our technology and our ability to come up with patient preferred products.
We've also always said that you can make a POC, you just can't make that POC.
And that is a very important distinction.
At the end of the day, this settlement is a testament that our patent portfolio is alive and well.
As far as the ---+ can it be used as a revenue generating tool.
Well that would require somebody infringing first.
And I can't comment on whether or not there will be any future or potential future activity on that front.
What we've always done in the past is to defend our patent portfolio if it's being infringed on.
The first question was, what's that study.
All I can tell you at this point is that we are collaborating on a study that involves the use of POCs.
I can't really say anything more than that at this point, not only because we don't want to, but because we really can't.
There's still a lot of work to be done.
Yes, I mean <UNK> it's really woven into the comments that we just made about business-to-business growth.
I mean I think that both the HME folks that buy directly from Inogen, as well as the folks that decide to purchase the private label product, we see those both being strong in the second half of the year, and it's reflected in our guidance.
So both.
And just adding to that, <UNK>.
We've had a great relationship with the private label partner.
They continue to invest in sales and marketing and continue to drive the conversion of POCs.
So we do see them as a critical partner for us and somebody who is performing very well for us, so we would continue to expect nice growth in that area of the business.
(multiple speakers) Remember, still POCs, as a category, have very little penetration.
And so we still have a large market that is on tanks that has the potential to convert to POCs over time.
And so our private label partner has been great at showing people how they can make POCs work for their business, in spite of the lower rental reimbursement rates.
No not really, <UNK>.
I mean we haven't seen anything markedly new on the competitive front.
As the homecare folks are coping with these reimbursement cuts and trying to decide what they are going to do differently, certainly a lot are looking to us.
They're familiar with our model.
We're a public company, so they can see our results.
We seem to be coping pretty well overall with the cuts.
And so a lot look to us because we have experience in that channel.
We've got a patient preferred product, so most people have had some experience with patients at least enquiring within their own DME company about our product.
So we haven't seen anybody that's migrating another path.
We are pretty pleased with that they are looking to us to help them with the solution.
So far, you see the results in the second quarter, and again for the guidance that <UNK> shared, we're hopeful that will continue.
Yes, so we're not going to breakout the specific impact, but it's really the decline from Q1 of 2016 to Q2 of 2016 is a mix between those private payer rate changes, as well as the provisions for rental revenue adjustments.
On the provision side, what that really is, is when we cannot procure the payment from the Medicare side, or on the private insurance side, for amounts that we've billed in revenue.
So that is the large driver of rental revenue adjustments.
That can be anything from a patient passing away and then having to write off that amount, or another provider being in the home, or an issue with the certificate of medical necessity, or timely filing of those claims, claims that enter the appeals process and are not approved through the appeals process.
There's quite a few factors that impact that rental revenue adjustments line.
But it really was a mix in the second quarter.
On top of that, we also have continued to tighten our intake procedures to try and improve the collectability of those accounts receivable balances.
Yes, I 'll take that one.
What we've seen in the past, and remember, we're several rounds into competitive bidding.
So historically, we've seen the private insurances, they would follow the rate reductions driven by competitive bidding, but there was quite a lag in the past.
I mean we'd see anywhere from six months to a year in a given area before private insurance started following down that rate reduction path.
What we saw this year is that private insurance companies started to follow the new rates basically a quarter after.
It's much quicker and much more aggressive in their timing of cost reduction, or rate reduction I should say.
So that was one of the things that was a bit of a surprise to us in the second quarter and it's really all across the country.
Again, remember that the rate reductions that just swept through this year between the rural areas and the Round 2 areas cover roughly 90% of the market.
So you've got private insurance companies, whether it's national players or regional players, they're all taken a look at that as a cost savings opportunity to reduce the rates.
No, we don't think that it's done yet.
We've seen some people start earlier than in the past, but that doesn't mean that they've finished earlier.
And we do expect, as <UNK> mentioned in her comments, that we will continue to see private insurance reductions throughout the rest of this year, that's our expectation, even though the Medicare rates are stable for the rest of the year.
It really depends on the volume.
So we don't break out ASPs by that level, but it really depends on the size of the customer and how much they are buying, what their prices would be.
I mean clearly the private label needs to be priced appropriately so they can sell into the traditional HME channel as well.
So private label sales would need to be able to operate at a margin, which means that at those same volumes they can still have a portion of that margin.
Yes, let me add to that.
On the private label front, our partner's done, as <UNK> already said, a great job of servicing the HME community, providing in-person service and handholding for those that need it, and there's a cost to that.
And by us basically ceding that responsibility to them, it's a cost that we avoid, but then they get some margin for that.
So if a provider comes to us versus looking at our private label partner, they are not going to see a difference in price between the two suppliers, they would see a price from both suppliers, as <UNK> said, based on their volume.
So higher volume, they're going to get a lower price no matter who they buy from, but equal volume it really doesn't matter.
Yes, so I'll take that one.
And you are correct, it's down about 8% on a sales revenue per unit sold compared to the second quarter of 2015.
I do want to first of all point out that at the same time, our sales cost-of-goods average on a per unit sold again is down almost 16% in that same comparative period.
So we have been able to improve our gross margin on our sales side of the business in spite of those lower ASPs.
And when you look at the ASP side, as we've continued to have success with the private label partner and traditional HMEs, those are in much higher volumes that what we saw in previous years as well.
You will expect to give slightly on price associated with those higher volumes, as well as you have the mix shift towards the business-to-business side compared to the direct-to-consumer side of the business.
So if you look at last year's domestic business-to-business as a percent of our total sales in the second quarter of 2015, it was about 30.6% compared to 35.1% in the second quarter of 2016.
So as you have higher domestic business-to-business sales in that mix, it has direct impact on that ASP.
Remember also that our direct-to-consumer business, the configurations they're buying tend to have more components in them.
They tend to buy extended warranties and batteries and those types of items, that also increases ASP and increases cost of goods associated with that.
So as you shift to more business-to-business sales, you have a lower level configuration being purchased versus the direct-to-consumer side of the business.
Yes, so on the sales gross margin side, when you look at the margin of the product, the real driver of the year-over-year decrease in cost was upgraded G3 product that launched in December of 2015.
So at really the first quarter of 2017, you'll start annualizing those large year-over-year decreases in cost of goods.
Now at the same time, you have G4 ramping up, which will provide additional cost leverage.
However, that cost leverage is a smaller amount on a per unit basis than what we saw on the G3 side.
And it also will enter the sales channels over time with starting direct-to-consumer then moving to business-to-business, as <UNK> laid out in his prepared remarks.
So you'll see that impact much slower than what you saw with upgraded G3 where we were able to convert all of the sales almost immediately to that new product.
Now where margin goes over time, that really depends on the mix of the business, how much is business-to-business, how much is direct-to-consumer.
And frankly that's one of the reason why we don't give a specific gross margin guidance, because while the business-to-business side does have a lower sales gross margin profile, it also has lower operating expenses associated with it.
So we really focus on how do we optimize the bottom line, and where our margin versus OpEx falls in between, it just depends on where the business is coming from.
Yes.
So, you have a couple of things going on there.
We will still see a little bit of headwind next year that just comes from the year-over-year because not all of the cuts of 2016 were effective in the first half of the year.
So as you still have a little bit of an overhang there.
It's not as much as we are going to see in the second half of 2016, but there is a little bit of an overhang there.
Then the rates will be stable for two years or so.
There's not going to be any (inaudible) until the beginning of 2019 I believe for Medicare.
So once we get through that overhang, which would be around the middle of next year as far as the Medicare market is concerned, that's going to be kind of the new reality, the new baseline.
And I wouldn't want to venture of predicting what pricing is going to look like 2019 and beyond, but what I know is that there is not going to be as many waves anymore because starting at the middle of 2017, even on a year-over-year comparison, it's all even-steven, it.
s all on an even keel.
We are responding to that in two ways, right.
One is that we put more emphasis on sales, just to kind of drive through the transition.
There will always be rentals because not everybody can afford a $2,500 or $3,000 purchase.
And those that can't, we will take on rentals assuming that all of the necessary requirements are fulfilled.
And what we are doing, like many other providers I'm sure are doing these days, is to be extra careful and double check, and be a bit more rigorous when we take on rental patients, simply because at these rates we can't afford the effort of chasing after paperwork and doctors' orders and signatures.
So we have to have that right from the get go and the same goes for co-pays, right.
At these rates, we can't afford the administrative effort to chase co-pays.
So that will, for a while, create a bubble in which rental intake slows down until it normalizes and everybody is doing it and it's a new reality, and then I think patient intake will return to normal levels.
But in the meantime, you have kind of a double-whammy right.
On one hand, we are slowing down the intake because we are more rigorous on the requirement.
And two, relative to years passed, we are putting more emphasis and stronger emphasis on the sales side of things and less on the rental side of things.
Did that answer your question.
| 2016_INGN |
2016 | FR | FR
#<UNK>, do want to handle that.
We'll break down the components of the same-store for the second quarter.
Overall we are at 6.3%.
And where that came from was rent bumps and cash increases are, what, 3%.
The drop in free rent was about 2.5%.
And as you mentioned on the expenses, the other major contributor was a drop in the landlord expenses.
And the real estate tax refund, that was about another 60 basis points.
Going forward, we still have some opportunity on the real estate tax refunds, but it may not be quite as much as we've seen in the past.
And then, <UNK>, this is <UNK>.
In the second-quarter outperform, that caused us to raise the midpoint of our same-store guidance by about 50 basis points.
That's a little over $1 million or about $0.01 a share.
Again this is actual compared to our guidance.
About half of that, or $500,000, is due to lower bad debt.
Again, we budget about $750,000; that came in at $225,000.
And the other $0.005 had to do with lower landlord expenses, and a little bit of pickup on same-store average occupancy compared to plan.
<UNK>, the other part, the main part of the drop was just overall utilities.
Landlord utilities was a big factor in there, too, also.
Correct.
I think the math that we are getting, <UNK>, is if you look at our midpoint guidance of 5%, and you back out our first two quarters of actual, you get a little over 3% same-store growth.
That's basically comprised of rental rate bumps and increases in rental rates.
Now, the first half of the year, we got the benefit of free rent burning off that we're not getting the benefit for the second half of the year.
Now, keep in mind, there could be some other upside potential as we had in the first two quarters.
For third quarter and fourth quarter, we've budgeted $750,000 each quarter for bad debt expense.
If we come in the same as the first quarter and the second quarter, which is about $200,000, our same-store would go up roughly about 80 basis points.
So that's the construct of what we're looking like for the back end of the year.
I'll have <UNK> jump in on that.
But we feel very good about what we're seeing in Southern California.
We're very excited about The Ranch in the Chino/Eastvale market, submarket.
We've had great success and we've got a great team.
And <UNK>, why don't you talk about that.
But I would expect that if we can find more product, we would continue to do it.
We do it and we have great success.
Let me add one more thing ---+ and <UNK> can talk about it ---+ we also have again a wonderful site that can accommodate about a 1.4 million square feet that is ---+ you might talk about that.
So we are bullish on Southern California.
And now you should expect us to continue to be pretty bullish on that.
Now, don't be rude like <UNK>.
I mean, that (multiple speakers).
I would say we're very encouraged.
We have narrowed down the candidate list.
And again leadership is the number-one thing.
But we are very excited about it and we've got great candidates, and we're making good progress.
But other than that, we're not going to say anything until we announce something.
But we are very confident that we'll have my replacement in place prior to the end of the year.
My successor, exactly.
Right.
Let me have <UNK> handle that.
<UNK>, this is <UNK>.
In Minneapolis, you're correct; we have some opportunity there.
Most of our vacancies are in the Northwest submarket, a series of different buildings ranging in size from about 25,000 feet to 221,000 square feet.
That Northwest submarket has seen a fair amount of new supply, and absorption has been a little bit slower; so, certainly competitive.
But we have continued to make progress on the smaller 25,000 to 30,000 square foot spaces.
But we still have work to do on getting the larger of those, particularly the 221,000 square foot space, done.
But we're confident in our team's ability to do that and drive the occupancy up there.
And then in St.
Louis, which has been a pretty consistent performer for us, we have a couple of spaces there that certainly meet the market from 25,000, 50,000, 100,000 square feet.
And we have work to do.
But those spaces have been occupied, and again we have confidence in our team's ability to have them reoccupied.
As far as 2017, we'll give you when we do the 2017 guidance.
And we'll report at that time.
<UNK>.
<UNK>, one quarter does not really make a trend.
And we actually said in our comments, we talked about the renewal sign and commencing in all of 2016.
That overall cash rental rate increase is 6.1%.
And then you also heard that right now we only have 2% or 1.4 million square feet of the portfolio is rolling the remainder of the year.
So that's ---+ again, that one quarter just doesn't really make a trend.
<UNK>, there was one transaction.
They already brought that down.
<UNK>, do want to take that.
<UNK>, do you want to take that.
Make sure you execute on your developments and we are executing [free up] new capacity.
And <UNK>, again if we have a build-to-suit, that doesn't count because that's ---+
And <UNK>, that includes the four starts that we presented on the call ---+ the four new stores in third quarter and fourth quarter, as well.
(multiple speakers) Park 94.
<UNK>, you want to take that.
Yes, on Southern California, the big ---+ let's do our property (multiple speakers) our $1.4 million (multiple speakers).
And The Ranch land is a lot more expensive.
Great.
Well, thank you for joining us on the call.
If you have any questions, as always, please call <UNK>, <UNK>, or myself, and we'd be happy to answer them.
And we appreciate your interest in First Industrial.
Thank you.
| 2016_FR |
2016 | CUBI | CUBI
#Sure.
<UNK>, we will do loan sales whenever we feel there is an opportunity for us to get a nice good price for it because we are not in the business of multifamily.
It's not a mortgage banking operation; it is a business that we are in for holding them in portfolios.
In the first quarter we didn't do any loan sales because there was somewhat of uncertainty in the marketplace as to the valuation of these multifamily portfolios, but you shouldn't be surprised if we do, do a loan sale of multifamily in the second quarter.
And then going forward, we are seeing payoffs and prepayments add up to somewhere between $150 million or so a quarter of multifamily loans and so if we do book more ---+ significantly more than that it's probably because, like you said so correctly, that we see opportunities for loan sales and we are very focused on improving our capital ratios without sacrificing earnings growth.
I think all of the above.
We are attracting the graduates.
We're doing a lot of testing on various approaches that work.
We have a BankMobile list program which is at non-Higher One colleges and universities who are bringing in a lot of these customers to us.
About all I can say to you is that direct BankMobile to consumer is not a frictionless process.
Indirect BankMobile through someone else, whether it's affinity group or its colleges and universities, whether it's BankMobile list, those kinds of things are much more effective that we are finding and much more cost-effective and a better quality of the customer that we are finding.
We will be talking a whole lot more about this, Frank, on June 3.
We will give it out on the Analyst Day and we will also share with you what our goals are at our Analyst Day.
All of it.
Almost all of it.
98% came from commercial customers.
Our average cost of funds on deposits for the quarter went up by about three basis points.
<UNK>, do you have it broken down by different categories.
Yes, I do.
I can tell you on ---+ I can't answer his question specifically in terms of those specific assets ---+
Money market deposits.
There's no reason to think these are different.
Money market deposits are at 58 basis points, Frank, and these are coming on in that 50 to ---+ in that ---+ generally in that price range.
We are not willing to do any of the things that you heard from our competitors, Frank.
Let me just make that clear.
There's nothing new about competition.
This is ---+ as banks woke up in the last two years to say, my God, we got to start generating more revenues, how do we do it.
And then they all sort of realized the ones who are generating revenues are the banks who happen to be doing a lot of New York multifamily and you've seen a lot of new entrants in the marketplace and the only way that they believe they can compete with us and with Signature and with New York Community is by price.
Well, I can tell you this; this is not just a price-sensitive market.
This is very much of a relationship business.
Even though it's done through brokers predominantly, it is entirely a relationship business.
And we are not going to be playing the price game with any of our competitors, even if it means we have to stay out of the market.
We have never made a multifamily loan below 3.25%.
We told you our average yield on the business we put on in the first quarter was 3.4%.
(Multiple speakers) No I/O.
No 10 years.
So that tells you it's not a commodity.
Yes, and if it changes we will change our business focus too rather than just match them.
Anybody else, Jessica.
| 2016_CUBI |
2016 | AME | AME
#It was difficult to hear you, but I think I have your questions.
The oil and gas business, as we talked before, was lower than forecasted in Q2, but stabilized.
So we saw orders in that second quarter that really matched our Q3 volume level.
So we feel good about that.
Coming into the year, it was about a $360 million business from AMETEK, about one-third of that is upstream, one-third of that is midstream and one-third is downstream.
The business is one-third US and two-thirds international.
We have $120 million take down this year, so the $360 million is going to be down $120 million.
That's about one-third.
It's about $60 million down in upstream and $60 million down in the combination of mid and downstream.
So, if you look at our upstream exposure, that's down about 60% and our mid and downstream exposure's about 20%.
Yes.
The pricing in the energy market is below the average for the whole Company.
It's a very difficult environment.
They have had to reduce cost to stay in business.
We still can maintain pricing because we have very premier positions with niche differentiated technologies, but it's certainly not at the AMETEK level, on average.
We are down a bit in the energy market, more in the upstream than the mid and downstream.
Sure.
Organic orders were minus 7%, so that was in line with sales.
Our EIG organic orders were down 5%.
EMG organic orders were down 9%.
Sure, <UNK>, I'll go around the world.
In the US, we were down high single-digits versus last year.
There was broader industrial weakness but the key factors driving the negative growth were oil and gas and metals.
In Europe, it was down low single-digit, so we've been at that level for several quarters.
Oil and gas impacted the region.
But we don't have much metals exposure in Europe.
In Asia, we were down mid single-digits.
China was down mid single-digits.
So, there was a little bit of an improvement in China, it was a better trend for Asia.
We were down double-digits for three quarters in a row.
Now, we are down mid single-digits.
China was a negative 4%.
Orders for the region, the entire Asia region, were a little bit better than the prior year, so it seems to be that Asia is stabilizing.
China is stabilizing.
The one emerging market that I'd point out that's doing better than the others, is India, that we have aboutmid single-digit growth in India.
It's a much smaller exposure, but our investments there are paying off.
Yes.
If I look at the trends in the US, even though we are down high single-digits, it's slightly better from last quarter.
Europe, that same trend is continuing.
In Asia, we are improving a bit but really it's ---+ we don't have anything factored in.
It's really a down mid single-digit.
Geographic wise, it is squared with our concept of stabilization.
Fundamentally, our business has stabilized.
We are working on earnings growth for 2017, now.
We're focused on our business.
We are getting ready to go into our budgeting process.
That budgeting process that we go through in Q3 and spreads into Q4, there's really no area immune from efficiency improvement.
We're going to look at things like global sourcing, low-cost region production, value analysis, value engineering, plant consolidations, all the tools that we have and we are going to get a healthy cost reduction target.
We're going to pair that with acquisitions.
That's how we're going to grow earnings next year.
So, geography is not a big factor in thinking through what we have to do for the balance of the year or what we have to do next year.
Yes.
That's direct exposure, it's not indirect exposure.
So, obviously, some impact in other markets that are not oil and gas related.
But that's a direct exposure and that will be down about $120 million this year.
Right.
Yes.
The total market exposure for AMETEK ---+ most of it is in process, but the total market expansion for AMETEK exposure, going into the year was $360 million.
That's the entire exposure.
I was talking about the indirect exposure, for example, you look at the helicopter market.
They used to use helicopters to fly to offshore platforms, so there's less demand for helicopters.
That's in our business jet and regional jet segment, that's where we report it.
So, when I was talking indirect, I was talking that.
The total oil and gas exposure is the $360 million.
Okay.
Thank you, Brandy.
Thanks everyone for joining the call today.
As a reminder, a replay of the call can be accessed at AMETEK.com and streetevents.com.
As always, we're available for additional calls and questions this afternoon.
Thank you.
| 2016_AME |
2016 | TYL | TYL
#Thank you.
I don't know if I have percentages for you, <UNK>, but ---+
Yes.
But there are a number of places where it's pretty productive right now.
Probably the most productive area is EnerGov.
So EnerGov, when we bought them, we kept their direct sales channel in that space, and so if a large county comes out for their solutions, they handle that as they did before on a direct basis, but we also trained our other sales channels on their products, product presentation, and so we do what is a lot of incremental business through our other sales channels, I guess a lot of it through the Munis sales channel.
A lot of their solutions include EnerGov now, and it's a pretty big-ticket item.
So if they sell a $500,000 Munis license, it might drag a $200,000 license for EnerGov, so that would be an example where it's very active and it's very incremental and it also improves our competitive position, so you'll never know for certain, but that could've been a deal that maybe Munis wouldn't have won without it, so all good stuff and all the kinds of things we're trying to accomplish with those types of acquisitions.
On our criminal justice side, now, which we've talked a lot about our objectives there, which we'll deliver a solution that's different than exists in that marketplace, so ---+ and it isn't just the big ticket items, so New World's public safety and obviously our Odyssey system, as they combine and will drive synergies there, but the SoftCode solution that we acquired a couple of years ago is in this whole alliance, the Brazos system, which is mobile devices and applications in the field.
That's a lot of potential.
So it's happening.
It helps in a lot of ways, obviously, this incremental revenue.
It improves the competitiveness of the core system by adding on these other extensions, and we do see more of it.
If you look historically at Tyler, we have this broad offering that really nobody else has, but we have focused on those individual applications individually in this ---+ call it the first phase of Tyler's product strategy.
The next phase of the strategy does have a lot more focus on building horizontal, use of these different applications, adding benefits and value to using multiple products.
And so we talked about I think last quarter creating an incremental R&D team that's led by Jeff Green, that focuses on those synergies, and there's a lot of that now so that it's not just having two products from the Tyler family, but really being able to specifically identify tangible advantages to having multiple Tyler suites.
All right.
Thanks, <UNK>.
Okay.
Well, thank you, Gail, and thank everybody for joining us on today's call.
If you do have any further questions, feel free to reach out to <UNK> or myself.
Thanks again.
Have a good day.
| 2016_TYL |
2015 | IFF | IFF
#Well, I cannot give you an exact rate, but I can tell you that the majority of new wins are the result of health and wellness solutions.
We have fantastic proprietary tools, which help [taste] calorie-reduced beverages taste better and we constantly make progress.
It's not like we have a few molecules and we only deploy them and we rely on the success of a few of them.
Over the last few months and quarters, the teams have made significant progress to come up with additional new solutions and frankly, we feel really excited of, first of all, the opportunities which we have; second, also on the success rate; and third, on partnering much closer with our customers together.
It is purely external sales and here it is very much targeted towards one specific segment of the market.
So we have some visibility into it and what we decided is not to participate in some lower margin business.
And as you know, we have been rationalizing both the portfolio and our footprint ingredients, especially in North America.
You remember that we had closed our manufacturing end of August last year because we knew that we would be facing some pressure.
So it was a decision for us not to participate in some specific contracts.
And <UNK>, from a definitional standpoint, it's sales in the US market; it's not exports from the US market.
For the year, you will see some pressure in North America for ingredients and then that will be a new base for the future.
Fourth quarter, <UNK>.
Yes, that's a great way to think about it.
<UNK>, good question.
We certainly look what can we do to fund the journey internally so that we will reallocate some of our resources towards our new programs and that's what we are doing.
Secondly, we certainly look at let's say our footprint and we already have, I would say, a pretty good natural hedge, but we have to look into it whether we can do some of these programs in areas where we have at the moment a euro exposure like in Europe.
And as you well know, we have brought about one (inaudible) employee base in Europe anyway, so that is certainly in the cards to look into it how we do it in the most efficient and effective way for us.
So these are the things we are looking into.
I think it was an easier comp.
If you look at the growth of 10% last year in Q1, you know very well that the market did not grow 10% and that growth really was primarily driven by new wins, but also by a customer prebuilding inventory before the implementation of SAP, something that reversed itself over the course of 2014.
So factoring that comparison and looking at the business over a two-year period, performance in Q1 2015 actually accelerated on a two-year average.
As such, we will expect our performance to return to growth going forward.
Yes, <UNK>, we are always looking at ---+ I think the levers that we can pull are looking at the spend and trying to be focused in terms of where that spend occurs and make sure it is focused on driving the business, whether it is on the R&D innovation side or on the commercial side to drive and accelerate the growth.
From a productivity standpoint, we look at opportunities day to day in our manufacturing operations, whether it is through capital investments or process improvement, to try to gain some leverage and that is inherent in our model.
And so I think those efforts will continue.
We may have some pressure near term when you combine currency in some of these new investments, but long term I think the model still works.
Well, we are flat year-over-year as it is in the first quarter.
So I think we have always said, look, we are not going to expect to have the kind of margin expansion that we had in prior years.
That is not possible.
I think we're going to be challenged by some of the mix impacts on the fragrance business.
But I think there are some opportunities that we'll look at, but there is some challenges from a timing standpoint.
Okay then.
Let me conclude the call.
So we are pretty pleased with our first-quarter performance, very robust in terms of 6%, which is certainly outperforming the market, which we expect 3% growth.
We have given you our outlook for the rest of the year, so we expect that in currency-neutral terms we will stick to our guidance and we certainly have an opportunity June 2 to update you on our let's say five-year strategy for 2020.
Thank you very much for participating and I hope I see many of you in New York here June 2.
Thank you and goodbye.
| 2015_IFF |
2016 | AMPH | AMPH
#Thank you, operator.
Good afternoon, and welcome to Amphastar Pharmaceuticals Second Quarter Earnings Call.
My name is <UNK> <UNK>, President of Amphastar.
I'm joined today with my colleague, <UNK> <UNK>, CFO of Amphastar.
We appreciate you joining us on the call today and look forward to speaking with you and answering any questions you may have.
I will now turn the call over to our CFO, <UNK> <UNK>, to discuss the second quarter financials.
Thank you, <UNK>.
Sales for the second quarter increased 26% to $68 million from $53.9 million in the previous year's period.
Sales of enoxaparin declined $17.3 million from $19.5 million due to lower average selling prices.
Unit sales of enoxaparin continued to hold up, as we maintained market share during the second quarter.
Other finished pharmaceutical product sales increased 52% to $46.2 million.
This increase was primarily due to increased sales of Lidocaine, naloxone, epinephrine and phytonadione.
Naloxone sales increased to $15.6 million from $10.7 million on strong unit volume but lower average pricing, as the company increased discounting and rebates.
Our insulin API business generated sales of $4.3 million, as MannKind purchased a portion of their unfulfilled 2015 commitment.
Cost of revenues declined in dollar terms to $36.3 million.
More importantly, we saw gross margin improvement to 47% of revenues from 25% of revenues in the previous year's period.
Improved pricing was the main driver for the increase in gross margin, but we have also lowered our cost of goods on enoxaparin, which partially offset the pricing declines there.
Also an increase in production levels at our French facility and at our IMS facility increased our overhead absorption.
Selling, distribution and marketing expenses decreased slightly to $1.3 million from $1.5 million in the previous year's period.
General and administrative spending decreased to $9.5 million from $11.3 million, primarily due to lower compensation expenses.
Research and development expenditures were down slightly to $10.5 million from $10.7 million in the previous year, as the PDUFA fee for the intranasal naloxone offset lower clinical trial spending.
We expect an increase in clinical trial spending in the third and fourth quarter of this year.
The company reported another profitable quarter with net income of $6.9 million or $0.15 per share compared to last year's second quarter net loss of $6.6 million or $0.15 per share.
The company reported an adjusted net income of $10.3 million or $0.23 per share compared to an adjusted net loss of $3.9 million or $0.09 per share in the second quarter of last year.
Adjusted earnings exclude amortization, noncash equity compensation and impairments.
On June 30, 2016, the company had approximately $66.7 million of cash, cash equivalents and restricted cash.
In the second quarter, cash flow from operations was approximately $9.3 million and was positive for the ninth quarter in a row.
Subsequent to the quarter end, we used $7.7 million of the cash on hand to purchase IMS U.K. from UCB, which <UNK> will discuss further in detail.
The cash expenditures for our CapEx project in France will ramp up significantly in the third and fourth quarter of this year.
We reviewed our financial assumptions on the ---+ for the model on the last call, and the only change is related to a potential timing issue with our retail revenues of enoxaparin.
With the termination of our contract with Actavis, we may not be able to ship retail units from September until January, unless we partner that product and have shipments to that partner.
Retail sales of this product have been running between $12 million and $13 million a quarter for the last few quarters.
I will now turn the call back over to <UNK>.
Thanks, <UNK>.
We made a lot of progress since our last earnings call in May and are happy to report another profitable quarter.
We had EBITDA of $13.6 million on $68 million of revenues.
In addition, cash flow from operations was $9.3 million, which, as <UNK> said, now marks nine quarters in a row of positive cash flow.
We continue to make good progress on our pipeline and remain on track to file an additional three ANDAs in 2016.
We resubmitted our NDA for Primatene on June 28, 2016.
On July 28, 2016, we received a letter from the FDA accepting our resubmission and stating that the agency considers the resubmission to be a complete Class II response to our May 22, 2014, action letter.
Therefore, the FDA provided us with a PDUFA date of December 28, 2016.
We consider this a big milestone for the company and are hopeful that we could receive approval by the end of the year, and launch the product back to the OTC market in the beginning of 2017.
We filed our NDA for intranasal naloxone on April 19, 2016.
On June 29, 2016, we received a letter from the FDA stating that the agency had completed its filing review and determined that our application is sufficiently complete to permit a substantive review.
The review classification for this application is considered standard.
Therefore, the FDA provided us with the PDUFA date of February 19, 2017.
As we have previously discussed, our naloxone injection product has been successfully used for years by first responders, who add a nasal adapter to administer the product to overdose victims.
We believe that FDA approval of this life-saving product is an important step in fighting the opioid epidemic that is affecting our country.
We are encouraged by the state and federal laws that are being enacted to allow greater access to naloxone.
As <UNK> discussed, pricing for our naloxone injection product has decreased, as we continue to offer discounts to customers and rebates to numerous states.
However, unit growth remains strong, partly due to the fact that our naloxone syringes are now being sold by retailers in many states.
We look forward to being able to market an intranasal version of the product, which can be more easily used by the general public.
On June 30, 2016, we entered into a termination agreement with our partner Actavis, regarding distribution of our enoxaparin to the retail market.
We believe this presents us with several positive opportunities, including entering into a new partnership agreement or directly distributing our enoxaparin to the retail market.
If we decide to sell directly to the retailers, as <UNK> said, there will likely be a reduction of sales in the fourth quarter, but thereafter, we would receive 100% of the retail profits.
Finally, in terms of business development.
On August 1, 2016, we acquired International Medication Systems (UK) Limited from UCB Pharma for $7.7 million, which included the marketing authorizations for 33 products in the U.K., Ireland, Australia and New Zealand, representing 11 different injectable chemical entities.
The products are generic injectables, including adrenaline, atropine, calcium chloride, Lidocaine, morphine, naloxone and sodium bicarbonate.
This acquisition allows us to further expand into the international market and provides for great synergies, given that we already make these products for the U.S. market.
We plan to transfer the products to our facilities in California, which will require U.K. regulatory agency approval before the products can be relaunched.
We anticipate that such regulatory approval and launch will take approximately 12 to 18 months and expect peak sales of $4 million to $5 million from these products in two to three years.
With that update, I will now turn the call over to the operator to begin Q&A.
Yes, sure.
On the naloxone, we've seeing steady market share and steady unit volume in the hospital.
In the first responder, some of that data we get, we know clearly that it's a first responder, but others we don't.
So we have to kind of guesstimate a portion of it that that's going to areas that we're ---+ where we don't know where it's going, so we're guessing that a significant portion of that's going to first responder.
And we've seen that market continue to grow in double-digit rates over the course of the past couple of years.
And what's new this quarter is that we've actually begun some relationships with some actual retailers, who are stocking it for the retail portion and are actually distributing the drug in local drugstores.
So that's new for us.
This is the first time we've ever sold to these people directly.
That's not to say some of the retailers could have been purchasing our product through a wholesaler at the high price before, but now we actually have contracts with a couple of different large retailers to stock the product.
And they are stocking the injectable product with the Luer-Lock tip.
Sure.
So let's start out with the short-term pipeline.
So with respect to the four injectable ANDAs that are currently on file with the FDA, we anticipate approval and launch of one of our pre-GDUFA filings by 2017.
We've had good communications with the FDA to give us that opinion.
And that ---+ there is no generic with respect to this injectable product, although, for competitive reasons, we have not stated what the therapeutic area or what the product is, but it is a significant product.
As we've talked about, the four ANDAs on file represent over $500 million in market opportunity based on IMS data, and this is by far the largest of those four products and makes up a significant portion of that $500 million.
And so that's, in the short term, we believe that we could get approval and launch in 2017.
And that's a generic injectable with no generic competition.
As I stated in my prepared remarks on the new drug side, we are expecting or hoping with the PDUFA date of December 28 for Primatene and then the PDUFA date of February 19 for intranasal naloxone, to get those done in the short term.
With respect to your second question regarding ADVAIR, you're correct, we've never confirmed or denied whether we're working on that.
You have actually done a good job at looking at our DMF filings and ---+ so we did read an analyst report that surmised that, that may be a product in our pipeline.
And we have talked about the guidance before.
We do believe that the guidance, as currently drafted, is not as tight or as stringent as we believe it ultimately will be.
Recently, we did see a study that was conducted, which indicates that bioequivalence could be difficult and ---+ we don't typically talk about competition, but we do realize that there is one company that has confirmed that they actually have an ANDA on file.
But the others, we believe at least with respect to one, would be a 505(b)(2).
So we think regardless of the timing, if we were to work on such a product and it's such a large product that there would be great opportunity.
And products like those are the type of products that Amphastar likes to focus on because of the technical barriers to entry.
So first, we would launch ourself.
We do have the relationships with the retailers.
And although it's been off the market for quite a bit of time, we still get inquiries from these retailers on a periodic basis.
It's always sold well, don't have to pay for shelf space.
With the PDUFA date of December 28, we're hopeful to get that approval by the end of the year, and we would be prepared to launch at the beginning of 2017.
We do think it will take some sales ---+ some marketing and some advertising to let people know that it's back.
And it could take a while to get back to those peak sales of $65 million, but we're confident that we can get back to that and even higher.
Sure.
So to start out with Primatene, we discontinued it due to the environmental reason of the CFC in 2011.
So I pulled that out of the dataset.
But for 2000 ---+ 2009 and 2010, we did $65 million in revenue.
So those are the peak revenues that I was referring to.
And we believe that we can get back to the $65 million, and ultimately, exceed the $65 million, just based on the fact that this has been off the market for five years.
We think we can take some inflationary pricing, not to mention that we do believe it's an improved product.
The old product was in a glass container.
This one is aluminum.
And this one now also has a dose indicator.
So that $65 million is what we're looking at and hoping to ultimately go beyond that with some marketing.
With respect to the ANDAs, we are on track to file another three in the second half of this year.
And then for 2017, we're looking to keep a steady pace, but probably, realistically, four in 2017.
And this is with respect to ANDAs.
Sure.
Couple of things were really driving it this quarter and some of those were the product mix that we had in the quarter led ---+ lending itself to some higher margin sales there.
And also, because of our factory utilization in France and then IMS, we manufactured more units than we have on average over the past few quarters, which led to higher overhead absorption in the quarter.
Some of those trends may or may not continue, especially, I'll say, in France, there is a good chance that, that manufacturing ramps down a little bit depending on the sales that we're going to do for the next 6 to 12 months there.
So that might not continue.
No.
It was just timing of certain activities that we had in the plant.
Earlier this year, we had an FDA inspection, and were kind of concentrating on that and ---+ kind of ramps back up this quarter, to make up for some lost time last quarter.
Yes.
So a couple of things there.
On naloxone, there was ---+ we did have higher ---+ as I mentioned, this is the first time we began shipping into the retail sector of that market.
So I don't know if that's sustainable or not because we've had some initial shipments there, but have not seen the reorders coming out of there yet.
So that may not be a repeatable number.
And then, as I mentioned in my comments, in the fourth quarter, we might have a timing issue with the enoxaparin sales on the retail market, which has been running $12 million to $13 million.
If we do not partner with another company on that, then we would not have those sales in the fourth quarter.
Yes, so both of those are trending down, both naloxone and enoxaparin and ---+ so I would continue to expect to see pricing decreases on those products.
Although they're fairly ---+ we're talking about single-digit declines, not big declines and ---+ but then partially offsetting that is that we are bringing down the cost of enoxaparin, as we have brought down the raw material cost.
And then there is also the possibility that we could get approval ourselves on the heparin, which goes into enoxaparin.
So if we can potentially bring that cost down a little bit more with that as well.
So there is some opportunities on the cost side as well.
I just like to add on naloxone.
The pricing is coming down.
A lot of that has to do with the discounts that we have been offering to the various states around the country.
And one, we want to offer those discounts so that's affordable for the government.
Two, we think that helps us keep our market share with the first responders, ever since Adapt got their approval of intranasal naloxone.
The good thing is we continue to offer rebates to the states, and they're trained on our product and like our product.
So I think that's a good opportunity to keep that business and even grow it.
Yes.
Good question.
So we have two plants here, one is our IMS plant in South El Monte and that ---+ in the last quarter, that ran pretty much at capacity as far as manufacturing went and really can't get any more units out of there.
However, we are in the middle of $11 million CapEx improvement at that plant, where we will be able to increase the capacity for our prefilled injectors out of that plant, hopefully, by the end of next year.
And we are bringing certain products essentially from the Hikma products and also all of the IMS product ---+ IMS U.K. products to that facility.
However, on the IMS U.K., we have to be inspected first by the U.K. authority there, and we will not be able to sell until we get that approval.
So we will not be making those products until we get that authorization approved.
And then our at Amphastar plant, we ---+ 95% of our production is enoxaparin.
So there is potential that we will ramp that down a little bit in the coming quarter.
However, right now, this plant is running at about 50% capacity.
However, a significant portion of our pipeline will be manufactured at this plant, and we are making ---+ we do have multiple R&D batches of different products set to be made in the second half of the year here.
Thank you very much, operator.
This concludes our call for today.
Thanks, again, for participating, and have a great rest of the day.
| 2016_AMPH |
2015 | DDD | DDD
#Good morning, everyone, and thanks for joining us today.
During the second quarter, we increased revenue by 13% to $170.5 million, representing a 22% increase on a constant currency basis.
The stronger US dollar reduced our revenue by $14 million at comparable second-quarter 2014 currency rates.
Several factors, besides currency, adversely impacted our revenue for the quarter.
Including continued industry level challenges, macroeconomic weakness, particularly in Asia Pacific, and remaining printer quality and performance issues related to specific nylon and metal applications that impeded our ability to sell additional printers during the quarter.
Altogether, these factors contributed to a 5% decline in organic revenue compared with the second quarter of 2014.
At constant currency rates, organic growth was 2% for the second quarter.
Overall, we were disappointed with our results.
While a period of high growth enabled us to acquire strategic assets and build critical expertise, our rapid expansion permitted certain operating inefficiencies that we are currently addressing.
Specifically, we're enhancing the quality of our products and services, accelerating synergy and cost reduction measures, driving process improvements, and working closely with our channel partners to improve our sales operations and worldwide coverage.
For the second quarter, our design and manufacturing revenue increased 12% over the second quarter of last year and 11% sequentially.
Growth within this category was curtailed by lower printers and materials sales, but benefited from greater software and services revenue.
We were pleased to see that the industrial customers with mission critical applications, including aerospace and healthcare customers, began to resume their planned purchasing during the quarter.
This contributed to sequential unit growth in SLA, SLS, and DMP 3-D printers, while jetting printers leveled off after several quarters of sequential decline.
Consumer revenue in the second quarter increased 27% compared to the second quarter of 2014 but decreased 41% sequentially on lower demand.
We entered 2015 with some residual backlog from delayed product introductions in 2014, which contributed to a higher consumer revenue in the first quarter.
Factoring out this effect, net quarterly bookings, which exclude backlog, decreased sequentially by approximately $1.4 million in the second quarter.
Increasingly, we're investing more of our efforts into education and desktop engineering.
Two categories that we believe hold more immediate opportunities for our consumer products.
As we continue to leverage resources and capabilities in support of key growth areas, we're observing some progress.
In metals, revenue for the first six months increased 14% on a 37% increase in printer units.
We believe that residual application and performance issues impeded growth, and we're working diligently to remediate these issues.
In healthcare, revenue for the first six months increased 32% to $64.8 million on expanded products and services.
And in software, revenue for the first six months increased 119% to $37 million, including the addition of Cimatron.
And with that, I like to turn the call over to <UNK> <UNK>, our Chief Financial Officer, who will discuss our financial results in more detail.
<UNK>.
Thanks, <UNK>.
Good morning, everyone.
For the second quarter of 2015, we reported revenue of $170.5 million, an increase of 13% or a 22% increase on a constant currency basis.
We reported a GAAP loss of $0.12 per share, and non-GAAP earnings of $0.03 per share.
For the six months, we reported revenue of $331.2 million, an increase of 11% or a 19% increase on a constant currency basis.
We reported a GAAP loss of $0.24 per share, and non-GAAP earnings of $0.07 per share.
Revenue from the Americas increased 15% for the quarter driven by healthcare, software and services, as well as higher sales of 3-D printers to industrial customers.
EMEA revenue increased 25% for the second quarter from expanded products and services, and improving performance of our European channel partners.
Which, excluding the impact of foreign currency, generated healthy organic growth.
Throughout the quarter, Japan, China and Korea shouldered adverse macroeconomic conditions, resulting in a 9% decrease in revenue in APAC.
During the second quarter, products revenue increased 10%, driven by expanded healthcare and software products.
Materials revenue for the quarter declined 4%, primarily as a result of a $1.5 million loss in sales to standalone service bureaus that have been consolidated by us and others and a $2.7 million impact from adverse foreign currency changes.
Services revenue increased 28%, driven by growth from software services, as well as healthcare services, quick parts and printer services.
Gross profit margin remained flat at 47.9% compared to the second quarter 2014.
Within categories, our materials gross profit margin increased on mix and operational efficiencies, despite the lower volume of sales.
Our services gross profit margin expanded on higher healthcare and software contributions, and improving quick parts gross profit margin.
Higher software and healthcare margins positively contributed to products' gross profit margins.
However, these gains were not enough to offset the impact of an inventory write off, and higher than normal manufacturing variances attributable to consolidation of production facilities, which pressured products' gross profit margin and restricted total gross profit margin expansion.
We reported second-quarter operating expenses of $105.5 million, inclusive of $25.7 million of R&D expenditures that amounted to 15% of revenue.
R&D expenses increased primarily from new product developments and acquired businesses R&D expenditures.
SG&A increased $79.7 million, primarily from acquired expenses including intangibles amortizations and higher compensation.
Cash operating expenses increased 11% sequentially, primarily from the integration of acquisitions.
During the quarter, we used $6.4 million of cash in operations, and paid $15 million for acquisitions in venture investments.
We exited the quarter with $171.2 million of cash on hand, and we have not used any of our available $150 million revolving credit facility.
We ended the June quarter with $130.7 million in inventory that we plan to reduce over the coming periods.
While we enjoyed some sequential improvements in printer sales, we estimate the inventory held by our channel partners at the end of the second quarter remained at first-quarter levels.
Our order book increased 3% from March, and we exited June with $38.8 million of orders in hand.
As <UNK> mentioned earlier, the recent period of high growth allowed us to assemble key assets and expertise, but this phase also permitted certain operating inefficiencies.
Therefore, during this challenging period, we are focusing on driving productivity and efficiency measures to achieve greater operational leverage.
Specifically, we are continuing to consolidate facilities, shed less profitable activities, accelerate synergy and cost reduction measures, and drive process improvement.
While we are consolidating and implementing cost reduction measures, our operating expenses have not yet leveled off as a result of continued investment in several areas that we believe are critical to success including quality and partner initiatives.
Accordingly, we expect that over the next few periods, we will see a leveling off and decline of cash operating expenses.
And that concludes my comments.
<UNK>.
Thanks, <UNK>.
We are focusing on leveraging our demand expertise in key verticals into new products and partnerships that we believe can drive incremental adoption.
Specifically, we expanded our presence and coverage in China through the acquisition of Easyway.
We brought in our partner network with the addition of Konica Minolta Australia, HK 3D in the United Kingdom, and MLC CAD Systems in the United States.
We entered into agreements with the United States Air Force Research Laboratory, Honeywell, and the United States Navy, expanding our relevance and aerospace and defense research and development activities.
We expanded the capabilities of our Cube Pro 3-D printer with Infinity rinse-away water-soluble support material.
We extended our educational coverage by entering into new distribution agreements with Douglas Stewart EDU and Thermo Fisher Scientific.
And we strengthened our K-12 offering by integrating STEAMtrax's curricula into our educational kits.
We also recently announced that the Baltimore Archdiocese is placing our Cube 3-D printers in all of their 49 schools.
We have come to believe that delivering quality in everything we do can garner a significant competitive advantage.
In line with that, we have recently created a board level quality committee, and have begun implementing a series of company-wide initiatives that impact every stage of our products lifecycle.
We are enhancing new product delivery processes by fully leveraging our acquired Wilsonville expertise in design, reliability engineering, quality and compliance testing for all products.
We're installing additional process checks and performance metrics designed to improve quality and reduce manufacturing errors throughout our operations.
We're also taking steps to provide the very best support for our customers and partners.
We're streamlining our service operations to deliver a faster and more comprehensive response, and we continue to rollout our partner Excel program, a comprehensive set of initiatives designed to simplify and integrate all aspects of our partner sales and service activities.
We believe that these measures are improving the entire experience for our existing partners, and helping us attract additional high-caliber partners.
In conclusion, we're concentrating our efforts and resources on quality, differentiation, and value creation.
We believe that delivering quality in everything that we do from product design and manufacturing processes to partner training and customer support, will strengthen our overall competitiveness.
We believe that focusing our resources and capabilities in key areas, including industrial, healthcare, engineering, and education, will allow us to deliver differentiated products and services faster.
And finally, we believe that our commitments to innovation, operational excellence, and partner friendliness will enhance our customer attractiveness and deliver greater earnings power as industry growth resumes.
And with that, we will now gladly take your questions.
<UNK>.
I think that first, thank you for your question.
It's an excellent question.
And if you listened to <UNK> <UNK>'s prepared remarks, he basically said that we are doing both.
On the one hand, we are continuing to invest in key to success initiatives like innovation, and quality, and enhancing the ease of doing business with us, and the attractiveness to our partners and customers.
And that I think, is evidenced by the R&D number increase and overall operating expenses.
But at the same time, we have taken on additional costs in the last few years, as a result of acquisitions.
And at the moment, we believe that our overall cost structure is a little bit ahead of revenue generation.
And so we're doing both.
We are realigning our costs with our priorities.
We are making sure that we're allocating resources to the varied growth initiatives, and new products, and quality initiatives that we deem to be critical and strategic to the next level of growth.
Because we believe that on the other side of this industry level pause, there is significant growth opportunities for our Company.
But at the same time, we believe that we can bring our overall cost structure to a much more manageable level and get the leverage, and the financial strength, and flexibility, and free cash generation that is worthy of the business that we are running.
Absolutely.
And that's another spot on question.
I'll give a little color, but I really want <UNK> <UNK> to jump in here and talk a little bit about the specifics for the quarter.
As we said in our prepared remarks, we had some good progress on materials gross profit margin for the quarter even though the volume was slightly down.
And we had greater contributions from software, and our Quickparts business did well.
But that wasn't enough to overcome some of our manufacturing variances and inventory write-offs that we took in the quarter as a consequence of manufacturing facility consolidations.
And <UNK>, maybe you can talk a little bit about this and also share what gross profit margin would have been if it wasn't for those issues.
Yes.
Thanks, <UNK>.
So as we said, as part of our OpEx evaluation, we are working to consolidate our facilities footprint and make efficiencies within the business.
So as we were closing some of our manufacturing facilities and consolidating them normal inventory processes, we came across manufacturing variances and inventory write-offs in our processes that affected the quarter by about 200 basis points on margin.
So margin would've been around 50%.
Which is exactly what we were signaling in the first quarter when we gave guidance of where we thought we would have improving margins.
So overall, we think margins would've been around the 50% mark, which would have been a slight uptick from where we were in Q1.
Yes.
And I think that what is significant here, particularly on materials gross profit margin, is that we were able to expand those in a meaningful way even on slightly lower volumes, which gives us some hope.
And regarding the horizon on operating expenses, and that goes back to the first question.
Because we are running concurrently to, if you will, opposing initiatives.
One is, continuing to invest in innovation, quality, and partner friendliness programs that we believe would enhance our overall attractiveness to end-users and competitive position.
And at the same time, trimming our overall cost structure as a result of the additional costs that we have taken on from acquisitions over the last few periods.
It's going to take us a few more periods for us for the OpEx to level off and begin to come down.
And it's particularly because we are investing at the same time that we are trimming.
And the precise period in which those two lines intersect may take a few more periods.
That's what <UNK> was trying to say on the OpEx.
Well in our specific case, it's mix related.
And so in the first six months of this year, we have sold more of the small and mid range systems and not as many of the large frame systems.
And that, in our case, is specifically attributable to some performance and application related challenges that we had, which we disclosed already in the first quarter.
These are issues that, again, this morning we said that we were working on very diligently.
We have identified and remediated many of them.
And we're continuing to work with each and every customer and stand behind the product, until we get to a favorable resolution on each and every one of them.
What is encouraging for us is that notwithstanding these challenges, we see that there is healthy, continued healthy demand, for direct metal systems.
We are disappointed that we haven't been able to fully remediate everything on the large frame direct metal printers already.
But we're making good progress.
And in the meantime, we've been able to sell more of the midrange and small range direct metal systems.
And finally, we're continuing to develop and invest in direct metal R&D efforts.
And we expect to continue to be able to not only enhance and expand the range of applications within the current product range, but to also bring some new products to the market.
We think that direct metal printing will continue to be meaningful to our business.
But more importantly, it's very meaningful to many of our industrial customers.
And it's also meaningful to certain government agencies as evidenced by some of the recent agreements that we entered into with the United States Air Force Research Laboratory, the US Navy, Honeywell, and so forth, to continue to develop capabilities in this field.
Sure, <UNK>.
I'll do that no problem.
So Metals revenue was down 3% Q2 2015 to Q2 2014.
And with respect to your question about our filing in Phenix, units were up 29%, however, so again, as <UNK> said, we're selling some more of the smaller frames than the larger frames, so I think he's answered that question.
So going to the question you had about the Phenix.
Phenix is not a completely wholly owned sub, we own 95% of Phenix.
And in our filings there, we have inter-Company transactions that are eliminated between the companies.
However, on a standalone basis, you have to file what stands alone for Phenix.
So within that transaction, the units and everything I think sync up perfectly for you.
There are dollar changes in between companies across a global organization, where you have shared services and inter-Company transactions.
And that's what led to the difference between the gross amount versus the total reported amount.
Does that answer your question I think.
Well there's inter-Company transfer pricing between countries, you have different transfer pricing.
So Phenix would be able to charge for the activities that they provide and the values that they provide.
There's a whole sales organization and back office organization in R&D that actually supports Phenix.
Which would mean on a global basis, we could actually take some profit in those machines and actually put them outside of the Phenix organization.
So Europe actually performed well, or improved its performance in the second quarter.
In fact, on a constant currency basis, Europe actually grew about 19% organically.
The only region that on constant currency actually showed healthy organic growth, and that is in no small part attributed to the channel partner organization.
Having said that, there is more to be done in Europe, and in the Americas, and in APAC in terms of continuing to build an enhanced coverage.
But more importantly, to give the tools and the support and the ease of doing business with to our channel partners.
So in terms of building up the EMEA capabilities and the rest of the world, we're probably in the second period of doing that.
Our partner, [Excel program], is moving forward as planned.
We're also making significant investments in our service center.
Not just in terms of technology and systems, but also in a complete new training approach.
And we're simplifying many of our procedures with our reseller partners to be able to add value to everything that they do.
So we're deepening, for example, our CRM integration with them.
We are investing more in pre and post sales.
We have integrated and are giving our channel partners now access into our logistics capabilities and tracking.
We're making it easy for them to get full integration into spare parts and logistics.
And all of that is done to really multiplex our collective capabilities, and to make both their business and our business more efficient.
Go ahead.
Well it's an excellent question.
I explained in my prepared remarks, that some of the year-over-year or the sequential comparison was a little bit skewed as a result of entering 2015 with a little bit of backlog that we could not fulfill in 2014.
Because we had, as you may recall, the delayed introductions or availability of the Cube 3 and the Cube Pro and that inflated our results in Q1.
Because if you look at it on a sequential net booking comparison, excluding the backlog, we sequentially declined by approximately $1.4 million quarter over quarter.
And that we attribute to overall softness in consumer demand.
I also said that we see more immediate opportunities for the Cube 3 and the Cube Pro in K-12 education, and around the engineer's desktop.
And that we have actually accelerated some of our initiatives, particularly in EDU, with the addition of the STEAMtrax curricula that allows us now to deliver a complete educational kits to schools and other packages.
And we are continuing, obviously, to support our other consumer initiatives, such as being in 100 Best Buy stores and participating in many other initiatives.
So we have the products, we think the products are really good products.
They were worth waiting for.
We certainly see that within consumer at large, we are experiencing some softness.
But specifically within EDU and the engineer's desktop, we see more immediate opportunities.
And so we're focusing our energies and resources on monetizing these opportunities, while we push forward with those products.
So we're not giving up on our products.
We're not giving up on the potential to monetize them.
But we're reprioritizing around where demand exists.
Well, look.
It's clear that we have some limited short-term visibility as to what is driving adoption.
Having said that, in our case, we believe that we have aligned ourselves well with our customer's mission-critical applications.
And that we also positioned ourselves to diversify within the key verticals that are attractive to us, like healthcare and aerospace and automotive.
And it's important to note that even during this period of industry-wide recess, if you will, or weakness or a challenging period.
For us, overall, we actually experienced sequential growth in SLA, in SLS, in DMP.
And it's particularly as a result of our industrial customers, including aerospace and healthcare, beginning to resume their purchases.
And the other interesting note here is that, within our jetting printer unit, after several quarters of progressive decline, we leveled off.
Which is really good.
So in terms of inventories, some of it is timing and it's related to the timing of orders.
And it's also related to the timing of product introductions, and so on and so forth.
And so within the inventory, we have all of these elements.
And as <UNK> said earlier today, we expect to be able to reduce inventory for the rest of the year based on everything that we have on our plan.
In terms of pruning products and better aligning our R&D resources with opportunities, we've said earlier this year, that we had quite a list of products that we plan to prune throughout the year.
And that remains the plan.
I think that we've even given some color and given some ranges of legacy products that we planned on pruning throughout the year.
And all of that is afoot, and it will make our portfolio much more focused and updated as we exit this year.
Certainly.
I'll be happy to talk about some of the challenges.
We have one nylon model, one nylon machine, that has had some performance-related issues around primarily thermal distribution within the powder bed.
This is not a new challenge with selective laser centering or with nylon.
It's a challenge that is inherent in that technology.
We have tried with this new generation of equipment to push the envelope further.
And everything looked good, until we got further down the line and discovered that we had a few more technological hurdles to overcome.
We now believe that we have successfully remediated this issue.
We have run substantial tests in-house, and with a select group of users.
And we have decided to go out into the marketplace and visit each and every customer that received this system, whether they have problems are not.
And to make good on our commitment to deliver this level of performance and to stand behind this nylon product.
In direct metal printing, with the large-format machine, we had additional challenges that were related primarily to powder or consistent powder feeding and powder refresh, which created a symptom of starving taller builds of powder incrementally.
So the word on the street was that the machine is challenged in building tall parts.
That was the symptom.
The root cause of the problem had to do with a consistent powder feed over very, very long builds that could exceed 40, 50 hours of build.
We have now successfully understood it.
We have solutions in place, and we are working with all of the affected customers one by one to get to satisfactory resolution.
Again, standing behind our product.
You also asked if this is a question of focus, or is this inherent in complex technology.
And I think that the answer is that these are largely inherent in very complex technologies.
We have seen a similar journey a decade ago with our stereo lithography machines.
Except that we, in those days, did not have such a rapid adoption as we're experiencing now.
So it's exacerbated.
And it was further exacerbated by the rapid growth that we experienced particularly with our direct metal machines, and over the last year, year and a half.
And it's further, if you will, highlighted by the fact that we have many users of particularly the direct metal machines that are taking this technology into unchartered territories in terms of applications.
And to a large extent, we and our customers are learning together about what is and isn't possible.
All of these issues created for us a challenge in terms of resolving it technologically, which we think we have in hand because we have really good people in our direct metals team, and they can overcome these technical challenges.
It created some quality challenges, which gave birth to our quality in everything that we do initiative inside the Company and at the Board level.
So we view that as a long-term ongoing opportunity to focus the Company on delivering much higher quality in everything that we do.
And it certainly damaged us reputationally in the marketplace with this particular direct metal model, and impeded on our overall sales potential for a few periods.
We're remediating it the old-fashioned way.
We are going to resolve each and every customer problem that we have.
We're going to fix it or make good on it.
And in the meantime, we see an overall unit increase from the smaller and midrange metals, because those are not exposed to the same issues.
And finally, we're continuing to develop and enhance the current portfolio, and to create some new models.
Because we are committed to metals, and we believe that long-term for our Company and for our industrial customers and healthcare customers that's a very important platform.
I think that for more than a year now, we've been saying that we had a period of accelerated investments and M&A activities.
Because we felt that we needed to assemble all the critical and strategic assets and expertise so that we could begin to execute the next phase of our growth with differentiated technology in-house, both on the printer hardware, the material science and technology, and importantly also the software and services capabilities.
We've been signaling now for quite some time that as we get ourselves to a point where we feel that we amassed all of these expertise, the next phase is going to be about optimizing what we acquired, leveraging it into new products and services, and delivering also the synergies that are available from the combination and consolidation of those businesses.
Including potentially new revenue streams that will come from the combination of software and hardware and process technology into various areas.
With that in front of us, we see that the next phase is one of internally developed capabilities, internally enhanced competencies in quality and service.
In refined coverage and sales capabilities, and in less M&A and more organic type activities.
And that is completely consistent with what we've said all along.
I'm changing a little bit the pace here, because I wanted to apologize to the audience this morning.
We had some difficulties with the conference call and with the way that we have taken questions.
And cut a few people off.
I want to apologize for that.
It had to do with lack of coordination with our operators this morning.
And I'm really sorry for anybody that we cut prematurely.
| 2015_DDD |
2017 | CMCSA | CMCSA
#Good morning, everybody
I'm on slide 4 for those following the presentation online
As <UNK> just said, we had a great first quarter
Cable delivered terrific results, balancing strong financial growth with healthy customer metrics
And at NBCUniversal, we had phenomenal growth this quarter, with good contributions from all the business segments
So on a consolidated basis, revenue increased 8.9%
Adjusted EBITDA grew 10.4%
And by the way, adjusted EBITDA is the new label for the metric we previously called operating cash flow
Earnings per share was $0.53, a 26.2% increase on an adjusted basis, and we generated $3.1 billion in free cash flow during the quarter
So now let's start with Cable Communications on slide 5. Cable Communications delivered strong first quarter results
Revenue increased 5.8% to $12.9 billion
We added 297,000 customer relationships, and we grew total revenue per customer relationship by 2.6%
Beginning this quarter, we are providing additional disclosure for residential and business customers, given the success of Business Services, which now annualizes at about $6 billion in revenue
Now for the numbers, starting with our Residential business, we added 263,000 net new relationships, an increase of 11% over last year, and ended the quarter with nearly 27 million relationships
Contributing to these results were the positive benefits of customer retention with our Video and High-Speed Internet churn remaining at the lowest levels in over 10 years
Customers continue to respond to our innovative X1 platform, our best-in-class high-speed data product, and the meaningful strides we have made in improving the customer experience
Our ability to bundle our products is also a key driver of customer retention, and we continue to do so successfully with 71% of our residential customers now subscribing to at least two products
In terms of the individual Residential revenue categories, High-Speed Internet continues to be the largest contributor to overall Cable revenue growth
Revenue increased 10.1% to $3.6 billion in the quarter, driven by an increase in our residential customer base and rate adjustments
Building on the strong performance in 2016, we added 429,000 total high-speed data customers in the quarter, with 397,000 of them being residential
We've invested to provide a best-in-class broadband product as we have consistently increased the speeds we offer our customers, and we continue to invest to improve the Wi-Fi experience in and out of the home
We ended the quarter with 54% of our residential customers taking speeds of 100 megabits per second or higher
Looking ahead, we believe we have a long runway for growth in adding broadband customers and a great roadmap to provide additional value to our existing customers
Video revenue increased 4.3% to $5.8 billion in the quarter, primarily due to rate adjustments as well as customers subscribing to additional services and an increase in our residential customer base
Of our 42,000 total video customer net adds in the quarter, 32,000 were residential
X1 continues to move the needle on the customer experience, ARPU and retention, driving higher customer lifetime value
We ended the quarter with 52% of our residential video customers having X1 compared to 35% a year ago, and we continue to expect our X1 penetration will be in the low 60% range by year-end
Voice revenue declined by 3.6% to $863 million in the first quarter, reflecting a modest decline in ARPU as well as the loss of 27,000 net residential customers
We continue to believe that our voice product is a good value for our customers and an important part of our triple and quad play bundles
Business Services delivered another solid quarter of double-digit growth, as revenue increased 13.6% to $1.5 billion during the quarter
We added 34,000 business customer relationships and grew revenue per business customer relationship by 5%
The small business segment accounted for about 70% of our revenue and 60% of our growth, driven primarily by the net increase in customers
And our mid-size and enterprise segments continue to grow at higher rates, given the strength of our product set and the earlier stage of our efforts in these areas
Cable Advertising revenue decreased 6.3% to $512 million in the quarter, reflecting lower political revenue compared to last year
Excluding the political contribution, our Cable Advertising revenue decreased 2.3%, reflecting a challenging advertising environment this quarter, particularly in discretionary categories
Turning to slide 6, first quarter Cable Communications EBITDA increased 6.3% to $5.2 billion, resulting in a margin of 40.3%, up 20 basis points compared to the first quarter of 2016. This is a terrific financial performance as we manage through a period of higher programming costs by offsetting this impact with strong revenue growth and real discipline on non-programming operating expenses
Programming expenses grew 11.7% during the quarter, reflecting the timing of contract renewals
Because of these renewals, our programming expense growth should trend higher for the remainder of the year, consistent with our guidance at year-end
Non-programming expenses increased 1.4% for the quarter, helping preserve margins given the increase in programming expenses
As we noted during our year-end call, this growth rate is trending lower than previous quarters as we benefit from our customer experience initiatives and overall disciplined cost management
Notably, Customer Service expenses declined 1.1% this quarter, even as we grew our customer relationships by 3.2%
Consistent with our objectives, we expect the rate of growth for our non-programming expenses to continue to trend lower this year compared to 2016. Now let's move on to NBCUniversal's results
On slide 7, you can see NBCUniversal's revenue increased 14.7% and EBITDA increased 24.4% in the quarter
These strong results were driven by a successful box office, strong growth in retrans and affiliate fees, as well as the continued healthy performance at Theme Parks
Cable Networks delivered strong growth this quarter, with revenue increasing 7.6% and EBITDA increasing 16.8% to $1.1 billion
This EBITDA growth is higher than recent trends of low to mid-single-digit growth, and it was the result of two factors
First, distribution revenue increased 8.6%, due to the successful renewals of a number of our distribution agreements, and should continue to contribute to healthy EBITDA growth for the remainder of the year
Second, content licensing revenue increased 54%, reflecting a new licensing agreement and is timing-related
Partially offsetting this growth was a 2.9% decline in Advertising revenue
Broadcast Television delivered another solid quarter with revenue growth of 5.9% and EBITDA growth of 13.4% to $322 million
This growth was primarily driven by higher retransmission consent fees, which increased over 70% to $350 million and reflect the same contract renewals I just mentioned in Cable Networks
We remain on track to reach $1.4 billion in retransmission revenue this year, a 65% increase over 2016 results
In addition, Advertising revenue was stable compared to the first quarter of 2016, reflecting higher rates offset by audience rating declines and lower volume
Partially offsetting this quarter's EBITDA growth were higher programming and production costs
Film revenue increased 43.2% and EBITDA increased 120.6% to $368 million
These results primarily reflect higher theatrical revenue, which increased by $415 million to $651 million due to the strong performances of Fifty Shades Darker, Get Out and Split, as well as the continued success of Sing in the quarter
In addition, Films' EBITDA growth reflects a positive contribution from DreamWorks, partially offset by higher programming and production costs
Theme Parks revenue increased 9% and EBITDA increased 6.1% to $397 million in the first quarter
These results reflect higher attendance and higher per capita spending, despite an unfavorable comparison from the timing of spring break vacations
The Easter holiday occurred in the first quarter last year but occurred during the second quarter this year, creating a challenging comparison this quarter
If we adjust for this timing, EBITDA would have grown double digits this quarter
We just opened the Jimmy Fallon attraction and we will be opening our third gate, the Volcano Bay water theme park, later this quarter
We expect these new attractions to drive growth at the parks this year
Let's move to slide 8 to review our consolidated and segment capital expenditures
Consolidated capital expenditures increased 10.2% to $2.1 billion in the first quarter
At Cable Communications, capital expenditures increased 13% to $1.8 billion for the quarter, resulting in capital intensity of 13.8%
For the full year, we continue to expect capital intensity to remain flat to 2016 at approximately 15% of total Cable Communications revenue
For the quarter, the increase reflects a higher level of investment in customer premise equipment related to the deployment of the X1 platform and wireless gateways
However, the increase is timing-related and we continue to expect full-year CPE spending to decline
In addition to our CPE investment this quarter, CapEx growth reflects a higher level of investment in scalable infrastructure to increase network capacity as well as increased investment in line extensions
At NBCUniversal, first quarter capital expenditures decreased 3.3% to $285 million, reflecting an increased investment in Theme Parks, offset by lower spending at headquarters
For the full year, we continue to expect NBCUniversal's capital investment plan to increase approximately 10%
And now finishing up on slide 9, as I mentioned earlier, we generated $3.1 billion in free cash flow in the quarter
In terms of returning capital to shareholders, this quarter included: dividend payments totaling $657 million, up 7.5%; and share repurchases of $750 million
We do continue to expect to repurchase $5 billion of our common shares this year
In terms of leverage, we ended the quarter at 2.2 times net leverage
This reflects investing activity this quarter, which primarily included a $500 million investment in Snap as part of its initial public offering, and the acquisition of Icontrol Networks
I would note that subsequent to the end of the quarter, we purchased the remaining 49% stake in Universal Studios Japan for $2.3 billion
Regarding the recently-announced results of the FCC's Broadcast Incentive Auction, as <UNK> said, it is still the quiet period, so we cannot discuss or answer any questions related to the auction or spectrum strategy today
However, based on facts disclosed by the FCC, I can confirm that, first, in the reverse auction, NBC sold spectrum in New York, Philadelphia and Chicago for expected total proceeds of $481.6 million
In the forward auction, Comcast invested $1.7 billion to acquire spectrum in the markets identified in the FCC's Public Notice
The average price Comcast paid per megahertz pop was $1.17. Hence, our net spectrum outlay is $1.27 billion
These results confirm the comments we made prior to the auction
We stated we would evaluate the opportunity and purchase spectrum only if we thought the price was right and if we thought the spectrum would have strategic value
That concludes our summary of the quarter
I hope that everyone now has a good sense for how pleased we are with our results as well as our momentum for the rest of the year
Now, I'll turn it back to <UNK> to lead the Q&A
And finally, <UNK>, it's Mike
On spectrum, we can't speak to the spectrum, other than to confirm what we did, which I did earlier
But I'll just say we approached it the way we said we would before the auction started, and we're pleased with the outcome
Just on Cable margins, we gave guidance for the year that we'd be flat to down 50 basis points for the year, with programing costs continuing to be high this year and that we did expect to drive improvement in the rates on non-programming expenses
So had a very good first quarter, but as far as going down the road on changing any guidance, we're not doing that
That said, I'll hand it over to Dave to give some qualitative stuff of what he's doing because all that will really continue
And, <UNK>, on capital returns, so the company's got a great track record of being very thoughtful about how we balance our needs to invest in the business and return capital to shareholders
So we maintain a strong capital structure, as you know
And we think that's strategically important
We like the idea of consistently increasing the return of capital to shareholders, but making sure that we keep the ability to allocate strategic capital to take advantage of opportunities when they arise
So it's way too early on tax reform to say anything, other than we seemingly are positioned well to be a beneficiary of the various ways in which it might shake out
And once we have some final details, we'll take all that into consideration through the lens that we've always talked about, our balancing capital priorities
Well, <UNK>, it's Mike
Thanks for the question
I mean, Dave covered earlier all of the things that are ongoing in the business, in terms of attacking non-programming expenses
And we've commented previously on where programming goes
So the answer, as I said earlier, is we're not going to go beyond the guidance we already gave of margins for this year, but we'll keep working on optimizing the business for the long term and we'll be back to you early next year with our thoughts
| 2017_CMCSA |
2015 | AZO | AZO
#Yes, we've got a few partnerships with a few important vendors, and also with customers as well.
And that's pretty much ongoing.
We will continue to grow the ALLDATA business.
We feel good about ALLDATA business.
We think that it's a leader in the industry.
And we had signed an agreement with AMCO, you may have seen, referring to recently to provide them with service through all their locations.
So it's a great product, well respected in the industry and has good prospects going forward.
Sure.
Yes, and that's a very good question and that's spot on.
So we were 37 basis points of deleverage due to supply chain and we had articulated a 25 to 30.
So it was a little bit higher.
I think part of that is really just as we continue to roll out new programs with activity.
If you look at the quarter in a little bit more finite detail, we probably rolled out about 300 programs onto the program this quarter, although we took off a couple of hundred programs that got us to that net 80.
So there was a lot of activity that occurred during the quarter.
And as we began to ramp this up, our handling costs, our internal cost to deliver more frequently will rise a little bit.
And also keep in mind that this quarter and particularly next quarter as well are slightly lower volume quarters.
So we really won't have the opportunity to leverage quite as much as we might during the summer months, so to speak.
So I think overall we feel pretty good about the estimates that we've given on an annualized basis, although on any given quarter they may fluctuate a little bit.
Yes, it's a great question.
And we do see variability.
And that's the reason why we're going to go forward with a strategy that says roughly two-thirds of our stores are going to see three to five time per week deliveries, and one-third of them are going to continue to see one time a week delivery.
The big variable that drives it, as you would expect, is store volume.
You're talking about replenishment levels.
And the more product that you sell, the more frequently you need to replenish it.
And so we do see significant variability, but it's along the volume scale.
I wouldn't say it would be changing the mix necessarily.
I think that as the commercial business continues to grow we will continue to invest in commercial sales pros, as you call them, in the organization.
I think really the comparison this year versus last is that we increased our service levels relative to where we were last year.
I think last year we probably cut back a little bit more than we wanted to.
I think actually, we probably might have called that out last year, that we thought our service levels weren't at the level that we wanted them to be.
And so this year we didn't want to repeat that mistake.
So we stuck with our model during the quarter and I think we delivered better service levels.
I think as far as resetting some of those stores we talked about, we've got a new store prototype so all the new stores open will be under that prototype.
We've gone back, I can't remember, I think about 126 stores that we've already remodeled on that new store prototype.
And we will continue to do that.
But frankly, I suspect we'll get into the hundreds of stores.
I don't see that being 1000 stores necessarily because we're going to have physical constraints as we go through the process.
But where we can find opportunities to add more hard parts into space-constrained stores, we're going to continue to that.
It's different enough for us to justify the investment.
We can debate what meaningful is.
But those stores are performing better and those hard parts are moving.
If I can add onto that.
Number one, the new prototype is not materially more expensive than the old prototype.
So as we open new stores, there's no meaningful cost differential.
The real benefit comes in the really, really space-constrained stores that we have.
Remember, we still have a lot of 3800 square foot stores or 5000 square foot stores.
When those stores are performing at high volumes and we're able to go in and remodel them to the elements of this new prototype, that's where we can really see a differential.
Sure.
Great questions.
First of all on the peso, our same-store sales are domestic only.
So the peso variances aren't impacting our same-store sales at all.
If you look at last quarter our same-store sales did 4.5%.
They did 3.5% in Q1 of 2016.
You can almost point directly to the last two weeks' performance as to why that's different.
And as we mentioned in the prepared remarks, we went up against the polar vortex last year in those two weeks, and we had phenomenal weeks.
This year we had good weeks but they were up against phenomenal weeks.
And that's basically the differential in our same-store sales for the quarter.
We plan to open ---+ we opened 158 stores last year, I believe it was, 157.
We plan to open about 150 stores this year on a domestic basis.
We're looking to grow Mexico around 40 stores and Brazil, we're kind of taking them one at a time.
It's a great question.
All right.
So a couple of things.
Number one, when we acquired IMC just over a year ago they had 17 branches.
We've now open five new branches.
We stand at 22 open locations.
Those IMC branches are servicing 600 AutoZone stores, but that's not a function of how many branches we have.
That's a function on some short-term system limitations that we have at AutoZone to be able to serve up that catalog in our AutoZone stores.
We're working ---+ we did some short-term solutions that have allowed us to get into those 600 stores so we can test it.
Now we are having to go back and do the more robust work to industrialize those system improvements.
That will be coming later in the year, which will allow us to expand how IMC services the AutoZone stores.
I want to also be careful to not overstate the implications of IMC servicing AutoZone stores.
Yes, we will leverage IMC.
But that's not going to be the big driver of our commercial business.
The reason, the main primary reason we bought IMC is because we think IMC in and of itself is a good business and we will continue to expand that business, as we've shown with the five stores that we've opened to date.
Yes, if you take a look at the industry leader in the import side of the business, they've got well over 100 locations.
But I don't see why we can't do the same over time.
There is some of that.
There is an ability for us to be able to extract some information.
I think that we still have a lot of work to do relative to acquiring more information out of all of that in order to improve some of the synergies across our commercial business as well.
So I would categorize it as it, is helpful on identifying certain trends.
But we still have a long way to go in doing that.
Thank you.
Good morning.
No, we haven't gone into the specific distinctions between inventory delivery frequency and mega hubs.
What we continue to say is that you have both of the programs.
They are going to add between $1000 and $1500.
Now, that also varies because some of the mega hubs are ---+ the stores that are serviced by that mega hub are serviced by them three times a day directly, while other stores are serviced by other hub stores that get deliveries three times a day and then other hub stores get overnight deliveries.
So there's quite a bit of variability in it.
But we continue to be pretty comfortable saying if you get frequency of delivery and mega hubs, it means about $1000 to $1500 per store.
It's just as simple as, number one, we wanted to go test this program until we got five up and running.
We made the decision in the late summer/early September to move forward with this strategy.
Now it's a function of the real estate development pipeline.
And remember, I mean, even for a regular AutoZone store it can take us two years to get a store open.
So it has nothing to do with anything other than our real estate pipeline and how long it's going to take us to do that.
Trust me, we are pushing very hard on that front.
Yes, everybody always wants us to talk about that, and we stay away from that.
Unlike a lot of organizations that will have their conference call four to six weeks after their end of the quarter, it's only been two week and two days.
So I think that it's not a good prudent strategy for us to talk about what's happened in the first couple of weeks.
And we've been consistent about that for a long time.
So I don't want to break that.
Now, I will say this.
Weather normalizes over time.
And I also want to reiterate that a really cold winter is great, but what we really look for is just a few good, hard cold snaps.
And that's when we really see big spikes in our business in certain failure-related categories.
Okay.
Thank you very much.
Thank you.
Before we conclude the call, I'd like to take a moment to reiterate that our business model continues to be solid.
We are excited about our growth prospects for the year.
We will not take anything for granted, as we understand our customers have alternatives.
We have a solid plan to succeed this fiscal year, but I want to stress that this is a marathon and not a sprint.
As we continue to focus on the basics and focus on optimizing long-term shareholder value, we are confident AutoZone will continue to be very successful.
We thank you for participating in today's call.
And we would like to wish everyone a very happy and healthy safe holiday season and a prosperous New Year.
Thank you very much.
| 2015_AZO |
2017 | FRED | FRED
#Good morning, everyone.
Thank you for joining today's call to review Fred's Financial and Operating Results for the Third Quarter Ended October 28, 2017.
Before we begin, I'd like to remind everyone that management's comments during this conference call that are not based on historical facts are forward-looking statements.
These statements are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.
It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences have been described in the news release issued earlier today and the company's Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission.
We refer you to those sources for more information.
Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings believed to be accurate as of today's date, December 6, 2017.
Because of the time-sensitive nature of this information, it is the company's policy to limit the archived replay of this conference call webcast to a period of 30 days.
With me this morning and also sharing prepared remarks is Mike <UNK>, Chief Executive Officer.
In addition, Tim <UNK>, Chief Operating Officer of Pharmacy; and John Foley, Executive Vice President of Stores, will be available during the Q&<UNK>
This call is the property of Fred's.
Any distribution, transmission, broadcast or rebroadcast of this call for commercial purposes in any form without the express written consent of the company is prohibited.
With those remarks, I'll turn the call over to Mike <UNK>.
Thank you, Jason, and good morning, everyone.
I'd like to start this morning by discussing the execution of our turnaround and assure you that our team remains committed to delivering long-term, sustainable growth and value creation.
We are focused on driving traffic, reducing SG&A, generating free cash flow and lowering debt.
Before I speak to that, I want to address our EPS results for the quarter.
Our third quarter EPS deterioration, excluding nonoperating charges, was caused primarily by the following: timing issue related to shipments of higher-margin seasonal merchandise; reductions in overall inventory.
Historically, our inventory levels have been too high, but this is now being managed more efficiently.
While this has impacted our gross margins, our cash flow plan remains on track as we streamline our business for the benefit of the company's long-term success.
In fact, cash flow from operations before onetime nonoperating items actually improved versus the same period last year.
And investments made in price to remain on strategy to ensure we stay competitive in the market.
We recognize that our EPS results are below expectations.
However, the management team, working closely with the Board of Directors, is taking the actions necessary to ensure Fred's achieves profitability and growth over the long term.
We continue to make progress to turn the company around, and we remain committed to achieving our goals.
Our intense efforts are squarely focused on the following key priorities: driving traffic into our stores, reducing SG&A, generating free cash flow and lowering our debt.
We are aggressively executing our turnaround strategy, and we are seeing traction in both Front Store and pharmacy.
We are not yet at the point of presenting positive quarterly comp sales and traffic improvement.
However, I can tell you that we are improving month-by-month as our initiatives are yielding results.
Our performance in September was an improvement over August, and our performance in October was even better and represents a strong indication that our plan is working.
Still, we are aware that there's a lot of work to be done, and our entire team continues to work with a sense of urgency.
To that end, we have already taken some actions this quarter that support our key priorities, including: a reduction in our workforce, which will translate to approximately $8 million to $10 million in annualized savings; the implementation of 0-based budgeting, which is becoming the foundation of our SG&A reduction initiatives.
With SG&A that is more in line with our peers, we will generate free cash flow, enabling repayment of debt and reinvestment in the business to drive sustainable growth and profitability.
As we accelerate our turnaround strategy, we are working to eliminate unnecessary expenses as quickly as possible and aggressively manage capital expenditures.
We have renegotiated leases in 30 locations during 2017.
In addition, nonoperating losses have been a topic of particular focus.
This quarter, we took steps to address previously unresolved excess inventory issues.
We recorded a $17.1 million write-down of excess inventory, and will execute clearance sales to drive traffic as well as sell this inventory.
In response to the larger-than-anticipated losses in the third quarter, we have implemented new processes to mitigate the risk of building excess inventory in the future.
Seasonal and fashion ladder plans will be used to ensure timely markdowns and that product is cleared out.
In addition, planograms will have individual item level tracking to better manage the entire product life cycle.
In order to lower costs, we are critically evaluating each and every expenditure to ensure that we are only spending in ways that align with our priorities.
As we pursue this reduced cost structure, we will enable an environment where our savings can be passed on to the consumer, in turn driving increased traffic and sales and ultimately, shareholder value.
As part of our turnaround, we are laser-focused on driving increased traffic.
This quarter, we kicked off a reduced price endcap test, which is showing promising results, so much so that we have decided to roll it out to all stores.
Our new circular strategy that was executed this quarter is proving popular among customers and will be a key component to driving traffic and sales.
We are observing positive traffic and comp sales trends in our stores as we concentrate on executing beer and wine, reduced price endcaps and new assortments in household chemicals, pet, cosmetics and tobacco, to name just a few, all of which have contributed to a 400 basis point improvement in Front Store traffic within the quarter.
This improvement has continued through November as traffic has remained relatively flat.
We expect these trends to continue.
In addition, and based on recent store visits, our stores and field operators are ready for the holiday season, which is off to a good start.
We have also witnessed a complete turnaround in our tobacco business, and our weekly trends are now flat on a 2-year stack basis.
We are pleased to report that the issues that were previously burdening this area of our business have been resolved, and we expect tobacco to be a strong piece of our business going forward.
Market share is a key metric that we use to gauge our performance, and it has improved over the last 52 weeks as a result of these initiatives.
For market share purposes, our Front Store business is divided into 4 categories: general merchandise, health and beauty, nonfood grocery and dry grocery.
I'm pleased to report that general merchandise market share, which was flat 52 weeks ago, has gained 14 basis points in the last 13 weeks and 28 basis points in the last 4 weeks.
Nonfood grocery lost share during the last 52 weeks but most recently, gained 24 basis points in the last 4 weeks.
And dry grocery and health and beauty picked up 4 basis points and 8 basis points of share the latest 4 weeks, respectively.
Clearly, we are seeing positive trends in market share across areas of our business.
Before I turn it over to Jason, I also want to highlight that today, we announced the cancellation of our dividend, an update to our share repurchase program and a review of alternatives for the noncore assets of real estate and the Specialty Pharmacy business.
The Board of Directors determined to cancel the quarterly cash dividend in order to retain free cash flow for debt reduction, share repurchases and other general corporate purposes.
I want to reiterate that we remain committed to our strategy and the team is focused on what matters most as we manage through this turnaround.
We are executing the necessary initiatives to achieve our key priorities of driving traffic into our stores, reducing SG&A, generating free cash flow and lowering our debt.
And with that, I'll turn the call back over to Jason to discuss our financials in greater detail.
Thank you, Mike.
Net sales for the third quarter decreased 4.5% to $493.6 million from $516.6 million in the third quarter of 2016.
The decline in sales was related primarily to the closure of 39 underperforming stores earlier this year.
Comparable store sales for the quarter declined 0.8% versus a 3.8% decline in the third quarter of 2016.
Comparable store sales for the third quarter of 2017 were negatively impacted by the continued increase in Generic Dispensing Rate as well as a 36 basis point impact from the sale of low productive, discontinued inventory versus the prior year period.
Fred's net loss for the third quarter totaled approximately $51.8 million or $1.38 per share, which included the following notable charges totaling $45 million or $0.96 per share: $20.1 million or $0.53 per share for a valuation allowance against the company's deferred tax assets resulting from the pretax loss recorded in the third quarter; $17.1 million or $0.30 per share after tax for a write-down of unproductive inventory; $5.2 million or $0.09 per share after tax for professional and legal advisory fees incurred in connection with the development and implementation of the company's turnaround strategy; and $2.6 million or $0.04 per share, after tax, for asset impairment for the sale of the corporate airplane.
We experienced greater-than-expected losses in the third quarter of 2017, in part due to nonoperating items, including nonrecurring charges related to inventory and fixed asset impairments.
Fred's third quarter loss compares to a net loss of $38.4 million or $1.05 per share for the third quarter of 2016.
Gross profit for the quarter of ---+ third quarter 2017 decreased 14.9% to $94.6 million from $111.2 million in the prior year period.
Gross margin for the quarter decreased 230 basis points to 19.2% from 21.5% in the same quarter last year, reflecting the contribution of incremental sales of lower-margin specialty drugs and tobacco products and a shift in timing of shipments to our stores of higher-margin seasonal merchandise.
Fred's recorded a LIFO reserve increase of $1.5 million in the third quarter of 2017 compared with an increase of $2.1 million in the same quarter last year.
Selling, general and administrative expenses for the quarter, including depreciation and amortization, decreased to $144.4 million or 29.3% of sales from $155.3 million or 30% of sales in the prior year quarter.
The decrease in expenses was primarily driven by our increased focus on expense controls, the closure of 39 underperforming stores in early 2017 and the change in asset impairments recorded in the third quarter of 2017 versus the third quarter of 2016.
For the third quarter of 2017, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, increased to a loss of $49.8 million compared with an operating loss of $44.1 million in the same quarter last year.
For the third quarter of 2017, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, was a loss of $38.8 million.
Third quarter EBITDA included the following notable charges totaling $24.9 million: $17.1 million or $0.30 per share after tax for a write-down of unproductive inventory; $5.2 million or $0.09 per share after tax for professional and legal advisory fees incurred in connection with the development and implementation of the company's turnaround strategy; and $2.6 million or $0.04 per share after tax for asset impairment for the sale of the corporate airplane.
In the third quarter, we saw a 13.5% reduction in our inventory level on a year-over-year basis from 36 ---+ $366.6 million to $317.2 million.
This development is part of our ongoing efforts to drive free cash flow and is another indicator that we are on the right path.
In addition, as part of our turnaround strategy, we expect our debt level will decrease to below $160 million by year-end.
In closing, I want to reiterate our commitment to the company's business model and turnaround strategy.
We are focused on accelerating the execution of our plan, reducing SG&A and improving cash flow.
Now I'll turn the call back over to Mike.
Thanks, Jason.
While we fully understand that there's a lot to accomplish, the investments and process improvements we've made are gaining traction.
Our Retail Pharmacy business continues to improve.
Our focus on technology and process improvement has yielded results.
The retail business has generated essentially flat comp scripts adjusted for 90 days year-to-date and continues to benefit from a shift to more profitable generic prescriptions, delivering a 68 basis point improvement in the Generic Dispensing Rate during the third quarter to 88.4%.
As we work to continue the improvements in our Retail Pharmacy business, we are focused on the execution of key initiatives, including, increasing the number of flu shots, which resulted in a flu shot comp increase of 9.7%; expanding our 340B program in an effort to help our customers gain access to more affordable drugs while improving our profitability deepening our relationships with payers in our markets, network changes as of January 1 are expected to provide access to 1.7 million lives, resulting in the potential for more traffic and filling more prescriptions; continuing to enhance our marketing efforts in order to improve the ROI on our marketing spend; and continuing our aggressive inventory management by reducing inventory levels by over $16 million from the third quarter of last year and ensuring that we are focused on the profitability of every script filled while continuing to deliver excellent care to our patients.
As I mentioned earlier, the board is considering various strategic transactions and alternatives for the Specialty Pharmacy business.
While this is under way, we remain laser-focused on continuing to grow the Specialty Pharmacy business.
This quarter, we built on the momentum from previous quarters by investing in salespeople, technology and therapy diversification.
In fact, last week, we had the largest sales week in the history of Specialty Pharmacy, which is a reflection of our strategy and the great people we have that are delivering these results.
Some specific initiatives that are contributing to the performance include: expanding our territories within our existing therapies; driving substantial double-digit sales comp on a year-to-date basis; leveraging our relationships with our payer partners to expand network access, as a result, our Specialty Pharmacy business will have the potential to access 5 million new patients in our markets; continuing to develop our relationships with pharmaceutical manufacturers to accelerate our growth into new therapies and revenue streams; diversifying our therapy mix and physician referral base, which positions the company for new drug introductions in the future; and continuing the development of new technology investments, which will improve decision-making, dataflow and patient care.
Moving to the Front Store.
We are encouraged by the trends we're seeing.
While our comp sales were negative, we did see sequential improvements month-to-month.
In fact, Front Store comp sales were positive in October and up 3.6% in November.
The changes we've made are showing results, and we continue to roll out additional enhancements, some of which include resolving the issues that were previously hindering tobacco sales.
We improved the supply chain, replenishment technology, pricing strategy, assortment and circulars leading to very positive trends in tobacco this quarter; turning around cosmetics, which is an excellent example of the transformative initiatives we are putting in place and the type of results we expect from our efforts, without expanding the physical space of our cosmetics department, we were able to double the average sales per week by listening to our customers and utilizing data to transform this department to meet their needs; successfully rolling out the high-traffic category of beer to approximately 150 stores and wine to approximately 50 stores, and we're on track to complete the rollout to the remaining stores, where permitted, by the first quarter of 2018.
The preliminary results of our reduced price endcap program indicate that this will be a significant driver of sales and traffic, so much so that we intend to roll out the program to all stores this year.
And plans to go live with lottery in a 20-store test market this month.
Lastly, in our reading glass and sunglass business, we implemented a scan-based trading agreement, enabling us to sell our inventory back to the supplier and only pay for items as we sell them.
Changes like this allow us to improve our free cash flow.
In closing, we are aware that there's a lot of work to be done, and we are working diligently to position the company for sustainable future growth and profitability.
The initiatives we have implemented are working, and we are beginning to see the payoff of our turnaround efforts and expect accelerated improvement as we continue to aggressively pursue our key priorities of driving traffic into our stores, reducing SG&A, generating free cash flow and lowering debt.
As we streamline our operations, we become increasingly nimble and better able to drive the company toward growth, profitability and enhanced shareholder value.
And with that, I'd like to open the call up for questions.
Operator.
Yes.
Gabby, we're not providing forward guidance at this time, and that would include in terms of our margins.
But I think that one thing we can say, and I believe Mike alluded to, is that the write-down of inventory that we took in the third quarter is not anticipated to be a recurring event, that we are addressing the pockets of inventory that we have that we believe are unproductive and that we expect to have more normalized results going forward.
Sure, <UNK>, let me give you a little color there.
We don't disclose separately Pharmacy from Front Store, so I'm not going to get into details on the margin of each.
I can tell you, though, that we're describing ---+ I mean, we did describe in our comments, some of the pressures we felt on the Front Store.
So that's where our focus was, I would say.
And within that area, I would tell you that it was ---+ again, while I'm not going to break it down in detail, I can tell you that, of the types of things impacting our margins negatively in the first ---+ excuse me, in the third quarter, there was a split between what I would call inventory and timing-related issues, and then some actions that we took to make sure we remain competitive in terms of pricing.
On the inventory side, as we bring down inventory, there are ---+ we do our own distribution.
We have 2 distribution centers.
And as we bring down inventory levels, the cost in those distribution centers, that in the past may have been attached to inventory going into our stores, is pushed through the P&L as a period cost as we also then look to reduce those overall distribution costs.
That was affecting us in the third quarter, in addition to the delay in terms of some of the shipping of our higher-margin seasonal products into the stores.
Again, that was all part of our plan because we don't need to be investing in that inventory as early as we were.
We need to invest at the right time.
And then the remainder being, again, as we mentioned, some actions that we took to make sure that we are competitive from a price perspective in all the key areas of our Front Store business.
That's actually a great question, <UNK>.
And I would tell you that as we think about our debt level and as we've suggested the target to get ourselves under $160 million by year-end, we are considering that from operations.
So this is Tim <UNK>.
We started to think about the specialty business related to the future, and we're evaluating whether we should be investing heavily into the space to grow the business or we should be seeking alternatives to capitalize on the value of the business.
We're in the middle of that evaluation right now, and I think that we're excited about the path we're going down with this.
I think that if we do nothing, you run the risk of being irrelevant in the space.
| 2017_FRED |
2016 | DOV | DOV
#The pricing in our backlog.
Gosh, <UNK>, we're such a book and ship business, that's not much ---+ that's not something I really pay much attention to.
As I commented earlier within energy, our price for the segment, our price concessions for the segment were down 3% for 2015, and we expect another 2% down on 2016, but I'm not sure.
Does that answer your question.
No, no I ---+ no, it's not.
I would say we dealt with the bulk of the FX impact on our backlog in the first nine months of last year.
I don't think we have any exposure in our backlog beyond what we're already guiding, which is another 2% headwind this year in FX.
And I should be sitting here with a smile on my face saying it's down from 4% to 2% but still 2% is a pretty significant number for us.
But, again, it's ---+ we are such a book and ship business that the ---+ you see it show it pretty quickly in revenue, and I think we've got it covered.
All right.
Thanks, <UNK>.
Good morning <UNK>.
Oh, my goodness.
I don't have that detail, <UNK>.
The restructuring in the fourth quarter in energy was a little over $4 million, and I think that was probably ---+ I think it was probably up $2 million slightly.
It was up about $2 million over what we thought we would do as we entered the quarter.
I think if we ---+ that's a good question, <UNK>.
I'd tell you that if we weren't continuing to try to expand our customer service activity, and we did in 2015 and our plan in 2016 is, again, to actually see an increase in product development spending within energy.
If we weren't doing that, you'd see actually more benefits coming through from some of the restructuring actions we've taken in 2015.
In 2016, I think our guide, we have I think $20 million of restructuring charges in our guide for 2016.
80% of that's probably in the first half, <UNK>.
There may be a little bit of trickle over into the third quarter.
But 80% of it I would say is in the first half.
Of the $20 million, probably $9 million of it is energy.
The balance of the $11 million, a little bit at refrigeration but the balance of the $11 million is pretty evenly split between fluids and engineered systems.
And if we see further deterioration in the energy market, look, we've got a ---+ at some point in time, we have this push versus pull of taking costs out versus continuing to invest for tomorrow and for being a better partner with our customers, and if we see further deterioration in the energy market, that debate gets a bit harsher.
Thanks.
Good morning, Shannon.
So do I have a split between drilling and production.
You'll have to follow up with <UNK> on that.
I don't have that.
I will tell you as a color comment that through every single quarter in 2016, our drilling activity was down year-over-year much more than our other upstream activity, which is artificial lift and automation.
I think our drilling activity in 2016 was down 60% or 65%, significantly more than we saw in artificial lift and automation.
Does that give you a little bit of color.
I don't have the exact numbers.
We're monitoring that pretty closely.
We continue to see what is the industry ducks drill but uncompleted.
We continue to see the ducks inventory built during the third and fourth quarter.
The ---+ it's ---+ that's always hard to forecast.
It is ---+ for us, it's something that we've looked at in our sort of our rear view mirror as the data gets released, but we do know that the activity is quite different between the basins here in North America.
West Texas or the Permian Basin is starting to see some increased completion of drilled but previously uncompleted wells.
We're not seeing that in the other basins, and that's our fourth quarter comment; that's not our first quarter comment.
No, you're referring to China as ---+ if the question is more of a general comment about China, I can't see the improvement.
We just don't see it, even when we talk to our folks on the ground there.
I think the improvement we saw in the fourth quarter, I'm going to trace it back to comments I've been making all year long.
It's ---+ we continue to look for opportunities for new product releases and new products specific to the China market.
Even with some of the restructuring activity that we have planned in the first three to five months of 2016, and this is a fluids comment, within the fluids segment, almost all of that restructuring is in Europe and China, interestingly enough.
And some of the benefits that we will achieve with the restructuring in China is actually being reallocated to increase our customer facing and customer service capabilities in China.
There are opportunities for growth, but I'm not going to label the change we saw in the fourth quarter as a ground swell change.
Oh, gosh.
This is probably the ---+ well, let's not talk about the segment.
It would be very ---+ my comment would be very specific to Hillphoenix.
I would say that this has always been a very price competitive market, and we'll see what happens in 2016 and 2017 with the change in ownership with our major competitor.
Margins in the segment for the fourth quarter, the fourth quarter is historically, traditionally our weakest quarter of the year for margins for this segment.
I think we saw that again in the fourth quarter of 2015, but we are ---+ we do see a pretty good path going forward here in 2016 for margin improvement for the year, for the year.
Do we have another question, Kristin.
Good morning.
Yes, we have some exposure.
I'm not sure what the percentage is.
I think it may be less than we have in upstream.
We have ---+ we've seen it in some of our fuel transfer products that deal with terminals and distribution.
I would say it was softer than expected in 2015, but I wouldn't label it as negative.
We are taking a cautious approach as we look at that part of the market in 2016.
But I will also point out that we also have this midstream exposure around energy within our energy segment in bearings and compression, and we watched that pretty closely, especially the OEM build rates around compressors, and that was down in the second half of last year.
We are not anticipating a recovery.
In fact, I believe that the guys are actually seeing further decreases in OEM compressor build rates in 2016.
Oh, look, you asked a question about the midstream.
Still, the bulk of our ---+ by a large percentage, the bulk of our activity in fluids is not in upstream or midstream.
The retail fueling piece, which is fairly significant and even more so now with the acquisition of Tokheim, we view as solid around the globe in 2016.
It has both market expansion opportunities as well as some significant drivers in safety and regulatory issues, and we had embedded within that platform within our fluid transfer platform is our medical and our connector business, our fluid connector business, and that business I think had 7% or 8% organic growth in 2015 and is looking at something similar to that in 2016.
| 2016_DOV |
2016 | IART | IART
#So I think that was three questions in there.
Let's see how we'll get those.
So, look, I think first of all, we just launched the product in second-quarter with 50 reps.
We pretty much had our plans laid out on the target approaches that we would go through.
And as we ramp up to a level that we'd start seeing the kind of saturation we think with the 50 reps, we'll add additional, which is pretty consistent with what we communicated.
And I would say, at the end of this year, going into the beginning of next year and throughout the year, we'll continue to add additional reps.
And so that's part of the plan with the reps.
Relative to clinical data, as you know, we've got the most extensive study that's ever been done really to date within the space.
And we already have, as we bring new users through the value committees, these are many of the folks that are actually interested in doing studies.
We have some people very much interested in doing health economic studies ---+ closure studies, closure rates beyond the traditional windows, what happens to a patient after a year.
A lot of those things that can drive some transformational changes within the industry.
So we have a lot of interest to work on that.
And I think you'll see some of those types of studies coming out next year.
There's also, because of the size of our studies, some very interesting opportunities to do retrospective work, just based even on the foundry study that we have out there.
And your third question was.
Yes.
So we actually have an amniotic product that we have in the doctor's office and other areas.
We have plans, I would say, next year to be in a situation that we could bring it actually into the wound care clinic.
And so we're working on those right now with some smaller studies and things of that nature to be able to bring it into the outpatient area.
So I would say in 2017, our plans would be to have a full-fledged 3x3 product line strategy, which is our Omnigraft, PriMatrix, and amniotic in the wound care setting.
And it's also a part of our strategy, just as we brought Voltec in, is to bring a few other products within to that portfolio, to give us more of ---+ I'll say a fuller bag of advanced products that can make a difference in the eyes of those clinicians.
So look for hearing more about that in early 2017.
Yes, we pre-negotiated the constructs for the international rights for Salto.
And we have some rights that are coming up to take advantage of those in the second half of 2017.
So, we'll make some decisions probably at the beginning of 2017, what we ultimately decide to do for that.
Sure.
Thanks.
Hi, <UNK>.
Yes, I would say there's a couple of points ---+ one is we had some softness in private-label, which is probably earlier in the year, which was more so around our expectations about what volumes would be.
And I'd say that's been stabilized, and we're running at a new baseline.
So I think on a go forward basis, we've kind of got that set.
But that was off our expectations earlier in the year.
This part is really more so around our impatient product, and that ties to two aspects of it, which is within the area of plastics and reconstruction, there was a warning letter for all types of players that touched into the breast area for a nonhuman product.
And those sales right after we purchased, kind of planed and flattened out.
We've got plans that our focus is to be able to do some broader clinical studies in that area.
We think that's going to be a really interesting growth area over time.
That's really the two main areas I talked about in the past that we distinctly have some opportunity with some channel additions and tweaks.
And we're actually looking at that right now.
We have a specialist group that will spend more time focused on some of those products.
We just recently did training with our groups in those areas.
And the fact is with the success of a lot of the new products we've brought out, there's been a little bit of a bandwidth issue that we talked about in Q2, and we started seeing that ---+ I'll say improve in Q3, as we saw sequential growth.
And we think that's going to continue here quarter over quarter as we add folks, and I'll just say get the products more integrated into the family.
I'm still very, very optimistic about what we have here.
Again, we have some new products that are going to be coming out in that area.
And part of our investments that we're going to make next year ---+ and really into 2018, for that matter ---+ are also in our broader inpatient regenerative channels where we've been growing significantly.
And that's going to help us be able to have more focus on some of those product families than we've had in the last two quarters.
Yes.
So if you look at, for the Company, which would be the Dural repair products, and then all of the tissue products and plastics and recon, and then the advanced wound care products, it's about 43% of our total sales.
And probably back in 2011/2012, it was around 30% or just below that.
Yes.
So if I think about the work we've done to date to bring our G&A costs down as a percentage of sales, a lot of it had to do with some of the organization changes we made back in 2015, where we moved to a two-division structure from five segments.
So that was an organization change that has helped us.
A big enabler for us, though, is moving to a common ERP platform.
And so you know, the work we've been doing to move towards Oracle R-12, getting on a common platform is important for us to centralize a lot of our back-office resources.
We've got about 90% or so of revenue going through one platform and 95% going through two.
So we've made great progress around that, including a lot of enhanced reporting across the Company.
In addition to that, we've got a lot of other initiatives as we look forward in terms of locations that we're looking at and things that we want to do relative to cutting a lot of our outside spend.
And we're going to continue to take another bite of the apple as we look at these types of things, including the outside spend.
But you'll hear more about some of the initiatives, <UNK>, I would say in about 12 months, but we do have plans that we're working on.
And a big part of it is continuing the consolidation of our manufacturing footprint, which enables us to continue to reduce our G&A.
We've made great progress in the past.
We closed two facilities this year; that has helped our G&A.
And then as you move forward, we'll continue to look for opportunities to consolidate facilities.
So those are just some of the enablers.
And you'll hear more probably in about 12 months of additional things we're working on.
Sure.
I'll give an update on enterprise and maybe <UNK> can comment a little bit on what we're doing with private-label.
So the enterprise selling organization has become an integrated part of kind of who we are.
I think for a diversified small to mid cap company, it's a really important tool in how we take multiple brands and products, and leverage our scale, and compete against some of the biggest players in the industry.
And so it's enabled us and some of the larger IDNs to be able to have multiproduct contracts, which become quite important for us.
We clearly see a trend across the industry.
We've talked about value assessment committees being a trend.
I think another trend is to really be on contract within a given IDM, even for your sales rep to be able to show up in that count and make calls.
And so to us, it's become quite important.
We've been able to leverage contracts where we're one of two in many cases, and that's driven a significant amount of sales through that channel.
But it's also helped us be able to take a look at areas where we're quite strong in one brand ---+ say, in neurosurgery and a large well-known IDN.
And we may not be as well-known in some other product lines, and be able to take a look at how that might be able to position us to be able to bring those brands in.
So, it's ---+ I would say our sales through accounts that actually have contracts has gone up quite a bit over the last two years.
And we only expect that to continue.
So that would be my view on enterprise and the importance of it.
<UNK>, why don't you comment a little bit about private-label, and maybe how we're taking about the added capacity and its role.
Yes.
So <UNK>, you know in the past couple of years, we've been supply-constrained with respect to our collagen implants.
Now that we've got our new facility up and running here in Plainsboro, it's given us the added capacity to now not just support increased demand from our existing large private-label contracts, but also go out and get new contracts in areas like the dental area ---+ dental collagen.
So we're seeing a combination of increased end-user demand in a lot of our existing contracts where we can now actually supply the product, which is helping our overall private-label business.
But also going out and winning new deals in private-label.
And this is clearly an area that's helped us.
I mean, we've grown this year double-digits.
We had another quarter of double-digit growth in Q3.
As we look to next year, I'd expect it to continue.
And so this will be a nice additive growth driver for us as we move forward into 2017 and 2018.
Thanks, Catherine.
Thanks, everyone, for all your questions and taking some time, I know, on this busy afternoon.
I'd like to briefly reiterate just a couple of the messages that we talked about ---+ <UNK> and I, in the prepared remarks.
First of all, we're exceeding our 2016 financial targets, raising organic growth rate to a range of 9% to 9.5%, and increasing adjusted earnings per share to $3.47 to $3.53.
Second, we're on track to achieving our long-term 2018 financial targets, while continuing to invest in these future opportunities we discuss, including M&A.
And we see our 2017 growth near the high end of our 6% to 8% organic revenue target.
Third, we continue to look forward to the growth of our advanced wound care strategy and believe Omnigraft, through its differentiated technology and economic advantages, will become a franchise product.
And finally, given our positive long-term outlook, we're pleased to announce plans for a 2-for-1 stock split, subject to shareholder approval later this year.
Thanks again for listening and we look forward to speaking with you all in the near future.
Have a nice evening.
| 2016_IART |
2015 | NVDA | NVDA
#Thanks for the question.
We really wanted to, just to provide the transparency on how important this litigation is to us, and what we're doing to support that with the expenses and the range.
We don't have a crystal ball of how this will go, so we know about what we're approximating for the full year in there.
We indicated in Q1 we spent about $16 million, but we'll take it day by day at this point.
It's a very, very important set of cases for us.
And we'll keep you updated as it goes throughout the year.
They've been a strong competitor for as long as I remember and they remain a strong competitor.
It's just that our strategy is very different now.
We use to be much more of a component supplier, competing directly with other component suppliers, but increasingly, we're really a differentiated platform supplier.
And so you find that the software investments that we've made over the years, you really increasingly define our product.
If you think about Tesla, the amount of software that stacked on top of Tesla from all the tools that we created, the middleware, the libraries, the programming models, the robustness of all of it, the integration with all of the industry's software products, and everybody else's software that's built on top of Tesla, is pretty daunting.
And so it's hardly just a GPU anymore.
GRID is all about software.
Otherwise, it's just another one of our GPUs.
The GRID is largely about software, virtualization software, concurrency software, the ability to deal with very, very low latency streaming.
The integration with all the tools in the world, and all the other platforms of the world.
So I think we think about our products and our platforms, it's really about the differentiated value that we built on top of our GPUs, number one, and number two, the deep integration with the large ecosystems around the world, to the point where other companies' capabilities are really glommed on to this platform, making this platform more valuable to customers.
And so that's really what's changed about our company strategy and why increasingly, we look very different than other component suppliers.
I think first of all, we're one of the few companies that didn't miss last quarter, and Q1 was relatively fine for us.
What we said was that we're going to let what is broadly impacting the rest of the industry inform us about Q2, and we think that when it comes down to enterprise, that's one of the factors.
Enterprise does affect us.
When enterprise slows down, because of FX issues or delays in purchase because of Windows 10, workstations is a part of enterprise, servers that they buy is part of enterprise, and so it affects us there.
We still have a piece of our business that even though it's a rather small percentage of our business at this point, it's still non-zero.
Our PC OEM business is affected by what's happening around the world.
And so I would say that yes, our Q2 is informed by all of those factors, but I would say that also our core business is really doing well.
Gaming is robust, and I expect gaming to continue to grow.
The work we're doing in accelerated data centers grew 50% year-over-year, and my expectation is that it's going to be a strong business for us going forward.
And the success that we're seeing in automotive and the expansion of car computers has allowed us to double our business there.
So our core businesses are growing very nicely, and largely independent of what is being experienced in PC OEMs globally.
I'm not sure that we've ever had process leadership.
We go to a new process when we're ready to go to a new process.
And as you know, we could wring out new architectural efficiencies in exactly the same process technology for several generations with 28 nanometer The difference between Kepler and Maxwell is pretty amazing.
To be able to deliver twice the energy efficiency in one generation using exactly the same process is pretty exciting.
And so I think there are many ways to skin a cat, and we surely expect, and we surely expect and look forward to going to next-generation nodes, but the GPU is a piece of the puzzle.
The algorithms we put into the GPUs is a very important piece of the puzzle.
The software on top of it is a piece of the puzzle and the system design is a piece of the puzzle.
There so many ways for us to deliver energy efficiency and performance.
I wouldn't get too obsessed about the process technology all by itself.
Within our overall GPU business and how big is notebook.
We don't give out that.
I don't have it actually front of me right here on this side, but we are seeing definitely a good amount of growth in terms of our notebook for gaming.
And we still have a very strong position as well, just in general PC notebooks.
So they're both about equal in size, in terms of our total.
It's a percentage of our PC number.
This is <UNK>.
First of all, I want to thank all of you for tuning in today.
We're really pleased with the quarter.
Our businesses are performing well.
Looking beyond the broad industry headwinds of Q2, we have a great growth drivers in our core platforms: gaming, HPC cloud, enterprise and auto.
And in each market segment as we discussed, our position is differentiated and strong.
We are excited that visual computing is more important than ever, and I look forward to talking to you next time.
| 2015_NVDA |
2016 | JCOM | JCOM
#As to the first question, Jim ---+ no.
I would agree that the number of deals is actually roughly on-pace with prior years.
The amount of spend ---+ that, I'd say, $75 million ---+ is less.
Gawker has nothing to do with that.
I think as you know, Gawker was something that really materialized in the June timeframe, May-June timeframe.
And so, obviously, there's been a lot of activity even before Gawker was a possibility.
And as you can see, we've got more than ample cash balances to fund that transaction and still do much more.
And if we do not win Gawker, the answer is also no.
I mean, there's going to be a push to do M&A.
I would say that if we win Gawker, there might be some things on the media side that we would like to defer.
Because we're going to spend the time to absorb the Gawker properties.
So that might change somewhat on the margin, but certainly has no effect on the Cloud business or no effect on j2's general appetite for M&A.
As to your second question ---+ I think that all of the other Cloud Services remain under-scaled.
However, the one that's closest to scale is the Backup business.
It did tip over 50% EBITDA margins this quarter, which is one of the factors we use in terms of determining scale.
But it's not solely determinative.
But it is clearly marching in that direction of being a full-scale business unit that could be standalone.
That's really more of the internal definition.
And we expect that when those businesses meet that criteria, as a result of it, they should be at 50% or better EBITDA margins.
So the Backup is the closest, I think, as <UNK> mentioned.
Depending upon the pace of M&A over the next six to 12 months, it probably reaches its scale.
Not necessarily its full potential, but its scale.
The other units, though, remain small ---+ the Email Security, the Email Marketing, and the web hosting.
Web hosting really is very, very tiny; it's about $5 million to $6 million of revs.
The Email Marketing is about $30 million, and the Email business is right around a little over $50 million.
So each of those three business units, to varying degrees, have to increase from a pure revenue standpoint fairly dramatically to hit scale.
I'll try to answer you, too, <UNK>.
There are two elements, revenue and EBITDA.
So from a revenue standpoint, the Cloud Connect is growing slow.
We have potential in voice, both in the US and internationally, but a slow grower.
EBITDA is very high, mid-50s to 60s.
On the Backup, we just reach over 50% EBITDA.
I believe that we can improve the cash flow there.
As we scale, we have better ways of reducing cost on our [colo storage].
And also, we keep on introducing services that are very highly valued.
But we don't really represent, beyond the initial investment cost, those services like disaster recovery.
And as you know now, more companies are dealing with ---+ they're being compromised by hackers that lock their data and they want ransom, ransomware.
So this service is now something that we can provide.
If basically somebody invades your data and locks it with ---+ encrypts it, you can go to us and say ---+ I would like to go back to my last pickup, which was, let's say, two days ago, before they invaded me.
And you can basically recover [to] companies.
The server doesn't necessarily cost us more.
It's just more sophistication.
So with this sophistication, and with these services at a very highly value, the price is not an issue there.
And it's unlike what you call stupid pickup ---+ smart pickup.
I do believe that we can continue to increase the EBITDA there, too.
On the Email Security, we're at a 40% level kind of.
I believe that we can go up to 50% once we continue to integrate all our customer to single platforms (inaudible) platform.
And we are making progress there.
Email Marketing revenue, EBITDA continues to grow.
It's a small business, $30 million.
We see a lot of acquisition.
Much less competition there, because the integration there is engineering challenge that we absolutely like and can do.
And the EBITDA there is very high.
So I hope I answered you all about the Cloud and the ability to scale.
And same with Media.
So I believe that with the Cloud Connect being a slow-grower, all the rest have big potential to continue to grow in the next five to 10 years.
You're welcome.
So excellent question, <UNK>.
First of all, this revenue is more than half outside the US.
So it doesn't impact inside Denmark and Norway and those countries.
So there's some FX impact.
Also, in these business, we are trying to migrate customers to our FuseMail product.
We have like three or four, or maybe five, brands that we bought.
We're all migrating into FuseMail.
The migration cause us to lose some customer.
But every customer that we migrate, the EBITDA doubles and triples.
So we don't care so much about the revenue there.
This group is focus about integration.
But every time we integrate a customer, we are saving $0.20 to $0.25 per email box per month.
And that's the focus.
The focus there is EBITDA.
And some customers refuse to migrate or have some specific.
So the revenue growth is lower, but the EBITDA growth is really fast.
That's a piece of it, but it's not limited to the videos.
So we talked about over the last year, we've got a couple things going on.
You've got a couple of additional properties that were added year over year.
So if you recall, Offers.com was acquired in late 2015, actually 12/31.
So we have the visits and the page views from that in Q2 of 2016, which we don't have in Q2 of 2015.
So that's probably one of the more important contributors to that delta, as well as what's going on just in the overall core business, including the video views.
It's been an important contributor.
I think if you go back over the last few earnings calls, when we've talked about video, it's been in the neighborhood of 5% of our Media revenue.
That's now upwards of 10%.
And also a big shift to mobile, which is very important.
So we've seen it have an increasing share, while at the same time the total revenues of Ziff Davis are growing.
So I think that the answer to your question is yes, there's very good conversion of those video views into actual not only monetization of revenue, but it's also aiding on the EBITDA contribution.
That's an area we've been very bullish in.
Now, it is not, though, systemically the case across all of our web properties.
It's heavily driven by IGN and by AskMen.
Most of the video content comes out of those two properties, whether it is viewed on our owned and operated websites or through third parties such as a Snapchat, Facebook and Twitter.
YouTube.
No problem.
Second one I'm not going to comment on.
I don't know.
The first one, though, is ---+ there are seven properties.
And so the two tech properties, Gizmodo and LifeHacker, fit very well into our tech vertical, where we have a number of different websites catering to different audiences.
Kotaku fits into the games area, where we actually have a much more limited set of web properties.
We have GameTrailers now, IGN.com and, if we're successful, Kotaku.
And then, there's three other properties that Gawker has that in our view we would combine with AskMen.com to form more of a lifestyle category.
And that's Jalopnik, which caters to autos; Deadspin, which is sports; and Jezebel, which is women's lifestyles.
So we would integrate these individual properties into our core verticals.
We think that there are opportunities to both improve the top-line performance as well as the bottom-line.
But I'm not going to get any more specific than that at this time.
Sure.
So the 8% notes actually became callable as of August 1 of this month, so a couple of days ago, at [104].
So that's ---+ if we wanted to get rid of them, that's $260 million.
I think as you know ---+ and there's obviously many different ways to either finance or refinance, but if we stayed within the high-yield markets, I would say they've had a somewhat volatile year, start off very poorly.
Although in the last six weeks or so, that market's caught fire post-Brexit.
And I feel pretty good that if we were to refinance in the current market environment, we clearly could lower our cost of capital from the current 8% on those notes, probably in or around the 6% range.
And then, I think the second question is, do we have a need for more capital based upon our prospective pipeline of transactions.
And the answer to that is maybe.
Part of that would be influenced by Gawker, not only the purchase price of Gawker but the fact that that is likely the all-US cash.
So when we look at our total needs, we look at the [407] [bolded] and aggregate number.
But then we also look at the split between the US portion and the foreign portion.
I think right now it's around [240] US and [160] overseas as of June 30th.
So we put all that together to decide what we need to do, if anything, to prepare ourselves for the next $300 million of spend.
Obviously, we're generating a significant amount of free cash flow as we march along.
So we've made no commitment at this point in terms of calling the notes, or formally refinancing them.
But it's clearly something that I'm looking at.
Yes, we're going to do that at least annually.
Obviously, this breaking down of the Cloud business into component pieces you see in the front part of the presentation.
So from an operating basis, that is the way we will continue to report.
And over time, there'll actually be even probably a further fracturing of what are called Cloud Services as these business units grow up.
So I think the next one to break out would be the Backup business.
At least, that'd be the current trend.
And then, whatever is still small would be in just Cloud services.
And at least once a year, on an annual basis, [which] you saw last quarter, you'll have the total capital spend and the implicit returns for each of the sub pieces.
It's ---+
Great, we wanted to make sure that you are really focused and you noticed it.
And I want to take the opportunity to tell our listeners today, at this time, there are like hundred earning calls.
And we got <UNK>, <UNK>, <UNK>, <UNK>, everybody (multiple speakers), and <UNK>.
So we want to thank you for giving us the priority to jump on our call versus the other 90-some alternative that you have.
And we want to thank you.
We don't take it easy.
A couple of ---+
Go ahead.
Adam.
Thanks.
Okay.
Couple of other comments ---+ as you know, we do take questions by email.
One is a comment on currency and FX, which nobody asked.
I'll let you know that the various Brexit volatility, and its volatility surround the pound-to-US dollar, had about $1.5 million impact in the second fiscal quarter on revenues, although much more muted on an EBITDA or earnings basis.
We continue to monitor, really, the basket of 10 currencies that matter to us, although I'd say this year, the GBP has probably been the one that's been most influential.
Our best estimation is the back half of the year for the total business relative to last year will be about a $5 million top-line impact, but once again more muted as it relates to EBITDA of probably only around a couple million dollars.
Next question has to do with ---+ and this has been an issue sometimes in how to spread the Media revenue over the course of the year.
So as you know, we give the annual guidance.
I think in February, when we first gave that guidance, we talked a little bit about the distribution of revenue as it relates to Q1 and Q4, but not necessarily as to Q2 and Q3.
It is ---+ what you have typically seen, although there is no necessity to it, is that the Q3 median revenue is greater than Q2.
That's been more happenstance and luck than anything else.
Our view is that generally those two quarters are roughly equal.
However, I would note that in the current Q2, we had the acceleration of certain licensing and business development agreements that will probably take, actually, a little bit of revenue away from Q3.
So as a result, don't be surprised if Q3 revenue in the Media business is somewhat lighter than Q2's revenues.
But everything remains consistent for the full fiscal year, just some timing differences between the quarters.
And if the operator has no other either polled questions, or we don't have any other questions by email, we would just once again thank you for joining us.
There will be a number of conferences beginning in September after Labor Day that we will be presenting at.
There'll be a press release on those probably in late August announcing the specific venues and times.
And so we would encourage you to attend those conferences or listen to the webcast and, if you're in those locations, to seek us out for one-on-one.
Thank you.
Thank you very much.
| 2016_JCOM |
2018 | MHLD | MHLD
#Thank you.
Good morning, and thank you for joining us today for Maiden's First Quarter 2018 Earnings Conference Call.
Presenting on the call today, we have Art <UNK>, Maiden's Chief Executive Officer; along with <UNK> <UNK>, our Chief Financial Officer.
Also in attendance today is Pat Haveron, President of Maiden Reinsurance Ltd.
Before we begin, I would like to note that the information presented here today contains projections or other forward-looking statements regarding future events or the future financial performance of the company.
These statements are based on current expectations and future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these expectations.
We refer you to the documents the company files from time to time with the SEC, specifically the company's annual report on Form 10-K and our quarterly reports on Form 10-Q.
Some of our discussions about the company's performance today will include reference to both non-GAAP financial measures and information that reconciles these measures to GAAP as well as certain operating metrics that may be found in our filings with the SEC and in our news release located on the Maiden's Investor Relations website.
Please also note that unless otherwise stated, all references to common share data in today's discussion are on a diluted share basis and comparative comments will refer to Maiden's results in the first quarter of 2018 relative to the corresponding period in 2017.
With that, I'll now turn the call over to Art.
Thank you, <UNK>.
Good morning, and thanks for joining us for today's call.
Following several challenging quarters last year, our results in the first quarter of 2018 have improved significantly.
We reported net income in the first quarter of $13.7 million or $0.16 per diluted common share.
On an operating basis, we earned $16.8 million in the quarter or $0.20 per diluted common share.
And importantly, we did not see significant adverse loss development in our Diversified segment and only a modest level of adverse development in our AmTrust Reinsurance segment.
I'll provide more color on business development in each segment, and then <UNK>, our Chief Financial Officer, will provide more detail on the quarterly results in her financial review.
Across the Diversified segment in the first quarter of 2018, gross premiums written were $279 million, down from $332 million.
Beginning with our U.S. underwriting operations.
As we expected with the continued competitive environment, we found it more difficult to renew some accounts; some due to competitive pressures, and others, we chose not to renew.
In particular, in the first quarter, on a comparative basis to the prior year's first quarter, we felt the impact of several large accounts non-renewed in 2017 and early in '18.
And in one case, we had a fairly significant return of unearned premium reserves.
We do expect revenue to grow in subsequent quarters versus the prior year quarter period, reflecting new client additions as well as increases from existing client relationships, but we're not presently expecting significant year-on-year growth in the U.S. While it has been a difficult environment for a variety of reasons, clients and prospective clients continue to see the value in our collateralized reinsurance solutions and our differentiated value proposition.
In Maiden capital solutions, our European regional business, we continue to add accounts and are enjoying increasing awareness and opportunities for our unique product offerings.
Our first quarter capital solutions business development was strong, with several new client relationships added during the quarter.
Additionally, in our international insurance services, affinity reinsurance business, we're seeing a variety of business development successes both in our branded consumer auto activity as well as our payment protection insurance products.
Both areas have experienced new program and new client growth.
Within the payment protection insurance component, we're expanding our offerings to other affinity relationships in areas primarily in consumer finance.
Of particular appeal to these new customers is our ability to customize products to meet their customers needs and also the team's fast time-to-market approach.
And finally, we're enjoying growth due primarily to increased shares we received in our German affinity auto reinsurance program, which was renewed on January 1.
Within our AmTrust segment, we observed a modest decline in gross written premium, reflecting their underwriting decisions made primarily in their program segment, some softening of primary market conditions and AmTrust's own initiatives to improve underwriting performance.
As we've stated in the past, we anticipate a continued moderation at AmTrust and a potential further reduction in revenue over time.
We believe they're responding effectively to competitive market conditions by maintaining disciplined underwriting.
As we mentioned on our fourth quarter conference call, we are evaluating all options to enhance value to our shareholders.
In April, we did announce our Board of Directors had engaged Bank of America Merrill Lynch to help drive this effort forward, and we're actively engaged in the process.
We will, of course, communicate any important developments in this process when they occur.
I'd now like to turn the call over to <UNK> <UNK>, who will provide more details on the quarter.
<UNK>.
Thank you, Art, and good morning.
As <UNK> said at the outset of today's call, unless otherwise stated, all references to common share data are on a diluted common share basis, and comparative comments will refer to Maiden's results in the first quarter of 2018 relative to the corresponding periods in 2017.
Last night, Maiden reported a first quarter 2018 net income attributable to common shareholders of $13.7 million or $0.16 per diluted common share compared to net income attributable to common shareholders of $20.5 million or $0.23 per share.
The non-GAAP operating earnings were $16.8 million or $0.20 per diluted common share compared with the non-GAAP operating earnings of $22.6 million or $0.26 per share.
The annualized non-GAAP operating return on average common equity was 9.3% for the quarter.
Gross premiums written in the first quarter decreased 7.7% to $853 million compared to $923 million.
In the Diversified Reinsurance segment, gross premiums written totaled $279 million, a decrease of 16%, impacted by the return of some unearned premium during the quarter on 1 large U.S. account that was not renewed at 1/1.
Also affecting the comparison to the prior year was the termination of several accounts that occurred after the first quarter of 2017.
Diversified growth outside of the U.S. was very strong for the quarter in both our International Insurance Services and European Capital Solutions businesses.
In the AmTrust Reinsurance segment, gross premiums written were $574 million, a decrease of 3%.
Net premiums written were $849 million, down from $901 million.
Net premiums earned were down ---+ were $685 million, down modestly from $710 million, mainly due to the decline in net premiums written in both segments.
Net loss and loss adjustment expenses in the first quarter were $473 million compared to $481 million.
In the Diversified Reinsurance segment, we had prior year loss development of $1.2 million compared to $6.2 million recorded in the same period last year.
In the AmTrust Reinsurance segment, we experienced $8.5 million of adverse prior year loss development compared to $10.3 million in the prior year.
Higher initial loss ratios were booked in both segments.
In the Diversified segment, the higher ratios added approximately 0.6 points to the segment combined ratio.
And in the AmTrust segment, the initial loss ratios added 1.8 points to the AmTrust loss ratio.
Commission and other acquisition expenses decreased 6% to $209 million, reducing the ratio to 30.3% compared to 31.1%.
Mix was the main driver of the lower combined rate ---+ lower commission ratios.
General and administrative expenses for the first quarter totaled $20 million versus last year's G&A of $17.4 million.
The increase was due in part to increased audit, legal and system cost incurred in the first quarter of this year.
As a result, the G&A ratio increased to 2.9% from 2.4%.
This 0.5 point increase in the G&A expense ratio represents more than half of the increase in the combined ratio from a 100.9% last year to 101.8% this quarter.
The Diversified Reinsurance segment combined ratio was 99.6% versus 99.9%.
The combined ratio for the quarter reflected higher initial combined ratio, which we believe to be prudent.
Within the segment, we also experienced a 0.9 percentage point increase in the year-on-year G&A expense ratio, which we do not believe to be run rate.
The AmTrust segment combined ratio for the quarter was 100.9% versus 99.8%.
The increase was due to higher initial loss ratios booked, offset by less adverse development in the quarter as compared to prior year.
Investment results were consistent in the first quarter with net investment income of $42.9 million compared to $42.2 million.
Investable assets decreased slightly to $5.4 billion with an average yield on the fixed income portfolio of 3.18%.
The duration of Maiden's total investable assets was 4.7 years compared to the duration of liabilities of 3.7 years.
With the rising rate environment, the mark-to-market adjustment on our available-for-sale portfolio was $68 million, which was recorded through AOCI, which reduced our book value by $0.82 per share this quarter.
However, importantly, the change in market value was not driven by a weakening of credit quality or impaired assets.
Maiden would only realize these valuation losses if we chose to sell assets at market.
As you know, Maiden does not have a significant liquidity risk in its portfolio and has relatively predictable cash flows.
Our book value per common share, excluding AOCI, was $9.10 at the end of the first quarter versus $9.09 at year-end.
We ended the first quarter with total assets of $6.76 billion compared to $6.64 million at year-end.
Cash and cash equivalents were $161 million ---+ $161 million, excuse me, compared to $192 million at December 31.
Shareholders' equity was $1.16 billion compared to $1.23 billion at year-end.
And finally, as we announced in our press release on Tuesday, our board authorized a quarterly cash dividend of $0.15 per common share payable on July 12 as well as dividends on our preference shares payable on June 15.
I will now turn the call over to Art for some additional comments.
Thank you, <UNK>.
As we look further into 2018, we believe we're taking the steps necessary to return Maiden to more stable results and more consistent profitability.
With our strategic review process well underway, we continue to focus on actions that will enhance value to our shareholders.
Before I end our formal comments, I'd also like to acknowledge the exceptional efforts of the entire Maiden team in remaining focused on delivering significant differentiated value to our customers.
While there have been a number of issues that have made their jobs significantly more challenging, I'm deeply proud and appreciative of their professionalism and their commitment to deliver value every day.
I'd also like to thank our customers for their loyalty and support.
We're committed to strengthening our value proposition for all of our clients and our shareholders to deliver exceptional reinsurance solutions.
This concludes our prepared remarks.
Operator, could you please open the lines for Q&A.
Sure.
We had a very quiet quarter for Diversified this quarter.
U.S. was flat.
Nothing booked in either direction.
There's obviously movements in all kinds of directions for all of the individual pieces, but it netted out to 0.
We had a small amount of adverse coming from our Bermuda runoff.
Some of this was contracts that were in place when ---+ at the very beginning of the Maiden existence, which we still have little bits of runoff from that but really not a significant amount.
That's really it.
And then IIS was favorable for the quarter, slightly.
Yes.
Remember, we booked a lot in AmTrust last year.
So I guess, my expectation would have been we book nothing.
But we did book around $8.5 million.
It was mostly in general liability, small amount of commercial auto.
And really, when you take it apart, a lot of it was coming from program.
Program continues to be a little bit of a challenge for us.
But the adverse development cover from AmTrust, as we've said before, it's really hard to compare what their results are going to be to our results.
There's different business going in that.
There's different things that are affecting that cover that we don't participate in.
And then the business that we do participate in, our starting points may be different.
So it's really hard to compare what they do with reserves, certainly on a day to ---+ quarter-to-quarter basis for what ---+ versus what we do.
Yes.
I think ---+ I mean, in terms of ---+ let's start with the reinsurance side of it.
I think ---+ let's ---+ and let's break it between access and pro rata.
A lot of our pro rata is in kind of the auto segment.
And we actually think that the pricing environment there and particularly in specific areas and jurisdictions is pretty positive.
On the access side, I think we're seeing more competition, sort of more rate pressure.
That said, we still have a pretty high retention on the business.
But the primary market, at least the rating indicators that we see, suggest that lines are just getting marginal levels of rate increase, and some lines are actually not seeing rate increases.
So our expectation and our outlook is not focused on significant price strengthening.
And keep in mind, when we price our business in the Diversified, we take a pretty objective look at the primary pricing environment, and then we build our pricing on that objective look.
So I'd like to say that we were seeing an improvement in overall reinsurance pricing, but I'd say that, that's not true.
Again, our focus is oriented on the things where we believe that margins will be attainable.
That would be things like our auto book.
That would be things like our accident health book, which has been a pretty stable contributor.
And the other area where we've seen some benefit and particularly with some of the growth in some of the lower combined ratio business is in our International Insurance Solutions business, the affinity business, we've had ---+ we have a pretty good view on 2018 in that particular area.
Yes.
And I guess I'd add on the AmTrust side, what we're seeing is probably a little bit of weakening on the workers' comp but strengthening in some of the other areas where there have been some profitability challenges.
So it's kind of a mixed bag there.
No.
That's a great question.
I said earlier how appreciative we are of the loyalty of our clients.
Some of our clients actually have been with us for ---+ pre-Maiden period of time.
And I think that ---+ our commitment is to enhance shareholder value.
We believe that things that enhance shareholder value will also enhance value to our customers, and that's a sincere belief.
And I think that, from that perspective, we're looking at things that can strengthen our value proposition to our shareholders and to them.
So in the interim, we continue to provide collateral.
Nothing changes there.
They continue to have the benefit of what we think is the strongest security in the market.
But we certainly get calls, and we talk to customers.
And for the most part, the majority have been very appreciative and understanding and recognize that there's not a lot we can divulge at this time, but the end objective is something that hopefully benefits them as well as obviously, most importantly, our shareholders.
Thank you, operator.
This concludes today's quarterly call.
Thank you all for joining us, and we look forward to speaking to you on future quarters this year.
| 2018_MHLD |
2017 | DISH | DISH
#A couple of quick comments on our subscribers
During September, Hurricane Maria caused extraordinary damage in Puerto Rico and the U.S
Virgin Islands, which resulted in widespread loss of power and infrastructure
Given the devastation and loss of power, substantially all customers in those areas were unable to receive our service as of September 30. In an effort to ensure customers would not be charged for our services, we have proactively paused service for those customers
Accordingly, we removed approximately 145,000 subscribers from our third quarter ending Pay-TV count
This adjustment represents all of our subscribers in Puerto Rico and the Virgin Islands
In the 50 states, net Pay-TV subscribers grew approximately 16,000 in the third quarter
This growth included the impacts of hurricanes Harvey and Irma
Combining the onetime removal of 145,000 subscribers in Puerto Rico and the Virgin Islands with the 16000 net additions in the 50 states, Pay-TV subscribers declined approximately 129,000. Please note, in order to reflect the underlying trends in the business other metrics including gross new Pay-TV subscriber activations, net Pay-TV subscriber additions or losses and Pay-TV churn rate were not adjusted for the impact of Hurricane Maria
In the week following Hurricane Maria, we have been focused on disaster recovery efforts such as setting up satellite Internet at hospitals and FEMA registration sites
Over the next year, it is our goal to economically reconnect to the majority of our subscribers in Puerto Rico and the Virgin Islands
However, we cannot predict when customers will be able to receive our service or how many may return to active subscriber status
In light of the situation, we expect to incur certain installation expenses in connection with reactivating our returning customers
For that reason, any returning customers will be recorded as gross new Pay-TV subscriber activations for the period in which they return
Lastly, while we expect to have lost revenue and additional expenses as a result of Hurricane Maria, we do not expect them to have a material effect on our financial position or operating results
With that I will open up the call to Q&A
Operator? Question-and-Answer Session
Yeah
On the first question, because the hurricane was on the 19th and 20th of September, we did have a slight revenue adjustment in the third quarter, both to us as well as the customers
And then, you're right
If we don't have paying customers, we don't pay programmers
So that's just the way that works
All right
So, <UNK>, the – your first question on D<UNK>S pressure, leverage, free cash flow, it's all kind of combined
We do look at fundamentals
As Charlie mentioned, with the backdrop of traditional Pay-TV distribution maturing and now declining, we're laser-focused on cash flow
I'll go through the different products that we have, satellite, Sling TV and dishNET, and how we look at it 2017 and going forward
For D<UNK>S, as <UNK> and Charlie already mentioned, we're acquiring and retaining higher quality subscribers in rural geographies where we see less bundling pressure
And we are more disciplined on retention core credits, as well as we are executing on several cost initiatives to offset some of the programming price increases
We're also right-sizing our customers into skinnier packages
<UNK> already mentioned Flex Pack
And we're also – we've also introduced the Hopper and antenna solution, where customers can drop locals and save
Lastly, to partially offset some of the E<UNK>ITDA pressure that we see on D<UNK>S, we're spending less on PP&E CapEx by using more remanufactured boxes versus buying new
Looking at Sling TV, we are seeing ARPU and margin expansion
For example, Charlie already mentioned this, we're seeing ARPU tailwinds from increasing addressable advertising revenue, as we have more and more channels available for sale for addressable advertising, as well as incremental products like DVR
And as you would expect, Sling TV is certainly gaining scale as it grows
dishNET, we've pivoted from the wholesale model where we are now seeing a very modest P&L favorability due to lower acquisition costs
Looking at beyond operations into interest payments and taxes with incremental debt year-over-year primarily from low coupon convertible bonds, cash interest expense is up on a year-over-year basis
<UNK>ut cash tax, without a sizable taxable gain from derivatives, like we had last year, with lower 2017 pre-tax income, higher cash interest, and planning for the incremental tax deduction from amortizing our newly acquired 600 megahertz licenses, we are expecting to pay significantly less cash tax in 2017. So because we're focused on cash, we are comfortable that we'll have the flexibility as we hit maturities, which are spaced out nicely over the next several years, that we'll have the flexibility to pay those maturities off or have flexibility in the market
Obviously, we have uplink, but we'll – we're not sharing the configuration
So operator I think we have time for one more question from the analyst community
Okay, operator
Let's move to the press
Okay
I think there are no other – are there other media questions in queue, operator?
All right
Well thank you, everyone
We'll talk to you the next time
| 2017_DISH |
2017 | LGIH | LGIH
#Thank you, <UNK>, and welcome to everyone on this call.
We appreciate your continued interest in LGI Homes.
During today's call, I will summarize our performance from the first quarter of 2017.
Then <UNK> will follow up to discuss our financial results in more detail.
After he is done, we will conclude with comments on what we are seeing for the second quarter, and our expectations for the remainder of 2017 before we open the call for questions.
To begin today, we are pleased to announce that Builder Magazine has released their rankings for the 2017 Builder 100.
We have come a long way over the past 10 years when we built exclusively in Texas, and we were ranked as the 151st largest builder in 2007.
This year, we held strong as the 15th largest builder for the second year in a row, based on our 4,163 home closings in 2016.
And I'd like to take a moment to extend a special thank you to our dedicated employees at LGI.
Because of you, we have been able to realize strong growth throughout the years.
Looking at the first quarter of 2017, the year's off to a solid start.
We closed 761 homes, generating approximately $163 million in home sales revenue, which represents a slight increase in revenue over the first quarter of 2016.
Year-over-year closings were lower than last year, primarily driven by lack of finished home inventory in select communities, but we saw an increase in average sales price, which offset our lower volume.
We continue to demonstrate our ability to expand our business to new markets.
We ended the first quarter with 69 active communities, which is an increase of 13 over the 56 active communities that we had at the end of first quarter last year.
These communities were spread throughout the nation, with 3 in Seattle, 2 in Orlando, Denver, and Nashville, and 1 each in Austin, Albuquerque, Phoenix, <UNK>olorado Springs, and our newest markets of Portland and Raleigh, net of 2 communities closing out in the Dallas-Fort Worth market.
Breaking it down by market, let's first take a look at the results of our Texas operations.
The fundamentals of this division have remained solid, generating 315 closings and representing approximately 41% of our total closings during the quarter.
This compares to 410 closings, or 49% of our total closings during the first quarter of last year.
This year-over-year decrease is primarily due to lack of available inventory and the closeout of 2 communities in DFW.
We continue to geographically diversify our operation.
Our presence outside of Texas increased during the first quarter to 59% of our closings compared to 52% of our closings in the first quarter of last year.
The Southwest Division represented 17% of our home closings, the Southeast Division represented 20%, the Florida Division represented 16%, and the Northwest Division represented 5%.
Historically, we have seen lower absorption rates in the first quarter.
This quarter, our top market was Nashville, leading the way with 5.4 closings per community per month, a direct result of our successful grand opening of our second Nashville community during December of 2016.
<UNK>harlotte was our second leading community this quarter, with 5.3 closings per community per month, and Houston in third, remained solid at 5.2.
Our marketing focuses on renters living within close proximity to our communities.
We have seen continued increasing demand for home ownership with our advertising producing over 80,000 inquiries during the first quarter of 2017, reinforcing our belief that there is strong demand in the first-time homebuyer segment.
In addition, housing demand drivers are alive and well in all of our markets, including nationally-leading population and employment growth trends, general housing affordability, and desirable lifestyle characteristics.
With that, I'd like to turn the call over to <UNK> <UNK>, our <UNK>hief Financial Officer, for a more in-depth review of our financial results.
Thanks, <UNK>.
As mentioned earlier, home sales revenues for the quarter were $162.9 million, a slight increase over the first quarter of 2016.
Sales prices realized from homes closed during the first quarter range from the $140,000's to over $480,000.
In the first quarter, approximate average sales prices were $206,000 in Texas, $251,000 in our Southwest Division, $184,000 in our Southeast Division, $197,000 in Florida, and $321,000 in our Northwest Division.
Our overall company-wide average sales price was $214,075 for the first quarter, an 11.2% year-over-year increase, and approximately 3% increase over the average sales price for the fourth quarter of 2016 of approximately $208,000.
This is largely attributable to changes in product mix, price points in new markets, and a favorable pricing environment.
Gross margin as a percentage of sales was 26.7% this quarter, compared to 25.5% for the same quarter last year.
Our adjusted gross margin was 28% this quarter, compared to 26.7% for the first quarter of '16, a 130 basis point increase.
Adjusted gross margin excludes approximately $2.1 million of capitalized interest charged to cost of sales during the quarter, representing 127 basis points.
<UNK>ombined selling, general, and administrative expenses for the first quarter were 16.8% of home sales revenue compared to 14.8% in the prior year.
We typically expect the first quarter to have the highest SG&A ratio due to lower closings on a per-community basis.
We believe that SG&A will vary quarter-to-quarter based on home sales revenue.
And for the full year, we expect SG&A, as a percentage of revenue, to be similar to our 2016 results.
Selling expenses for the quarter were $16.1 million or 9.9% of home sales revenue compared to $14.1 million or 8.7% of home sales revenue for the first quarter of '16, a 120 basis point increase.
The increase in selling expenses as a percentage of home sales revenue is due to an increase in advertising-related expenses in both new and existing markets.
General and administrative expenses were 6.9% of home sales revenue compared to 6.1% for the first quarter of 2016, an 80 basis point increase.
The increase in general and administrative expenses as a percentage of home sales revenue reflects an increase in overhead related to our ongoing expansion and lower closings on a per-community basis.
Pretax net income for the quarter was $16.8 million or 10.3% of home sales revenue, a decrease of 70 basis points over the same quarter in 2016.
As a result of the recently adopted accounting standard, our effective tax rate of 30.1% is lower than the statutory rate due to the tax benefit of deductions in excess of compensation costs or windfalls for share-based payment that impact this quarter's tax rate.
We expect our effective tax rate for the remainder of 2017 to be similar to the 2016 rate of approximately 34%.
We generated net income in the quarter of $11.8 million or 7.2% of home sales revenue, which represents earnings per share of $0.55 per basic share and $0.52 per diluted share.
Weighted shares outstanding for calculating diluted earnings per share are impacted by our outstanding convertible notes.
In the first quarter of 2017, our average stock price was approximately $30.50, exceeding the conversion price, and therefore the convertible notes were determined to be dilutive under the treasury stock method.
This resulted in an approximate 1.2 million share increase to the weighted average shares outstanding for the diluted EPS calculation for the quarter.
First quarter gross orders were 1,734, and net orders were 1,402.
<UNK>oming off a record-breaking quarter at the end of 2016 for homes closed, we began the year with a backlog at 446, which was lower than the prior year, and a contributing factor to our year-over-year decrease in homes closed in the first quarter.
Our backlog, as of March 31, was 1,087 homes compared to 814 at the end of the first quarter of last year, and the cancellation rate for the first quarter of 2017 was 18.9%.
We ended the first quarter with a portfolio of approximately 29,300 owned and controlled lots.
And as of March 31, approximately 12,400 of our 20,800 owned lots were either raw or under development.
Turning to the balance sheet.
We ended the quarter with approximately $32 million of cash, $789 million of real estate inventory, and total assets of $868 million.
As of March 31, we had a total of approximately 2,150 homes complete and in progress, compared to 1,560 as of December 31, increasing our investment and vertical construction by over $50 million this quarter, in line with our increase in backlog during the quarter.
In February of this year, we increased our revolving credit facility to $400 million in accordance with the accordion feature of the credit agreement.
At March 31, we had $350 million outstanding under the facility as well as $85 million outstanding in convertible notes.
Our gross debt-to-capitalization was approximately 53% and net debt-to-capitalization was 51%.
Also during the first quarter, we issued 150,000 shares of our common stock under the 2016 ATM program, generating net proceeds of approximately $4.7 million.
At this point, I would like to turn it back over to <UNK>.
Thanks, <UNK>.
Let me provide some guidance and thoughts on what we are seeing thus far in the second quarter and looking ahead into the remainder of the year.
<UNK>losings for the first 4 months of the year have totaled 1,126, which is 9.8% less than 1,185 closings that we started last year with.
The primary reason that our closings are down year-over-year is that we had strong closings in December 2016, and our inventory of completed homes during Q1 was not as high as we would have liked.
As <UNK> mentioned, we ended 2016 with 1,560 homes at various stages compared to 1,710 homes at the end of 2015, giving us fewer homes to close in the first quarter.
We believe the situation will correct itself over the next few months as we're bringing new inventory online with additional homes under construction and the completion of new development sections.
As we continue to build back our inventory, we have continued to sell homes.
Sales over the last 90 days have been very strong.
We have had over 500 net sales in each of the months of February, March, and April.
We currently have more homes under contract than we have had at any one time in our company history.
We expect our inventory levels to increase in May, trending back to targeted levels over the second quarter, and in line with our strong sales performance.
Based on our backlog, we expect to close between 450 and 500 homes in the month of May, resulting in an absorption pace north of 6 closings per community per month, and right on track to meet our goal of closing more than 4,700 homes for the year.
We ended April with 71 active communities, continuing on pace to end the year between 75 and 80 communities.
New projects will be introduced in both Minneapolis, Minnesota and Winston-Salem, North <UNK>arolina by the end of the year, and we'll have continued expansion in Nashville, Houston, Dallas, <UNK>harlotte, and the Seattle markets.
We believe our average sales price will continue to increase during 2017, just as it did in the first quarter, ending the year with an average sales price between $210,000 and $220,000.
We also expect our gross margin to be in the 25% to 27% for the remainder of the year, and adjusted gross margin for the year will continue to be in our historical range between 26.5% and 28.5%.
Given our guidance of delivering more than 4,700 home closings, along with an increase in average sales price and consistent gross margins, we continue to believe our basic earnings per share for the full year 2017 will be between $4 and $4.50 per share.
Now, we'll be happy to take your questions.
The first one, much better performance on gross margin than we expected.
<UNK>ould you talk about how much that was price versus mix.
Sure.
This is <UNK>.
So predominantly mostly price, but a combination with ---+ in the last quarter's call, we also talked about some cost initiatives that we implemented at the end of the summer and into the fall.
So we again got to see some of those benefits that carried into the first quarter as well.
And that's why we had a better-than-expected performance in the first quarter.
Got it.
I mean, on a percentage basis, how many of your communities do you think you're ---+ be able to raise prices right now, if you look across your whole footprint.
Yes, Jay, this is <UNK>.
I think we are raising prices pretty much consistently in every project nationwide because we're continuing to see costs go up.
And everybody's been talking about lumber costs going up, we're finding that across the country, whether it's the price of a developed lot, the fees coming out from cities, the cost of lumber, the cost of concrete.
Generally, it's more expensive to build a house today than it was 90 days ago.
So we're consistently raising prices.
We keep that gross margin consistent.
Okay.
And then the last question I had, with the expansion to some of these geographies where, Minneapolis, you may have some weather issues or Winston-Salem ---+ I mean, not Winston-Salem, but some of the other Northwest geographies, is it going to make your backlog run a little bit longer.
Or are you thinking the cycle times for the company are going to be moving up because you're going into some of these different areas where weather might push out closings.
Yes, I think that's going to happen to be built in our schedule.
I mean, we don't talk about weather here at LGI very often.
But certainly in those markets where you have to deal with the climates, more so than in Texas, our build schedule is going to be a little bit longer.
But we don't anticipate the build schedule in those markets being any longer than 5 to 10 days longer than we are building in Texas.
Yes, sure.
I think the issue is a combination of a few different factors, and you're correct.
And we have room to improve on that.
A couple of different things.
One, is we just flat out, didn't start enough houses.
We dropped the ball in some cases.
We just didn't start enough houses to build up the inventory for the first quarter.
Also, construction times, we just had the question on construction times.
We got room for improvement, nationwide, on reducing our construction times.
The construction times in some of our newer markets are not where we want them today.
And also, from a development standpoint, getting plats and cities to approve our plats and getting new development sections on the ground, especially in the Dallas-Fort Worth market, which is where we're really short of inventory, and we closed out 2 separate communities, that had an influence.
And then, obviously, we don't want to not say sales weren't an issue either.
I think inventory was the predominant reason we were less year-over-year on closings, but we can always use more sales.
I mean January ---+ and we talked about this on the last call, January sales were down year-over-year, but February, March, and April have been, like I said, over 500 net sales a month.
So I think it's a combination of factors, <UNK>, but I think our inventory is going to be in line.
And we're not going to be talking about inventory anymore over the next couple of quarters.
No.
I think it's not material.
And we worry about those issues you talked about.
I mean, certainly from a contract standpoint, the longer customers are under contract.
And I think this is the case with every builder, the longer it takes from the contract signing to closing, the better chance that life's going to get in the way and something happens and that deal has a higher percentage of not closing.
Now I don't think that's going to be a material number for us, but I do think we will probably lose more as that gets extended.
And as far as the quality, I'm not concerned about the quality.
The costs ---+ like I said earlier, the costs will continue to go up.
So the longer it takes us to start houses and get them closed, I think the costs will go up.
I think we've got that built into pricing, so I think our margins are going to remain consistent.
<UNK>orrect, correct.
I mean I just think based on our history of selling houses, if it takes an average 30 days longer than it did to close houses, you will lose some percentage of those deals.
So our business model is converting renters into homeowners.
And ideally we have the house finished, so the customer can look at it, and we can close in the next 30 to 45 days.
And the longer that it gets extended, there will be more deals that cancel.
But like I said, I don't think that's going to be a material amount.
We need to do a good job to keep the customers engaged, keeping them informed and keeping them excited.
But there will be a situation where the customer's life gets in the way, and it will lead to some, but not much.
Yes.
Yes.
I think Houston has been in our top 3, <UNK>.
I mean, <UNK>harlotte's has been strong for us, Dallas was actually our #1 community last year in closings, surpassing Houston.
So Houston, for the first quarter of last year, averaged 5.8 closings per community, and this year we averaged 5.2.
So slightly down this year, but Houston is going to continue to be a strong market for us.
That number in the second quarter will certainly be over 6 closings per month per community.
So Houston feels good as it always has.
This is <UNK>, <UNK>.
It ---+ definitely, we believe that there's a wide range, and there's a number of factors that come into play on a quarter-to-quarter basis on gross margin, introduction of new markets, transition between communities within our existing markets, <UNK> mentioned and we talked a little bit about some of the labor and material headwinds that we constantly really kind of see on a regular basis, all of that offsetting with increased average sales prices.
So I think it's more of a function ---+ 2015 and 2016, both came in at an adjusted gross margin at 27.8%.
So if we think we come in somewhere in and around that number, is how we would define being consistent.
Yes, we did.
Yes, we had over 80,000 leads in the first quarter this year.
That was up at least 20% over last year.
So we spent additional dollars, primarily as a result of having more communities.
So we keep it pretty consistent on a per community basis.
But we're definitely seeing the results of that additional spend.
Yes, they're going to be coming online over the next 90 days.
And that's a big part of us talking about getting our inventory back in line.
Dallas-Fort Worth is a big part of that, so we're looking for pretty big numbers out of that market over the next 90 days.
Yes, I think, it's gaining experience in the new markets.
Our construction times in Texas have historically been quicker, if you will, than the new markets out of the state.
And in the markets we've been in longer, like a Florida market or a <UNK>harlotte market, we're in pretty good shape there on our construction timelines.
And then on our newer markets, like Nashville and Denver and even the Northwest, we are still working on getting that construction timeline down.
And it really comes with a lot of experience, learning our systems, but also getting credibility in the market, getting access to the trades.
As we open up more communities and can produce more volume, that should come down as well, building that relationship with our trade partners.
Yes.
We're building to a schedule of 50 to 60 calendar days in the Texas markets, from the time we start pushing dirt until the home is complete.
And our out-of-state markets, it's running 15 to 30 days longer than that, and we think we can improve on that by 5 or 10 days.
Yes, this is <UNK>.
Yes, it will pace out relatively even out for the remainder of the year.
We will have net communities ---+ net of some other community closeouts that we're expecting.
And then you're also right in terms of the communities that we add in the late to back half part of the year generally tend to count as a community, but don't contribute a significant number of closings until the following year.
Probably around 5 of those, I would say.
This is <UNK> speaking.
It's not going to be a problem for us getting our inventory back in line because we've already got that scheduled, that's in progress.
We're comfortable that we can deliver enough houses because of labor.
I think where labor does come into play, and I think this is a challenge for the industry, is labor is tight in some markets, and we're going to have to pay up for it.
So I think, it is more of a margin headwind than getting the houses built.
Yes.
We haven't given a specific guidance range outside of 2017, so 4,700 homes in 2017.
But we have talked about before on the call, and we'll reiterate that we are going into new markets, we continue to grow and, obviously our community counts continue to grow.
And our goal is to get into the top 10.
We talked about on the call today, we're a top 15 builder right now.
Our goal is to get into the top 10 over the next few years, and eventually be a top 5 builder in the United States.
Yes, good question, <UNK>.
I look at it from an absolute numbers, but you're correct in your math on a per opportunity basis.
So to get to 4,700, we basically have to close 450 houses per month, the rest of the way from May on.
And we said on the call that we're comfortable based on the division presidents and what they said, we can count on them to close this month between 450 and 500 closings in May.
And also based on our pipeline, the next 90 days of closings looks real clear to us.
So I'm very comfortable saying in May, June and July, we can average 450 closings per month, which is where we need to be for the year.
So that's why we think we're right on track to hit that 4,700 number.
Now once you get past July and you get into August to December, obviously, I'm not as confident of that other than our historical trends because we know the phone's going to keep ringing and we're going to have closings, but we just haven't got into a lot of sales that's going to impact the back half of the year yet.
But the next 90 days, averaging 450 closings a month and putting us right on track for the 4,700 gives us a good confidence in that number.
Yes.
I mean, the active communities is defined by information centers or sales teams that are open having closings.
But you're right, transition.
And that part of the inventory challenge in the first quarter, we had a lot of communities transitioning from one community to the other.
They were still having closings, but closings definitely got bumpy, if you will, so the goal is to stay in each submarket and stay consistent.
We mentioned on the call, we had 2 communities in DFW closeout.
So it reduced our community count by 2 compared to last year, so there's going to be some of that, but we want to stay pretty consistent in each submarket and replace the communities that we're currently selling in.
All right.
Thank you, and thank you, everyone for participating on today's call, and your continued interest in LGI Homes.
Everybody, have a great day.
| 2017_LGIH |
2016 | CVS | CVS
#Thanks.
Well, <UNK>, it's <UNK>.
I'll start and I know others will jump in here.
<UNK>, your answer to that in part lies in terms of the client makeup and the client adoption of those differentiated services.
So a client who is adopting Maintenance Choice, and it's a new client, obviously we're going to see a rapid uptake of share coming into one of our distribution channels because that's the nature of that plan design.
I think if you go back ---+ and, again, reflecting on some of the things we talked about at Analyst Day, this past year, a big piece of that new growth is in the health plan segment.
And as you look at our enterprise share of those health plan clients, it's in the low 20%s, so obviously that creates a big opportunity.
And that's something that will occur at a much slower rate than a client who adopts Maintenance Choice.
So obviously, a lot of opportunity and opportunity that we'll see cascade over the life of that contract.
<UNK>, this is <UNK>.
I think that's right.
I would just caution you a little bit.
If you look at the sales wind, certainly as we cycle into 2016 largely health plan, health plans as <UNK> articulated earlier, takes a while for them to sell in their programs.
So obviously the name of the game here has been let's gain the life and then, quite frankly, make the life more productive as we move some volume into our channel and save the client money.
In health plans that just takes a little longer.
I'll think the ramp of that will ---+ the slope of that was a little ---+ it's not as steep as in compared to the employer clients.
Yes, <UNK>, this is <UNK> here.
I do think the market is still pretty fragmented, so I do think there's file-buy-type opportunities within the market space and you'll see us continue to probably do that within the long-term-care business.
And then I think as you look at the long-term-care business, you kind of need to look at it in different client categories.
I think from a skilled nursing facility perspective, it's all about growing the number of beds.
I think from an assisted living facility is really designing products and solutions that capture more of those members within the beds that we have while, adding beds as well.
But there's more of a, let's say, a product development set that needs to happen there for share capture and share gain.
<UNK>, I think the only thing I'd add, it goes back to <UNK>'s question earlier, that we've spent enough time with the long-term-care clients to understand their pain points and their needs.
And that's what's driving some of the pilots that we have underway.
And I do believe that recognizing that to some degree long term care is episodic.
And you've got 2 million patients that are being discharged each year back into the home.
And being able to provide differentiated services for the client, the facility operator, and then, again, be able to follow those patients across their continuum of care is a significant opportunity to grow share.
And again, that will continue to evolve over time, over a multi-year period.
But I think we're excited by the opportunities that we see there.
Hi, <UNK>, this is <UNK>.
So Hep C volume I think has leveled off as we're into 2016, down a little bit from where we were last year.
Merck launched their new product at a list price of $54,000 and that is less expensive than the other products on the market like Harvoni.
So we'll evaluate these new products and negotiate the best deal for our clients and we continually evaluate our formulary selections and we'll do the same as these new products come to market.
I think as we look out to 2016 or 2017, we haven't seen a lot of treatment in the Medicaid space.
They've had real stringent utilization programs, so I think the question is as these drugs become more affordable, can we begin to see more treatment in that area.
And CMS came out with guidance actually encouraging the Medicaid providers to do that.
So, yes, you could potentially see an uptick in treatment if we see that movement from the Medicaid plans.
I think as far as specialty, we see clients very interested in doing more to manage specialty under the medical benefit.
It is not being well managed today, so we have a tool if they don't want to move it over to the pharmacy benefit, that's Novalogix, we have over 30 million members that we're managing with that tool today.
And it brings all of the management we have on the pharmacy side, but we also have an opportunity to move specialty from the medical side into the pharmacy benefit.
And, yes, not that you'll ever get the majority of it over there but there are opportunities to do more.
Yes, <UNK>, the 32% growth does include the ACS, the specialty component from Omnicare.
It was a relatively small piece of the growth.
And I'll ask <UNK> to comment in terms of the market reaction to Specialty Connect.
Specialty Connect really opened up a pain point in specialty that exists in the marketplace today and that's access, so now a specialty patient can walk into any one of our 9,600 retail pharmacies and get the same high levels of service because we've integrated into our back-end specialty platform ---+ you get the same high levels of service.
We see similar adherence, so it is, it has been favorably received by specialty patients.
And how we know that is it acts very similarly to Maintenance Choice.
We see half the patients want to pick up their specialty prescription at their local CVS that are using Specialty Connect and the other half want it mailed to their home.
So it really opens up the convenience so for our clients where we are the exclusive specialty provider, it enhances service.
It's enhancing revenue from the open market where we're competing with other specialty pharmacies, so physicians that are much more active in referring patients in the specialty space than in the non-specialty space like the capabilities and the service that we deliver.
So we think it's a real competitive advantage in the marketplace.
Well, it was 50% ---+ of the members that are coming through Specialty Connect, 50% of them want to pick up their specialty scripts at CVS pharmacy, so just to be clear it's not 50% of our overall volume.
And, <UNK>, the other thing I'd just point out as a reminder, this gets back to our focus on managing the CVS Health Enterprise, because from a financial point of view, everything that <UNK> articulated, whether the point of access is the retail pharmacy, from a financial point of view, it goes through the PBM segment.
And we aren't worried about in this example, you could say we're penalizing the retail pharmacy.
We don't look at it that way because we believe that it's a unique and integrated product that is allowing us to capture incremental share in the market which is good for the CVS Health Enterprise.
<UNK>, this is <UNK>.
Back to your original question about ACS.
If you look in specialty, for the full year growth rate was approximately 34%, if you excluded the specialty that came through ACS through Omnicare, growth would be above 30%.
So fairly small impact from a growth-rate perspective, most of the growth is coming from the core.
Yes, I would just say overall, I'd say things are holding fairly steady.
We certainly have seen the consumer ---+ I wouldn't say any change really from what we were seeing in the fourth quarter.
I think the big thing we've been focused on and continue to focus on is being smart about where we invest our margin dollars, so you can see us continue to downplay our circulars and really focus on ExtraCare, which is allowing us to find those high value customers and make sure they're coming into our stores.
Yes, well from a cadence perspective, a lot ---+ I'll point you back to a couple slides that I put together at Analyst Day back in December.
But it really relates back to, one, is the acceleration of growth from a Medicare Part D perspective and as that growth occurs, those profits are back-half weighted, so that clearly tilts the cadence delivery, profit delivery, to the back half versus the first half.
Secondly, we have several initiatives underway, both as we look at the acquisitions but more importantly as we look at different efforts that we have across our business.
Many of those initiatives deliver benefit in the back half versus the first half and probably most importantly is the timing and cadence of break-open generics.
Those are largely back-half weighted so you'll see the impact of that flow through in three and four versus Q1 and Q2.
So those are the major elements of how to think about that.
And we have not broken out specifically the percent of front half versus second half.
You're welcome.
Charles.
Okay, why don't we go on to the next one, maybe Charles will get back in the queue.
Well, <UNK>, it's <UNK>.
Let me take the last question and then I'll flip it over to <UNK> back to the first question.
I'm going to go back to a slide that we had at Analyst Day that showed that ---+ and I mentioned this in response to an earlier conversation.
The health plan business that came online last month, we have 22% share across our distribution channels.
When we look at the overall health plan enterprise share, it's right around 28% for existing health plan clients.
So, again, there is an awful lot of white space, as we've been talking about, in terms of opportunities to grow that, acknowledging that that growth is over time.
We talk a lot about the fact that when you look at the employer segment, with the stroke of one signature the Head of HR or the Head of Benefits can make a decision that several thousand employees are governed by.
And as we've been talking this morning, it works a lot differently across the health plan space.
So with that context, I'll flip it over to <UNK>.
Yes, so with our health plans, they have their own downstream clients and their downstream clients are no different than our clients that pharmacy is a bigger part of their health care spend than its ever been and it's the fastest growing part of their healthcare spend.
So they're very interested and motivated to sell our products and services that better manage these costs.
What we have been able to do over the last 12 months to 18 months is actually create financial incentives for the health plan sales team to actually create compensation for them as they sell these programs in, so their clients win, they win and we win.
So we think we've got very good alignment with our health plans now and they are very motivated, based on what's happened in the marketplace over the last several years, to get these plan designs implemented.
And, <UNK>, your other question just does the election have any impact in terms of how clients look at this.
I don't think it does.
I think whether it's a health plan client, an employer client, everyone is focused on, how do I provide the right level of service for my members at the lowest possible cost.
So I think what we're seeing play out every night on TV I think is kind of irrelevant to their goals and objectives.
Yes, <UNK>, I think it does because we've got products and services that I know as our Head of Sales talks about, I could remember years ago when I was out selling the dream of what we might be able to do and today I'm selling the results of what these products do.
So they've been proven to ---+ when we think about access, quality and cost, we can sit down and quantify those benefits around each.
Yes, Steve, it's <UNK>.
When you look at ---+ keep in mind this is now probably 10 years in the making that as you look across the states about half of the states have already implemented some type of acquisition cost-based reimbursement or managed Medicaid.
So they're immune to AMP, and I think it's consistent with what we've been talking about that the objective of AMP, we have been seeing for the last several years in the form of reimbursement pressures.
I think as you look at the remaining states, they will be ---+ it's our understanding that states will have 12 months with which to implement some type of acquisition reimbursement, acquisition cost reimbursement model and along with corresponding changes and dispensing fees.
So I think as we sit here today, we believe that the rollout across the rest of the country with this will be immaterial to our results.
But, again, I think that's going to play out on a state-by-state basis, acknowledging that states that have implemented that have made adjustments in dispensing fees, so more to come on that.
You know what, Steve.
I guess I'd answer that question by saying nice try.
Okay.
We'll go ahead and take two more questions.
Well, this is <UNK>.
We stand by our guidance.
As we look at the trends going through where we are today, we see nothing that's any different.
Again this continues to be an evolving marketplace driven largely by the mix of our business.
Medicare and Medicaid continues to accelerate and grow more rapidly than some other lines of business.
Secondly, as we indicated before, with a large win in the health plan business from a PBM perspective, the adoption of those programs that move share into our channel just take longer, it's longer for those to mature and for that adoption to occur.
And so the offsets as we think about 2016 are just not available to us.
This is <UNK>.
We made a decision several years ago that health plans were going to be an important growth vehicle for us, particularly when you looked at the growth coming from Medicare and Medicaid.
So we work hard to keep our health plans competitive in the marketplace, so we aren't really seeing repercussions or halo to pricing in the marketplace from that event.
I think it continues to be competitive but rational and I don't expect there to be an impact.
Thanks, Bob.
Final question.
Yes, <UNK>, it's a great question.
And as we've stated previous, this past summer we completed the rollout of our epic EHR across all of our clinics and that does a couple things for us.
One, is it does provide an infrastructure that allows us to expand our scope of ---+ and broaden our scope of practices.
And you're beginning to see that now as we're getting into the treatment of some additional conditions.
And that does create a tighter interface with the health system affiliations where we can transmit the information around a particular patient in a seamless fashion, so we're beginning to get some traction in terms of triaging patients across the delivery of care.
Yes, we've said that we had that target of 1,500 clinics.
I think with the acquisitions, we may not hit that number by 2017.
Obviously, we're going to be focusing on the Target integration, which includes about 80 clinics this year, so we may be a year or two behind that original target of 2017, but we continue to be comfortable with the rollout.
As a matter of fact, as we sit here today, about 50% of the US population actually lives within 10 miles of a Minute Clinic.
Okay, thank you.
And let me take a minute to thank everyone for your continued interest in CVS Health.
And as always, if anyone has any follow-up questions, you can contact <UNK> <UNK>.
Thanks, everyone.
| 2016_CVS |
2016 | MOV | MOV
#We're doing this across all of our licensed brands.
This is a partnership we did with HP, and we're very happy with the initial feedback we have received.
There's a total of 25 SKUs, and we are very thoughtful in terms of ---+ it's design and brands first, plus the functionality.
So when you look at the watches, they represent ---+ whether it's a Tommy Hilfiger watch, it looks like a Tommy Hilfiger watch.
You go to Ferrari, it looks like a Ferrari watch.
We've been very thoughtful.
It's not a cookie-cutter approach.
They are very different.
And we also were very careful in planning the price points so that they mirror the customer that has appeal for these brands.
So we feel very good on how we plan the price points and the functionalities.
Our research indicates these are the top functionalities; it's notifications for these watches; it's step count.
Those, at those price points, we believe are the right things.
And it's a combination, analog watch with ---+ there's a screen that lights up on a dial that is invisible.
When you look at the watch without being lit up, you think it's a traditional watch.
So we think we hit a sweet spot in terms of design and technology functionality.
The short answer to that is yes, we expect our gross margins to hold up.
And our operating expenses ---+ we continue to invest behind our brands from brand awareness and initiatives.
We will obviously take out the variable expenses that are related to the decline in sales, but ---+ and obviously we're very good at managing our expenses.
We have got a really long track record of that.
But we're going to do what is right for the longer-term health of the brand and the Business, and continue to support and build behind our initiatives.
No, I think, as <UNK> mentioned, we're doing very well in the chain jewelry stores specifically, and they are mostly mall-based.
So I think their traffic is less variable, as they have a large jewelry business and bridal business and things like that.
You also have to recall that that's not the distribution for our fashion watch brands.
The fashion watch brands are primarily, in the US, distributed in the department store arena that is more highly challenged today.
So, I think it's both the category and the channel that is challenged.
And so our growth specifically is in the Movado brand, and Movado is outpacing the fashion watch category everywhere ---+ department stores and jewelry stores.
And I think that it was also in <UNK>'s comment is we continue to gain fairly significant market share.
Well, let me speak first about movado.com because that, as you know, last year we revamped, we launched a new platform, and we continue to see major increases in our business there and also in traffic.
And we have been adding a lot of digital initiatives, so we're seeing there's a connection between social media and digital initiatives.
People will go to the website as the first point of entry to learn more about new collections and story telling, and we picked up some of the sales there.
Other sales, we don't pick up, but we believe that the brand website is serving as a platform, a showcase, to tell the story of the brand and the collections.
So we're seeing that, and we're seeing a huge rise, as most people, in terms of people are coming through mobile devices, so that's one big trend.
When you look at other categories, whether it's in a retailer.com or pure plays, we are seeing that we have consumers across all price points and brands that are interested in shopping online for other reasons, which may be convenience, ease of use, price comparison, whatever it may be.
But we're seeing that trend across all price points there as well.
Yes, I would agree, it's going to be somewhat neutral for the remainder.
We don't anticipate anything at this point being significant.
And if you recall, when the big fluxes were now more than 12 months ago.
Hello, <UNK>.
Good morning.
I'm giving you feedback on a quantitative survey over 1,000 respondents in the US.
And what's interesting is almost half of the consumers, when we look at the bottom two boxes ---+ definitely not interested, not interested ---+ this is the second wave of the survey we're doing.
We're tracking this over time because we thought it was important to understand ---+ there's been a lot of competitive activity in the last six months, and we wanted to track what is the impact of that.
Now, consumers ---+ this is a US representative sample.
They've now been exposed to a lot of activity in the smart watch space.
So, what this is revealing is that about half of them, even knowing what they know now, are not interested.
And you still have about another quarter that are undecided.
So there's still a lot of people that are still either on the fence or not interested.
So that's the first thing.
When you double click by age, obviously there's a higher interest in younger consumers in this.
But also for certain functionalities for older consumers, you still see an interest, but the big difference in interest is coming from younger consumers.
That is, we believe, a fashion that is coming in that category.
Okay.
And we've seen in initial products that we have launched and that are in the marketplace, that there's a trend of younger consumers to simplicity and fashion.
A lot of young consumers also spend a great deal of their time on their screen.
Yes.
So they don't necessarily need the connectivity to a watch.
We all see that.
Whether they are watching videos or attending to social media or things like that ---+ much more challenging to do on a watch.
There are multiple trends.
These two we've talked about are two trends.
The other trend which I had mentioned in my prepared remarks are the appeal to this Heritage collection we've launched.
We know that if you follow social media, there's a big appeal for millennial consumers to this vintage look, so we're seeing ---+ so it's not one size fits all.
What is interesting about the times we're living in is that people now have multiple choices, and there's different trends that do emerge.
You are also seeing handbag companies, for example, that are in the, that have a heritage, bringing back products from their archives very successfully.
And we have done that with our new Heritage collection in Movado.
Okay.
And just my last question is: You called out some strength in the Middle East, I think, specifically, which I thought was unusual given what's going on.
Did that surprise you at all.
Well, we've been developing some really important partnerships in the region and, yes, definitely the region is undergoing a difficulty period, but we seem to be doing better than most, gaining market share, and the market is not disappearing.
There's a reduction in the market on the consumption, but people are still buying watches.
And through our partnerships and the quality of the execution, we have been able to convert more and to gain market share, so it's really a function of outperforming in a difficult market our competitors.
With no additional questions in the queue, I would like to turn the conference over for management for any additional or closing comments.
Thank you.
| 2016_MOV |
2016 | CB | CB
#We don't have second careers around here.
This is all we do.
We have all day for this.
No, there is nothing related we have been a big primary player for a long time.
There is nothing related to that, <UNK>.
It is truly market.
Our reinsurance folks, we liberated them a long time ago from volume.
You will do the right thing to earn an underwriting profit or you will walk away from the business and that's all that's a reflection of ---+ Look, it's a little like that the E&S business.
In reinsurance you have to be prepared in the way we run reinsurance.
Everybody's a little different.
Where it has more volatility to it based on the market signature.
You will have moments when you may grow very quickly and then you've got to be willing and prepared that on the other side, there's volatility and you just shed like mad if you have to.
If your intent is to earn an underwriting profit.
Wholesale E&S is [next] like that.
The market expands or shrinks depending on market conditions.
We are focused in just a couple of geographies around the world.
We are focused in the UK.
There is a business, and it has been a good business and we are putting more effort and more investment into that UK business and <UNK> is exploring a couple of places on the continent.
In a thoughtful way, where there is opportunity we believe.
And beyond that, we are in Australia, where we have a portfolio and are growing that.
Other than that, it's where our customers emanating out of the US, or one of those markets, may in fact have a property or an exposure in another country.
Then we have a Lloyd's Platform that is used to be able to quote and issue that alongside their US policy because they have a home in Mexico or they have a home in Colombia.
So we can serve on a global basis.
The notion of expanding high net worth into a whole lot of countries.
If you understand the market environment in those countries and the actual consumer behavior, there is, as we know it there is not a high net worth market to be pursued in most markets of the world.
That's just a fact.
Well it does carry weight.
We are pushing, I would say this, the ACE brand was a bigger brand in China as an example than the Chubb brand.
The conversion to the Chubb brand it gets the Halo of what was the ACE brand because it's based on personal relationship more than anything.
In the other markets of the world, the Chubb brand ACE brand we are promoting the brand and building it.
I think it's very well received.
There's a tremendous brand equity in that Chubb name.
It just has a distinguishing brand image in terms of service and claims like no other insurance company I know.
And that is an asset.
And that is an asset we will promote, that we will burnish, that we are fiduciaries of and will protect.
| 2016_CB |
2017 | GGP | GGP
#Thank you, <UNK>, and good morning, everyone
First off, I would like to give you an update on our review of options to create long-term value in our business
Given the significant and inappropriate gap between private and public market values, we thought it was prudent to undergo a strategic analysis in our efforts to maximize shareholder value
The first thing to report is that we have concluded that this franchise has best in class retail
There is also a tremendous amount of embedded value within our portfolio residing in these incredibly well-located urban and suburban infill locations with the ability for greater amount of apartments, condominiums, office, hotels, data centers, co-working gyms, tailors and the like
In that regard, we looked at all options available to us and actively engaged our board in numerous discussions
Given the market conditions and results of our outstanding portfolio, we and the board believe proceeding with our current strategy under the direction of our deep and experienced team will produce the best long-term results for the shareholders
And should a larger opportunity arise, we will, of course, consider in light of our ongoing efforts to maximize shareholder value
We will continue to lease, lease, lease, redevelop our anchor boxes, densify our assets and prune the lower quality assets
It's very gratifying to see the results of our portfolio; scale has its ad<UNK>tages
Over time, our assets will be places to shop, entertain, discover, live, work, gather and also be hubs for the last mile
Over the last five years, the composition of our portfolio has evolved away from apparel
The non-traditional retail uses of entertainment, restaurants, car show rooms, fitness and grocery have increasingly become a large part of our business
For example, we currently have a number of them already in place or in process of opening, including the following: 58 movie theaters, 36 entertainment concepts, 14 fitness centers, 12 grocery stores
In addition, we have been adding non-retail uses at our properties
In fact, more than three-quarters of our properties already have some form of mixed use
To put that in perspective, we currently have the following; 15 hotels, 6 million square feet of office and 2,000 residential units
It's all about location, location, location
Our centers are within an hour's drive of 56% of the U.S
population
Brookfield in-the-money warrants expire in November and therefore, must be exercised prior to that date
While Brookfield could settle all of its warrants without paying any cash in what is referred to as net share settlement, Brookfield has advised us that they will exercise a portion of their warrants of approximately 55 million shares for a cash settlement of $460 million
As a result, Brookfield will own 34% ownership of our company
We believe that this additional investment demonstrates Brookfield's support for our company and our long-term plan
We will utilize the cash to support our enhanced redevelopment program, debt or preferred pay down and/or share repurchases opportunistically
Earlier today, we released our second quarter earnings and I'd like to highlight a few items
Company FFO per diluted share for the second quarter was a solid $0.35, consistent with our guidance and consensus
Company NOI increased 1.3% and was impacted primarily by store closures
Excluding $10 million of bankruptcy impact, growth would have been 3%, as we indicated in our last quarterly call
NOI weighted sales per square foot increased 1.7% to $705, demonstrating the quality of the portfolio, and total sales excluding apparel increased 3.1%
An interesting fact, NOI weighted sales without apparel was $906 per square foot
Lease spreads were up 10%, within our expectations, up over 13% when NOI weighted
And more so, when you look at lease spreads for new transactions or new leases, lease spreads were up over 18%, demonstrating the demand for the space
Our guidance for the year is $1.56 to $1.60 per share with NOI growth reaccelerating 3% to 4% in the second half, as tenants move into spaces vacated earlier this year
Our board declared a $0.22 quarterly dividend, a 10% increase from last year
If I just focus on the A-rated centers within our portfolio that drive the substantial amount of our business, they account for 75% of our NOI
NOI is expected to grow nearly 4% this year
NOI weighted sales per square foot increased 2.5% to $785 a square foot
Total sales excluding apparel increased 4.7%
Lease spreads are up 12%
NOI weighted lease spreads for the A portfolio is up 15% and occupancy is at 95%
Traffic to the centers is up 1.4% year-to-date compared to the same period 2016, as measured by cameras in our properties counting people as they enter the center
Parking lots are near capacity, so much so that we created an app to help find a parking space
Our leasing and developing teams look forward several years to line-up new tenants
To-date, we have leased 9.5 million square feet
Just to put that volume into perspective, it's equivalent to leasing 30 malls
More so, I would like to say that there was 1.8 million square feet of bankruptcies this year; 80% has been re-leased, i
, 1.4 million square feet
As I mentioned, there is strong demand for our real estate from a wide and growing area of tenants
We looked through the tenant list of new tenants this year and it's well over 100 new tenants, 317 new in count and the list is long
If you ask me the question, I will recite later on
In addition, there are numerous e-commerce retailers planning to open stores
These are companies that have been operating for five to seven years on the Internet and have sales of $25 million to $100 million
They are established brands seeking profitability and planning to achieve it with a brick-and-mortar presence
Turning to our investment activity, GGP has been acquiring, redeveloping and re-tenanting anchor boxes within the portfolio since early 2011. We view this capital allocation activity as a key component of our long-term earnings growth
We have been ahead of the curve in this activity and plan to continue
Strong demand exists for vacated department store boxes given the quality of the real estate
The recapture, redevelopment and re-tenanting of department store boxes is what we do
We've done over 115 to date
We have no vacant boxes
Each anchor box opportunity is different in its potential economics
What we found is that the tenants of all types want to be located in the best real estate, so when we recapture department store at one of our properties, we generally have it pre-leased prior to redevelopment
In July, we acquired an additional interest in 13 Sears boxes located in our portfolio from Seritage Growth Properties
In eight of these locations comprised of 1.5 million square feet, we now own and control 100% of the real estate, including the surrounding land, which may offer future densification opportunities
These locations are substantially leased to news tenant such as restaurants, fitness centers, entertainment venues, supermarket and other large format stores
Sears will continue to occupy 600,000 square feet of the 1.5 million square feet at rents that are $7 per square foot, well below market today of $30 per square foot
Future upside resides all with GGP
In addition, we acquired interest in five additional locations comprised of 1 million square feet, four at A-malls and one at a B+ mall
We look – we took no leasing or development risk to enhance our portfolio
Upon completion of the redevelopment, Sears will continue to occupy about 400,000 square feet of the 1 million square feet at a rent of $4 per square foot, well below market of $25 per square foot; again, providing future upside potential to GGP
We also acquired the Younkers anchor box at a Class-A mall, Jordan Creek in Des Moines, Iowa, from parent company, Bon-Ton
Younkers plans to continue operating from the location
We recently submitted plans for the redevelopment of Macy's at Stonestown Galleria
You may recall we acquired the box of Macy's late last year along with Tysons Galleria
We envision bringing new uses to Stonestown, such as entertainment, restaurants, large format stores and other new tenants
The center's sales productivity is over $800 a square foot
Our large developments are progressing as expected with the expansion of Staten Island Mall hitting its first milestone with steel topping in June
The expansion is set for completion next year, bringing new retail, entertainment and food options to the borough
We broke ground in Norwalk and increased the size of the development from 540,000 square feet to 717,000 square feet to accommodate demand
Escalations and project scope contributed to the increase in cost
All upsizing permits are approved and the appeal period expired on July 28, 2017. We're about 60% leased, with an additional 13% mutually approved for over 70% leased
Sales are expected to be north of $800 a square foot
As mentioned last quarter, we are in final negotiations with two institutional partners to own half the development
We acquired the remaining 50% interest in Neshaminy Mall located in Bensalem, Pennsyl<UNK>ia
There is a redevelopment opportunity with at least one of the existing anchor department stores, along with possible densification of the overall site
As you may know, Bensalem is a near suburb of Philadelphia
The property is well-located east of Philadelphia and houses a very successful AMC Theater and Boscov's
We increased our ownership of the Miami Design District
Phase III is expected to be complete in the spring of 2018. It is over 80% leased
We disposed of Red Cliffs Mall in St
George, Utah and Lakeside Mall located in Sterling Heights, Michigan, consistent with our strategy of continuously pruning the lower quality of our portfolio
Turning to some corporate matters, I would like to sincerely thank <UNK> Neithercut and Mark Patterson for their service to GGP shareholders over the past several years as members of the board
Each made a significant impact upon our Company through their leadership, intellect and guidance
I would also like to welcome Janice Fukakusa and Christina Lofgren to the GGP board
Janice was most recently served as the Chief Administrative Officer and Chief Financial Officer of Royal Bank of Canada, and Christina most recently served as Executive Vice President of Real Estate and Property Development of the TJX Companies
I believe each will make significant contributions to our company and shareholders
Finally, the board formalized the Lead Director role with Dan Herbert assuming this important responsibility
I thank Dan for expanding his participation on our board
And finally, early next year we will be relocating our Chicago headquarters from 110 North Wacker Drive to 350 North Orleans, just a few blocks from our current location
Before turning the call over to <UNK>, we will be hosting a property tour and reception at Stonebriar during the November NAREIT Conference
Stonebriar is the home of the new <UNK>dZania
You should be receiving a save-the-date notice shortly, but if you don't and wish to attend, please contact <UNK> <UNK>
<UNK> will now review our financial results and guidance
Good morning
Given the current climate and the gap between public and private market values, we felt it was worthwhile for the board and management to more formally review where we stand, as I mentioned in my comments
We're always here to maximize shareholder value and we want to stay focused on that
The board looked at numerous opportunities along with management, and we compared it to our current state
We believe that at this time that the highest and best use of our time and effort is to stay the course and continue doing what we're doing
We will stay focused on maximizing our existing operating platform on behalf of our shareholders
And as I said, again, in my comments, that should a bigger opportunity arise, we're here to maximize value for the shareholders, but we felt it was best interest in the company to stay the course
Again, as I said in my comments, we would think about using it for either our enhanced redevelopment program, our debt or preferred pay down
You know we have some preferreds that are callable in February of 2018 that have a coupon of 6.375%, that's $250 million, and/or share repurchases opportunistically
In the second quarter, we were not in a position to buy stock because we actually made a comment at the end of the first quarter about strategic alternatives, so we were restricted
Our restriction is lifted as of this Friday
And so we will opportunistically be in the repurchasing of stock business
We have a board authorization of almost $400 million to do share buybacks
Please repeat the question, again
The Class-A properties
I mean, again, a lot of them have been done in the past, and I would sort of sit back and say the A assets continued to drive traffic
The B+ assets are still positive, and the B assets are somewhat flat in our portfolio
But, yeah, we do see an uptick as we continue to change the uses
The overall exposure is still 50%
The new leasing for the year is 25%
So, it's trending down to 41%
In the A assets, it's already down into the low 40s
As I said to you in my comments, we will continue to prune the lower quality assets
We have sold over 60 lower quality assets over the last two years
Our trend has been to continue to sell three to five a year
We've already sold, I think, three this year
We're in the market with one this year more
We will not comment on how we try to bring in joint venture partners in our A assets; suffice to say, we're regularly looking at the portfolio to maximize shareholder value
We're not in the business of selling A assets that have the best growth profile to make a valuation point; however, as we have sold in the past, Ala Moana, Fashion Show and Grand Canal Shoppes, where we felt we had too much exposure to a single asset or a market
We're very happy to go it alone
If you can build an A-plus-plus asset at over $800 a square foot that's 70% preleased at an 8% – north of an 8% yield, you do it alone
It's prudent to bring in a partner, but you do it alone
We've had no conversations with the ascena group (sic) [ascena retail group] on their closure plans
<UNK>, we engaged with the board
We looked at numerous opportunities, options, compared to our current state
We looked at the quality of our retail portfolio
We looked at the ability to densify the assets, which has tremendous embedded value as you create live/work/play environments
We felt that the best use of our time was to stay the course, continue to lease, lease, lease, and run our business
We have a great business
We see our NOI growth re-accelerating in the second half of the year
And I think we need to be able to run our business to demonstrate the growth, and then the value will be built
So at this stage of the game, the board and management have decided to stay the course
We did a paper analysis
We did not start a marketing process
The inbound call from institutional investors was very high to buy the best quality assets for the cap rates we mentioned
Again, we did not feel it was appropriate to sell A assets with the highest growth just to print a value
So, the complete paper analysis – the board decided, where we trade today, we better stay the course
Again, Alex, we felt there was a tremendous disconnect between public and private markets
We felt it was good for us to go out and do a strategic analysis with the board
We did the analysis and we came to the conclusion of, where the stock price is trading today, the best course of action for us is to stay the course
We've also determined that the inherent embedded value in the real estate is so high that you actually do the best for the shareholders
This is not the right time
There is a bid for the B quality assets, and we continue to sell and prune the lower quality assets over time
So there are bids and we are entertaining the bids, and we have been selling assets on the lower quality
As I said, we've already sold three this year
We'll probably sell a couple of more
And so, the bids are two to five asset portfolio bids from different companies
<UNK>, as I said in my comments, it's about a 1.8 million square feet impacted with bankruptcies, and we have leased 1.4 million square feet to-date, about 80%
Oh, <UNK>, I don't have that breakdown, but I can sort of sit back and tell you that if I look through the top retailers that we've leased to, there have been – I'm just looking at my list – in the top 50 retailers that I've looked at, I'm looking at a list, only one, two – there are only three apparel retailers in the top 50 of my list
It has to be a small percentage
We had an option to exercise to increase our ownership by 7%, which we exercised
We feel very confident about the project
Phase III is near completion; should be done in spring of 2018. The project is 80% leased
The sales productivity is performing above our expectations, and the demand continues to be there for the space
So we had a option to exercise a right to increase, which we did at the valuation that we bought into the asset initially
We look to the total project to stabilize in 2019.
So when we bought the asset, we invested $10 million into the asset
We sold the asset for $14 million of cash plus a $9 million note, which was guaranteed by 10% ownership interest
So, ex the 10%, we got a 14% IRR on the property
So this was sort of, I call it, the icing on the cake, which was converted back to an ownership interest
We've been sort of a stuck record for the last, I think, two years, saying the leasing spread range should be 8% to 10%
Again, it's never sequential
As I pointed out, I think, in the last call or the call before that that in 2014 spreads were 8%, and then, 2015, they accelerated
So, we still feel pretty good that spreads should be in that 8% to 10% range
Well, I think we're all cautious in where sales are going to go
I think retailers have to start to rationalize their portfolio
And I think as they rationalize their portfolio, you will start to see over time the higher-quality assets being the beneficiary
But I think this is a 12 to 15-month process
I also see light at the end of the tunnel because I think the high-quality assets will be the beneficiary, as those are the locations where the retailers have shown their best – have put their best foot forward
But I do believe that you're starting to see sales starting to tick up, and you're starting to see some light at the end of the tunnel
Could you repeat the question? Sorry
So I would sort of sit back and say that if we were – I think I may have mentioned this on a previous call as well, but if we were to restart Norwalk again, I'm not sure whether we have the need to put two department stores
I think that it's important to have one, but not necessarily two
And I think the second one could easily have been an alternate use, such as a grocer or more entertainment
And as we evolve the plan – and the reason the size and the scope increased is we did bring in alternate uses into the property because we felt that was important to do to create a mall of the future
But at this stage, I would sort of sit back and say having one department store, either a Nordstrom or a Bloomingdale's, would have been a – would be an important element if you are planning to do a 500,000 square feet shopping center
The plan is to do it during construction
We are getting a benefit from where we are buying it
So, you – from where you're building it, so there is a premium built in; but obviously, they are taking a little bit of the construction and leasing risk as well
So it's not as if a fully stabilized asset will be sold, but it's also not a development deal
So we leased 9.5 million square feet
And the leasing cost, as you see it, that's been increased, is a function of the big box leasing that we've done to the entertainment user, the grocers
If you take out the 4 million square feet of restaurants and big box users and the CapEx that went along with redevelopment of those boxes where we got a fair incremental return, the leasing costs or the TA costs for the in-line tenants was exactly the same as it's been over the last couple of years; actually, no increase
Look, they have long – they have lease obligations, so the only way to pass the lease obligation is to do something dramatic with the courts
So we have leases and we don't anticipate for them not to honor their leases
And I might just add one aspect, which is, in 2016 the termination fees were about $20 million
We don't anticipate the termination fees in 2017 to be much more that what it was in 2016.
Again, when we did the paper exercise, we did the valuations and the valuations didn't really provide any surprises to us
Again, the inbound calls told us there was plenty of interest in the A assets at cap rates that we've seen deals being done, or the ones that we did
We decided that there's a lot of upside in these assets because one thing that we didn't fully appreciate was the embedded value to densify the assets and the value in these departments store boxes in the A assets
And we felt that to get the maximum value for the shareholders, we should continue down the path of continue to densify these assets and make them more live/work/play, as we've done in Ala Moana and are looking in various markets like Metro Chicago, Metro Denver, Metro New York
And so, there was – and Metro Seattle
And so, we felt that there was a lot of meat on the bone that the board didn't want to leave on the table
And I would just sort of add, you could see the strength of the portfolio because the lease spreads include the modifications
And I would also add that the average lease term is seven years, inclusive of the lease modifications
It actually should not be viewed as a acquisition based upon a cap rate
We view it as a development site
And so, effectively it was a land play for development to redevelop anchor boxes and to densify the asset as it is in, as I said, just outside the City of Philadelphia
So I don't view this to be a cap rate discussion
We brought on board a joint venture partner who's been with the asset for a long period of time, and they didn't want to proceed with doing a development asset
And we felt that at that price, we get a good current yield while we come up with our development program to densify the asset
Thank you for joining our call
As always, please contact <UNK> or <UNK> with any questions and have a great summer
| 2017_GGP |
2015 | MCK | MCK
#Thanks for the question, <UNK>.
As you know, we were delayed in getting operational control of Celesio.
It delayed our ability to really begin to execute against the procurement synergies that we believe exist for us as we create a global footprint and a single relationship with these manufacturers on a global basis.
So, that work was delayed.
As I mentioned we launched the opening of that office in January.
We're in the midst of our discussions with, as you might imagine, the very largest of our manufacturing partners, talking about how we can streamline the relationship between our companies and make sure that they win when we win.
And those discussions are probably too early to describe relative to how far along we are or certainly percentages of completion.
I would say that we're getting a terrific response, however, and the manufacturers are eager to work with a company like McKesson where we can deliver such significant value.
And I think it also helps if we can have a unified message globally with what we're trying to do.
And clearly our footprint in the US, our strength with Rite Aid, our strength with OmniCare, our HealthMart capabilities, I mentioned the 1,900 banner pharmacies in Canada along with the several thousand pharmacies in Europe, both owned under the Lloyd's brand as well as franchised, give us a significant footprint that manufacturers are very interested in.
So I'm excited about the early progress and we'll clearly keep you guys informed as we continue to make progress.
That's a good question.
I think we actually expect more dollar value of branded generic launches ---+ launches of branded drugs in FY16 than there were in 2015.
So, you're right, there's more dollar value of product going generic.
I think as we look at our portfolio of generic estimates, we, frankly, see the character and characteristics of some of those generics being not quite as favorable for us as the launches that took place in FY15.
An example would be a generic that might have many participants, and the value back to the supply chain as a result of that competitive activity wouldn't be as great.
I would just say, there are some [nuantial] differences between our view of the portfolio of generics.
It's not so much size based as it is characteristic of the launches.
Why don't I start with the answer and let <UNK> fill in some of the details.
Clearly, based on our belief at this point and what we've described as our expectations for FY16, we will have a very strong balance sheet at the end of the year.
We've also talked about our priority related to maintaining investment grade.
We did talk in the call about debt that's going to be extinguished this year as it comes due.
And in an earlier conversation we talked about the rights of the minority shareholders of Celesio.
So there are some uses of capital included in internal investment that <UNK> and I have described for FY16 that will consume some of this financial strength.
We've also talked over time about, in addition to the priority remaining investment grade, the priority of high value transactions and the ability for McKesson to execute on those transactions in a strategic way that produces very positive returns, above our cost of capital returns for our shareholders.
And that remains a priority, as well.
And we did talk about the Board approving a $500 million repurchase, which is not insignificant as it relates to share buybacks.
So I think you'll continue to see us unfold our strategy as the year goes on.
And we're cognizant of the fact that our balance sheet remains a source of opportunity for us and we plan to use that opportunity judiciously on behalf of our shareholders.
I would just further emphasize that I think it's helpful to have some cash balance flexibility to allow us to take advantage of attractive M&A if it should come along during this period of delevering.
You hit on a very key comment there about potential launch.
I think that as relates to our FY16 guidance and the uncertainty related to biosimilars and their uptake, we have really nothing included in our guidance related to biosimilars.
I would say that I think the Company's well-positioned in the biosimilar space.
As you know, we have a very active specialty business and we have a complete array of services that can be provided to biosimilar manufacturers, which we think will launch in a very similar way to branded manufacturers' launches in terms of the support for patients, the special handling requirements, the reimbursement requirements, the physician contact that needs to happen.
We do that in a significant way today.
In addition, I might add, any of the biosimilars that will be focused on the oncology product market are particularly attractive to us because of our physician network.
The US Oncology Network has a track record of helping branded companies come to market through our clinical trial work.
And they also have the ability to create formularies when they're convinced that, from a clinical perspective, the product can be selected and defined for the patients in a way that delivers best-in-class quality and the lowest possible cost.
So I think that unique asset in US Oncology will play a role here over years as biosimilars come to market in the oncology class.
It's been difficult for us all along to quantify ACA's effect on the demand in our businesses.
Albeit, we do believe there is a positive effect associated with people getting access to care in the fashion that ACA's provided.
I would say that in my conversation with people on the <UNK> and at the state level around the markets, I believe that the country's going to have to position itself to take care of folks that are not able to afford their own care, and to do so in a way that's effective and efficient for our businesses and for our country.
So, I think the end result here, even if something were to come from this Supreme Court ruling that may put a question mark on the subsidy or support for these patients, I think that there'll be a quick reaction on the <UNK> to try to find another way to provide low-cost quality care to patients so they don't fall through the crack and end up in the emergency rooms in America.
And I would remind also to the listeners that know this well, that pharmaceutical use and the appropriate use of pharmaceuticals and primary care physicians is the best way to treat patients, as opposed to letting their situations falter and having them end up in an acute situation in one of our great American hospitals.
And that, I think, needs to be avoided.
I think it's early to call but I think that this, combined with the continued pressure from the demographic perspective, and all of the things that we see from a growth and opportunity perspective in our industry, keeps me very excited about the future for McKesson.
Thanks for the question.
We are excited to be a participant in CommonWell.
As you know, CommonWell is a not-for-profit gathering of roughly 70% or so of the systems provider volumes in the country for physician offices and hospitals.
And that aggregation of technology companies who have decided to come together and create a method by which we can move information between our non-native systems ---+ or between each other's competitive systems, said another way ---+ is a landmark opportunity for this country to actually get interoperability and exchange data in a way that's never been done before.
This opportunity for McKesson translated into our ability to continue to support CommonWell's mission through the services that have been offered by RelayHealth.
And Relay is one of probably many in the future providers of capabilities to CommonWell that will facilitate this movement of patient data and financial data that will soon be very helpful.
I'm quite excited about it.
I'm, frankly, right now more excited about what it's going to do for healthcare in this country than I am necessarily for the revenues of Relay, which will follow over years.
But I think the adoption curve is going to be steep and I think people are going to benefit from CommonWell's efforts.
I think the way we think about our technology business is the value that it delivers to our customers and our ability to make sure that we're delivering against those needs.
As we think about the overall portfolio of McKesson's companies, you can see that we are always active in our management of that portfolio and that's frankly one of the reasons that the Technology Solutions segment, which is an aggregation of many different companies, revenue has been down as a result of that portfolio activity.
There are assets in there that are very directly correlated to other business unit strategies in our corporation.
There could be things like our Relay pharmacy business, which is the connectivity provider for most of America's pharmacies.
Or it could be our outsourcing business for physician offices, which is heavily correlated with our practice management activities where we are supporting the efforts of community oncology or community physician work.
And then there's other businesses that may not be as correlated to the strategy of the rest of our businesses.
And in those cases the key for us is can we optimize the performance of those standalone companies, vis-a-vis their competitors.
So, I don't ever rule anything in or out on any of our businesses relative to our strategy.
I think I look at it as an evolution and we need to continue to do so.
And we need to make sure that we optimize the value and the performance of these businesses on behalf of our shareholders.
I think the industry is going to continue to be filled with chatter and clatter related to strategic partnerships and mergers and acquisitions.
There are certainly people in our healthcare industry that promulgate some of these discussions and rumors more than others.
McKesson, as a policy really, we don't talk about our customer contracts and we certainly don't talk publicly about M&A or potential M&A.
We have very solid relationships with our customers.
We've earned the right to have their business for years, and sometimes decades.
As you know, we've currently earned the right in several cases of expanding our relationship with our customers to include all of the purchasing of their generics and their distribution of their business.
I might also note that we have a very broad base of customers.
We clearly, to the extent that our relationship with one customer changes, hopefully we're at the same time expanding relationships with others.
All I can tell you is we stay close to our customers.
And in many cases if a customer changes from an ownership perspective, McKesson stays with that customer even into the new entity from a service perspective.
You might recall, <UNK>, when CVS purchased Caremark, we were fortunate to have CVS continue the Caremark relationship with McKesson.
There are many examples where you'll see M&A activity and McKesson maintains a relationship.
The tax rate guidance that we've offered for FY16 reflects the expected mix of profits between our international businesses, which tend to be taxed at a lower rate, versus our domestic businesses.
And recall, of course, those domestic businesses have been growing very nicely in recent years, and so that's a factor in the thought behind the 31.5% tax rate guide for FY16.
We're not looking to try to project out beyond FY16 at this point in time.
<UNK>, I think you hit the same word I was going to use and that was prudent.
I think we've seen a very robust cycle of generic inflation, at least as we view it, and clearly we expect it to continue.
We expect it to moderate slightly as we give our guidance for next year.
To the extent that our prudent guidance proves to be incorrectly low, then at some point we'll over-achieve our expectations.
And to the extent that we project it to be too high in our crystal ball, then we'll be disappointed with what happens with our generics.
But I think overall we remain very optimistic about our portfolio and how we manage it.
And I think we do a pretty good job of forecasting where the business is going to be.
Thanks for the question.
We are in the specialty pharmacy business in various aspects of our strategy.
And certainly if you think about it globally, particularly where we own pharmacies, we have a specialty pharmacy activity.
You pointed out oncology as one example.
I think we've always been sensitive to supporting our customers and their activities and we are reluctant to compete with our customers in a real significant way.
To the extent that specialty pharmacy can support our overall strategy and not be in conflict with what our customers expect from us, then we'll continue to pursue it.
And in certain areas it makes a lot of sense for us to be there.
In other areas it makes sense for us to support other people's specialty pharmacy businesses.
No chance.
Slower than we are.
<UNK>, I think that's a very interesting question and I think it has a very complex answer that I'll try to deal with.
I think the way we think about Europe is the way I think about McKesson 16 years ago when I landed in this seat ---+ how can we optimize the performance of the businesses we have and focus on those businesses, and then how do we branch from those businesses to adjacencies that we know how to operate in markets where we can compete.
And I think the situation with Brazil, it was not obvious that we could create a market-leading strategy there, particularly given the vertical nature of some of the retailers in that market and nuances associated with the business models down there; and clearly whether we're scaled properly, et cetera, that I think the conclusion was reached that we should have our focus on Europe and in those markets where we currently have a strong beachhead.
In many of those markets we're number one or number two already from a distribution or retailing perspective.
And in many of those markets, the hospital business is still direct, the specialty business is nascent.
There aren't a lot of services that are similar to what we provide here in the US, both to manufacturers and to the end customers.
So, I think we do see an opportunity, both through organic growth as well as M&A, in several of those markets, and that'll be part of our focus as we think about the strength of our balance sheet.
Thanks.
I know there are a few other folks that are still on the line hoping to ask questions.
So if you want to go a little bit further I'm happy to do that.
Yes, the one-stop program has been and continues to be very successful for us.
And this last year the number I quoted was a 40% growth rate year over year, which was quite significant.
Now, obviously a portion of that was our success with Rite Aid.
But the business still grew very significantly even outside of the Rite Aid business.
Just to be clear, the growth rate was in store count, not in revenue of those stores.
Those stores, I'm sure some of them did come from competitors, but I would imagine there's a portion of them that just came from great customers that had been doing business with us for a while and realized that HealthMart added a bigger opportunity for us and for them.
And that expansion of our footprint with them and the services we provide gave us a better position with those customers.
So, it expands our footprint of HealthMart across the country.
And our objective with our customers is hopefully to earn the privilege to be HealthMart for all of them.
Obviously, with the exception of the large chains which are creating their own brands.
I'm not concerned yet, and I would say that the manufacturer relationships we have are very significant.
Clearly, to the extent that we can create value by delivering channel or volume to them, they're interested in working closely with us, and that's our objective.
I certainly don't see on the horizon a situation where manufacturers no longer need McKesson as part of their solution.
<UNK>, I guess the best way to describe it, it's a separate operation that is organized in London and it reports directly to Paul Julian, and its job is to focus on a global relationship with large global manufacturers.
As to the financial effect of those businesses, of this activity, you probably would find it in many different parts of our corporation, including maybe even maybe medical supplies as we source globally for medical supplies in private label.
So, it will end up in various P&Ls as success is reached there.
I certainly want to thank everybody for their time today and for being on the call.
I know we ran a little bit over but it was our year end and we spent a little time chatting, so I wanted to make sure that we spent some time making sure we have all of your questions answered.
We think we have a very strong operating plan for FY16 and certainly exciting growth opportunities across McKesson.
I'm certainly proud of our track record of delivering value to our customers and strong financial returns to our shareholders and to each of you.
And I'm certainly proud of our terrific McKesson team which continues to deliver year in and year out.
So with that I'll turn it over to <UNK> for some upcoming events for the financial community.
Thank you, <UNK>.
I have a preview of some upcoming events.
We will participate at the Bank of America-Merrill Lynch Healthcare Conference in Las Vegas tomorrow, May 13, and the Goldman Sachs Global Healthcare Conference in Rancho Palos Verdes on June 9.
We look forward to seeing you at one of these upcoming events.
Thank you and good-bye.
| 2015_MCK |
2016 | LPX | LPX
#I don't have the industrial numbers in front of me, but what we did ---+ what we do track is how much of our OSB is value-added.
And last year, in 2014, it was about 40%.
And we increased that by about 4% to 44% in 2015.
So we did make (multiple speakers) that was largely ---+ it was FlameBlock, it was TechShield radiant barrier and our flooring products.
We are hoping ---+ my objective is to get that over 50%.
But I don't think we are going to do it this year.
It will be multiple steps.
On FlameBlock, it is not tied to random links.
We do a quarterly pricing.
So obviously you have to take random links into consideration, but it's a quarterly pricing, not subject to weekly adjustments.
On TechShield and our flooring products, those are largely an adder, so they are tied to random links.
And what we're trying to do is move some of the higher-end flooring products away from random links but we haven't done that yet.
On the industrial products, they are priced generally on a quarterly basis.
FlameBlock is just in its infancy now.
We probably had a 40% increase last year but on a very small base.
We expect, with the new plant we're putting in place, we are adding about 30 million square feet of capacity, and there's about $20 million at our partners right now.
So when that's fully running, that will be about 50 million square feet.
I think the industrial ---+ I guess it's probably around 100 million to 120 million feet.
In 2015, we put a price increase in place that took effect on January 1.
We have not put a price increase in place for this year yet, and I'm not sure we will because we're trying to recover the ---+ well, get back to the growth rates that we have enjoyed in the past.
So I think that you probably won't see any major changes in the price because the mix will get better, but I don't think we are going to put any price increases in.
What you will see is that we will probably go back with some of the customers, as I mentioned, that we high-graded out and get back into their good graces and start selling.
One of the reasons we can do that is Swan Valley will be the lowest-cost plant in our system, so it does give us a little bit of flexibility to maintain margins while giving a little on the price.
I would be very disappointed.
That's very fair.
I just put pressure on our general manager, by the way.
In OSB, the problem is that all of our customers know that the Canadian exchange rate is down.
So if you look at the primary benchmarks for product from Canada coming into the US, which would be the Western Canadian print and the Eastern Canadian print, they are by far and away the lowest performers across the region.
So, unfortunately, we haven't been able to capture all of that because we are giving some of the pricing ---+ we are giving it back in pricing in the random links reported numbers.
I think currently, between north-central and western Canada, we have a $40 differential.
So that ---+ that's the problem.
If they are selling into those regional pricing environments, they would not be more profitable.
Now, if they can ---+ if they are closer to the north-central market, then they could be.
We won't cut you off today.
I can only talk about LP, <UNK>.
And you saw the amount of downtime that we took.
We did pull inventories down throughout the year.
We just think that if we are more real-time with the market and not have an inventory overhang, that that makes a lot of sense.
So we are running our mills to respond to the demand that we have.
No, that's not the dynamic.
The dynamic is that we want to run Swan full on siding, but we don't have demand yet for 100% of the siding capacity we have, so we will use that swing capability at Hayward to run OSB in the north-central region.
We have other equipment throughout the system.
I don't want to be too specific because our competitors are listening here.
But we have under the fellow who heads up all of our procurement and logistics and forestry, he's got a team put together to look exactly at that, at sites that make logistical sense that make sense from a personnel standpoint, and to look at equipment that we could redeploy most cost-effectively.
So that was my comment about when you think about future capital, we do have to think about where the next mill goes to support the siding growth.
Yes.
Actually, in Chile, we already make siding down there.
And actually the third mill that we want to put in Chile we will put on the same site that we already share, and that smaller mill will likely go to 100% SmartSide with a new mill being OSB.
That is exactly our plan.
We are struggling to figure out how to do that in Brazil with a continuous press, and we haven't figured that one out yet.
Correct.
We still had ---+ <UNK> just told you we had 128 down days in the fourth quarter, so we would like to get rid of those first.
And then the further growth is we still have the Chambord mill that is indefinitely curtailed.
There's no change in status.
Near as we can tell, nobody bid for the wood, so we still have a very good chance of getting that back should we want to start it up.
But with 128 down days in the quarter, I would much rather fill that out.
And as <UNK> said, we've made very good progress at Peace Valley and Clarke County in getting them up to their rated capacities.
Yes, for the OSB piece.
For the industry, I'm guessing we were at 60%.
We weren't much different than the industry.
(multiple speakers) we have a little bit of an export business, so that offset it a little bit.
But we are probably right there with the rest of the industry.
In fact, <UNK> and I just looked at some numbers yesterday.
Our growth in I-Joists was a little bit better than the industry.
Our growth in LVL was a little bit less, and then LSL was above.
But fundamentally we grew where the industry grew.
Thanks <UNK>.
Ashley, I think that's all the time we have for questions, so if you could please provide the replay number.
And I'd like to thank everybody for participating in our call.
And Mike and Becky are here to answer any follow-up questions you may have.
So thank you very much and have a great day.
Thanks.
| 2016_LPX |
2016 | LYB | LYB
#Production will be lower, <UNK>, right, because of Morris being down and the timing of that turnaround, so that's one of the things you have to factor in.
That's also going to put some pressure and impact polyethylene, as <UNK> said.
I think you will see that.
We had some maintenance and turnarounds planned work in the second quarter, so that you will probably see hold pretty even, I think, across the quarters.
We will see ethylene production being down.
We said in our prepared comments that third-quarter production loss would result in about $150 million impact for the quarter.
Yes.
Of course, with the $140 million you are considering the refinery in there.
We are in the low- to mid-$0.60 per-pound range per annual pound of capacity.
Yes, <UNK>, if you think about the improvement, probably about half of it is structural based on feedstock improvements, fixed-cost improvements and so on.
The rest is more market related.
Having said that, If you think about the European market there's really no new capacity coming.
The euro is weaker than it was two, three years ago.
We had $1.40 euro/dollar; today we're $1.10.
My sense is that Europe will kind of be an insular market.
I don't see a whole lot going out or coming in.
With no new capacity being installed in olefins and polyolefins there, and demand growing modestly but growing some, we see a pretty balanced market.
I think the operating rates ought to be reasonably high over there.
I would suspect that'll be sometime back 2018 into 2019.
Definitely not all of the derivative capacity has been announced yet, just like we are announcing today our polyethylene plant.
I think that will balance out but on paper you would assume that it's something in the back half of 2018, 2019 range.
I think the European market just has a different underpinning given the feedstock and the olefin prices there.
Our sense is that, that should continue for the first seeable future.
Propylene is a little bit ---+ (inaudible) been about flat or a little bit less than ethylene over there.
I think you've got to step back and look at global pricing as well to be instructive on that.
I suspect that some of it would need to go to Europe which would be the next logical destination.
Europe over time will probably need propylene, so I think Europe seems logical.
Of course Asia has a large need and for them it's also make versus buy because in Asia you see a lot of new PDH capacity coming.
Will have to watch that.
The thing we have to see is how much propylene export capacity there really is in the US and whether somebody would build more or not.
I don't have a fresh view on that.
Okay.
I would think Europe would be more logical destination and then next to South America.
What we see is that in a more moderate oil price environment over the medium or longer term and ethane trading somewhat above its fuel value.
Construction cost being what they are in the Gulf coast, greenfield is challenging, we think, to earn reasonable returns and perhaps our return aspirations are a lot higher.
I don't know.
So far we'd like to see how the rest of the decade plays out before we take a really firm view on that.
In the meantime, we've still got some de-bottleneck capacity that we can do.
As I mentioned, we have one more we can do at Channelview.
We are focused on PO/TBA and polyethylene.
We have pretty healthy slate of growth projects and capital projects ahead of us.
I'd like to see us execute those really well before we think about new a greenfield plant.
We have announced this next 10% buyback over 18 months.
We are on pace to be able to fund that.
Beyond that, we'll just have to see how markets develop and what ---+ our view is that we have sufficient cash flow to continue to supplement our share repurchase and so on and still engage in these growth projects.
<UNK>, I didn't know if you had anything else to add to that.
No.
We have never really given perspectively information or estimates about share buybacks.
As we have said, we have a new program approved for 10%.
We have more than $5 billion of liquidity if you look at the committed credit facility as well.
We are in a good situation to execute on the progressive dividend and on the share buyback program.
I'll start and then I will turn it over to <UNK>.
Generally speaking, our aim is to create value for shareholders.
There's a range of options you've outlined, we evaluate those.
At the end of the day, that's what we are focused on near term, midterm, long term.
<UNK>, I don't know if you want to add more to that.
No, we are evaluating the share repurchases obviously, without options.
Answering your question about how far would we go with respect to leverage, what's very important to us is to maintain a healthy balance sheet.
We are focused on the BBB-plus rating as mentioned in my initial outlines and that is clearly a very much a guiding benchmark to maintain that BBB rating through the cycle.
If there are no other questions then I will close with a few comments.
First of all, in the near term we see markets being very strong.
We see solid demand growth year over year.
Planned maintenance and some unplanned outages in the industry and our planned maintenance have kept supply moderate, so we see pretty balanced markets.
When we think about the cycle with some delays in new capacity, operating rates are not going to dip much below 90% on paper in the past.
As we see some of these delays and even some of the CTO projects in Asia being canceled, there's a higher likelihood that 2018 effective operating rates may not dip below 90%.
Our view is that we are very constructive on markets near term, medium term.
We are continuing to deliver strong earnings.
Last 12 months had a pace of nearly $10 per share, excluding LCM.
We have a strong dividend.
We're engaged in our fourth 10% share buyback program.
By virtue of those two things, we are returning significant cash back to our shareholders.
Our focus remains very consistent, safe, reliable, cost efficient operations.
We're going to finish the Corpus turnaround and de-bottleneck it by the end of Q3.
We're going continue to execute on the other turnarounds that we have.
I think what all this planned maintenance activity sets us up for is a very strong 2017.
We have very little turnaround activity in 2017.
I think that positions us well for next year.
We're starting to build out our growth project portfolio, with our polyethylene project in 2019 and potentially the PO/TBA project in 2020.
We are continuing to advance those growth projects as well.
We look forward to updating all of you on those items at our next call.
Thanks again for your interest in our Company.
| 2016_LYB |
2017 | ALXN | ALXN
#Thanks, <UNK>
Starting with slide 8. Total reported revenues in the third quarter were $859 million and grew 8% year-over-year
As we had forecasted and previously communicated, growth this quarter was lower than the previous two quarters due to a few factors
First, the second quarter benefited from approximately $35 million due to timing of orders, which directly impacted quarter-over-quarter and year-over-year growth for this quarter
Second, the impact from ALXN1210 and other clinical trial enrollments increased
We estimate that this impact in Q3 was approximately $30 million versus approximately $20 million for the first half of the year
This is a welcome headwind as we continue to advance this program
And, third, pricing was a 1% headwind in Q3, a slight increase versus the first half of the year, although lower than we had anticipated
The third quarter non-GAAP earnings per share of $1.44 grew a strong 17% year-over-year
Moving to slide 9, our product sales were driven by growth in the U.S
, Europe, and the Asia Pacific region, whereas growth in the Rest of World was impacted by the timing of orders
You can see we delivered a 9% increase in volume, partially offset by FX headwind of less than 1% inclusive of hedging and a pricing headwind of 1% compared to the same period last year
Turning to slide 10. Soliris revenue was $756 million and year-over-year volume growth was 3%
ALXN1210 and other clinical trial enrollment was an approximately 4% headwind to year-over-year volume growth in the quarter with the largest geographic impact from enrollment in Europe and the Asia Pac region
Importantly, when you strip away a number of the moving pieces over the last few quarters, we continue to see underlying volume growth for Soliris maintaining its momentum
More specifically, when adjusting for ALXN1210 in ordering patterns, Q3 volume growth was around 13% which is consistent with what we've seen in the last five quarters
As shown on slide 11, we reported Strensiq revenue of $87 million as we had continued momentum from existing patients continuing on therapy, as well as new patient additions
Growth was impacted by changes to our pricing strategy in the U.S
as we work with payers to better align the value for higher dose patients
Looking at Kanuma, we achieved revenues of $16 million
Turning to operating margin on slide 10. During the quarter, we delivered a non-GAAP operating margin of 45%, benefiting from revenue growth and focus on operating expenses
Non-GAAP R&D was $175 million or 20% of total revenue
The decreased R&D spend compared to third quarter of 2016 was due to cost savings from the announced deprioritized programs and terminated partnerships, offset by increased investments in ALXN1210. Additionally, R&D spend in Q3 of this year benefited by approximately $6 million due to the timing of batches of clinic drug compared to our expectations
This expense is now expected in Q4. Non-GAAP SG&A was $230 million, 27% of total revenue
The year-over-year increase includes spend associated with the build of the dedicated field teams in preparation for the gMG launches in the U.S
, Germany and Japan
The effective tax rate in the quarter was 10% and benefited from the conclusion of a routine IRS audit for the years 2013 and 2014. This contributed approximately $0.07 to non-GAAP earnings per share in the quarter
For the full year, we now expect the tax rate to be between 12% and 13% including this benefit, and expect an increase to 13% to 15% in 2018. Non-GAAP EPS in the quarter of $1.44 grew 17% year-over-year, driven largely by revenue growth and a favorable tax rate
We reported Q3 GAAP EPS of $0.35 and recognized $164 million in restructuring and related expenses as outlined on slide 13. The majority of these expenses were associated with our planned closure of the Rhode Island manufacturing facility and employee separation costs
Of the $164 million, $74 million will be cash outlays
In the quarter, we generated over $580 million in free cash flow and ended September 30 with approximately $1.5 billion in cash and marketable securities, of which approximately 35% is in the United States
We repurchased approximately 475,000 shares in the quarter
Let's now turn to slide 14 and walk through the full-year guidance and a few items to keep in mind as we move forward
Total revenues are now expected to be between $3.475 billion to $3.525 billion, up from our prior guidance range of $3.45 billion to $3.525 billion; we're effectively increasing the low end of the revenue range
At the midpoint, this represents 13% total revenue growth year-over-year
This includes an updated estimate of $30 million to $40 million of foreign currency headwinds and our expectations for the impact of ALXN1210 and other trials on Soliris, which I'll discuss in a moment
Excluding these, revenue growth would be approximately 17%
For Soliris, our revenue guidance is $3.09 billion to $3.125 billion
Similarly, we've increased the low end of the range
This assumes continued underlying volume growth with PNH and aHUS globally
It also assumes the impact of Soliris revenue from ongoing ALXN1210 trials as well as other studies, which we believe will fall within $80 million to $90 million now
To touch briefly on 2018, we do expect incremental headwinds to Soliris revenue from the ALXN1210 studies, given the ramp of enrollment through 2017 and that these patients will remain in extension studies until a regulatory decision which we're targeting for PNH in the first half of 2019. In addition, we expect some limited incremental headwinds due to our plan to initiate a Phase 3 subcu study in 2018. With regards to the MG launch, given the timing in the year, we expect limited contribution from MG in Q4 2017. Turning to Metabolics
Our revenue guidance is $385 million to $400 million which is also an increase at the low end of the range
GAAP operating margin is expected to be between 16% and 19% with the reduction due to restructuring and related expenses
Non-GAAP operating margin guidance is unchanged
We anticipate a sequential increase in operating expenses in the fourth quarter due to seasonal medical congresses, as well as the timing of clinical drug batches I previously mentioned
This will be partially offset by savings from the restructuring
The guidance now assumes a non-GAAP effective tax rate of 12% to 13% versus our prior expectations of 13% to 14%
GAAP earnings per share of $2.00 to $2.35 includes the restructuring and related expenses
Our revised non-GAAP earnings per share guidance is $5.50 to $5.65, an increase over our prior guidance range of $5.40 to $5.55. This EPS guidance represents approximately 21% growth at the mid-point of the range
Turning to slide 15, we're executing on the restructuring plan we provided last month in working towards the 2019 financial ambitions as shown on slide 16. These include double-digit revenue growth, operating margin growing to 50% in 2019 and leverage from the top line to the bottom line, leading to greater non-GAAP EPS growth
We anticipate delivering on these objectives while simultaneously investing in our pipeline, including through disciplined business development
On this note, I'm pleased to announce that Dr
Aradhana Sarin will be joining us as Senior Vice President of Business Development and Corporate Strategy
Aradhana brings to Alexion over 20 years of professional experience at global financial institutions, has a strong orientation for science, an excellent understanding of the sector and deep transactional experience
I'll now turn the call over to <UNK>
<UNK>, thanks for the question
And I think what you noted is probably the soft spot in terms of our affiliate performance, with respect to kind of affiliates around the world
When we kind of dialed down, the dynamics in Latin America around ordering and the macro trends that I think are probably common across the whole sector, is actually – we think it's impacting us as well
So, I think some of those countries there, which had been growth countries, probably – will probably won't be growth countries in the future
But what – even in light of that, what we're seeing is, on a global basis, kind of maintaining overall global volume trends that we've seen over the last five, six, seven quarters
Let me try to take, this is <UNK>, Geoff
Thanks for the question
I think I understand it
It's a little bit – I'm trying to weave in
I don't think we think that our business development efforts per se are tied to progression on ALXN1210. No doubt we've been talking about it kind of for the last 90 days
And that comes a lot out, in terms of an outgrowth of prioritizing the pipeline and a number of terminated programs that we'd certainly feel great about ALXN1210 as a pipeline within itself in kind of that alone
But beyond that, we certainly need, we believe we need to rebuild the pipeline
I would characterize it, despite we've talked about it, is that while we have a good sense of what we want to do with respect to strategy, I mean moving from ultra-rare to rare, staying in the disease areas of focus, leveraging our development capabilities in rare disease and our launch in commercial capabilities and pointing towards kind of Phase 1, Phase 2 assets, I'd still characterize it as we're building internally a set of capabilities to be able to do this over a long period of time
We just hired a new head of the group
We'll build out the team even more and I think we still have to get into the flow before we actually begin executing transactions
Matt, this is <UNK>
With respect to the second part, the second question, we absolutely have a sense of urgency here
I mean, it's a new team here, a new business development team being formed
We will undoubtedly balance that with focusing on quality, not quantity of assets
I fundamentally believe that in where we're looking strategically, there's likely to be more competition than there was 5 or 10 years ago, but the opportunity set is, probably offsets that
So, there's a – I think that in – but I think absolutely sense of urgency balanced by making sure we get quality assets
I think, I mean, the starting point that we talked before, it just is trying to adjust for a slightly different mix between pediatrics and adults that was originally thought through
So, I think of it as not really changing our outlook at all for essentially what it could achieve in terms of peak sales
So, I think it's actually just a smart strategy working with payers in the United States
Yeah
This is <UNK>
I think your question is focused on Soliris, but I'll actually broaden it out as well
What we're, no doubt seeing is growth across PNH and aHUS, but aHUS outpacing the growth of PNH
That is relatively consistent
We actually have a few markets, where our best estimate of revenue is that aHUS is now crisscrossed over PNH
And hope that that continues on, without sacrificing, obviously, continued PNH penetration, where in both indications, they're quite, quite a lot of headroom
No doubt, what we hope is MG ends up kind of being a big, kind of, accelerator as well
The timing of that is still unclear, as it kind of really kick-in in 12 months out or 6 months out or whatever the timing is
And then I think the Metabolics franchise for us, driven by Strensiq, I think can continue to be meaningful contributions to, if you will, almost a cause of change contribution to growth on a year-after-year basis
| 2017_ALXN |
2016 | PFS | PFS
#Hey Matt.
We actually ticked up a little bit this quarter up to 79 basis points on a trailing 12 months return.
So I think we're pretty stable with that level.
We're pretty stable at that level.
I think you want to keep the clients.
It's the competition in that space also.
We don't really look for custody business much in that space, but if our client wants to do that, we could work on it.
It's been pretty stable all along.
Obviously markets move and that will affect the revenue on the go forward basis.
If we have a stable market, I think it's going to hold serve.
[ph].
Well, kind of why you support, if you like, the dual system of banking and charters.
You keep supporting it.
I would think that from our standpoint I would be concerned about everybody being in the same and the regulators making, "Okay, you can only have X amount of this, X amount of that, and then we\
The REIT also in addition to the balance of tax exempt issue, so we had a little bit of benefit on the state tax side which helped us.
<UNK>, I'm sorry.
It stopped ---+ I said <UNK>, I meant Matt.
It's become negligible.
I kind of stopped tracking at this point.
Good morning.
Well, I think, <UNK>, we're not really ---+ we always look at what is the best risk adjusted return and making sure you have the right group behind it to support any kind of exposures or outside the parameters that we have established.
Of that ---+ the pipeline, we have about $1.5 billion, we'll get about a 50% pull-through rate, and in there about ---+ of that, so let's say $760 million, you have approximately $200 million that would be in the CRE space, approximately $190 million in middle-market and $176 million in business banking.
So it's pretty well diversified all the way through including some asset base lending.
And I think we look at all of these criteria.
One thing I can say that we have done is we've gone back and look and keep our thresholds and our return on equity model.
So any multifamily, any CRE, any C&I meet those hurdles going forward.
And I know that in the commercial real estate space, it's not just multifamily, we're seeing a bit of industrial production coming in also.
Yes, that's what we're (inaudible).
Yes, absolutely.
That's correct.
The pipeline yield is about 3.67% versus I think it was at 3.97% portfolio yield.
Thank you.
Well, thank you for your attendance today on the call.
As I referenced in our release, we are named by Forbes as one of the Best Banks in the United States and we're very proud of that from our officers and our employees and our board.
And we look forward to seeing you and talking to you on our next call.
Thank you very much.
Have a great day.
| 2016_PFS |
2017 | AWR | AWR
#Thank you, Rachel.
Welcome, everyone, and thank you for joining us today.
I'll begin with some highlights for the quarter, <UNK> will then discuss some third quarter and year-to-date details and then I'll wrap it up with some updates on various regulatory filings, ASUS and dividends.
And then we'll take your questions.
I'm pleased to report another quarter of solid earnings, mostly due to our hard work on regulatory and U.S. government filings over the past year in conjunction with our focus on operational efficiencies.
Our regulated utilities continued to invest in the reliability of our water and electric systems.
We are on target to finish the year with approximately $110 million to $120 million spent on capital projects, about 3x our expected depreciation expense for the year.
We're also excited about expanding our service to the U.S. government yet again.
Our contracted services business, American States Utility Services or ASUS had a big win during the quarter when it was awarded a new 50-year contract to provide services for the water distribution, wastewater collection and treatment facilities at Fort Riley, a United States Army installation located in Kansas.
The initial value of the contract is estimated at approximately $601 million over the 50-year period and is subject to annual economic price adjustment.
Like Eglin Air Force Base on which we commenced operations in June, Fort Riley is also one of the largest military installations in the United States covering over 100,000 acres of land and it has a daytime population of 25,000 people.
It is currently home to the 1st Infantry Division.
We expect to assume the water and wastewater operations at Fort Riley following a 6- to 12-month transition period currently underway.
With the addition of Fort Riley, ASUS will be providing water and/or wastewater utility services to 11 military bases including 4 of the largest military installations in the United States: Fort Bragg, Fort Bliss, Eglin Air Force Base and Fort Riley as well as one of the most high-profile bases, Andrews Air Force Base.
I will now turn the call over to <UNK> to review the financial results for the quarter.
Thank you, Bob.
An overview of our financial results is on Slide 7.
Diluted earnings for the quarter as reported were $0.57 per share compared to $0.59 per share for the same period in 2016.
I will discuss the major items that impacted our revenue and expenses including certain items that affect the comparability of our quarterly results.
The sum of these items are shown on the slide as non-GAAP adjustments, which, excluded from 2016 earnings, would have resulted in adjusted earnings per share of $0.56 for the third quarter of 2016.
Adjusted earnings per share for the third quarter of 2017 of $0.57 per share were $0.01 per share higher than adjusted earnings per share for the third quarter of 2016.
The operating income on this slide, Slide 8, has been adjusted for 2 items.
The first item relates to the delay by the California Public Utilities Commission in issuing a decision on the water general rate case.
Due to the uncertainties of the outcome of the water general rate case at the time, the water gross margin recorded for the third quarter of 2016 reflected Golden State Water's litigated position in the then-pending water general rate case.
When the decision was issued in December 2016 with new rates retroactive to January 1, 2016, we recorded a cumulative downward adjustment of $5.2 million to the water gross margin in Q4 of 2016 related to the first 3 quarters of the year.
Of this amount, $2.2 million related to the third quarter of 2016, which would have decreased revenue by approximately $1 million and increased supply costs by $1 million for the third quarter of last year.
The second item relates to CPUC-approved surcharges implemented in 2017 to recover previously incurred costs approved by the CPUC as part of the final decision on the water general rate case.
Increasing revenues and water gross margin totaling $1.9 million for the surcharges was offset by an equal and corresponding increase in operating expenses, primarily in the administrative and general expense, resulting in no impact to earnings for the 3 months ended September 30, 2017.
Please reference the appendix slide for reconciliation details.
Adjusting for those items, revenue decreased by $300,000 as compared to the third quarter of last year, primarily from the phasing of Golden State Water's Ojai operation, which you will recall was sold in June ---+ this past June to resolve the eminent domain action and the decreasing ASUS construction at CPUC.
This was largely offset by increased management fees at ASUS as a result of successful resolution of price adjustments and asset transfer filing throughout 2016 and 2017 as well as revenue generated from Eglin Air Force Base and increased revenue from CPUC-approved second year rate increases effective January 1, 2017, for the water segment.
Our water and electric supply costs were $27.2 million and $26.3 million for the third quarter of 2017 and 2016, respectively, when you exclude the impact of the delay in the water general rate case decision.
Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts, which will be recovered from or refunded to our customer in the future.
Looking at operating expenses.
Excluding supply costs and the adjustments previously discussed, consolidated expenses decreased overall by $2 million for the quarter.
The decrease was mainly due to lower construction activity at ASUS as well as lower planned management activity and lower legal expenses related to condemnation activity for Golden State Water utility.
These decreases were partially offset by costs incurred at ASUS to operate the system at Eglin Air Force Base and an increase in depreciation expense.
Slide 9 shows the EPS bridge compared to the third quarter of 2017 with the third quarter of 2016.
Slide 10.
This slide reflects our year-to-date earnings per share by segment including the impact of certain items we have previously discussed on this call and also from last quarter.
For more details, please refer to yesterday's press release and Form 10-Q.
I'll briefly discuss our liquidity on Slide 11.
Net cash provided by operating activities for the 9 months of 2017 increased to $120 million due in part to an increase in operating cash flow for Golden State Water due to various CPUC-approved surcharges implemented this year to recover previously incurred costs as well as federal income tax refunds received in 2017.
We also saw an increase due to the timing associated with the billing of and cash received for construction work by ASUS during the 9 months ended September 30, 2017.
Net cash used in investing activity was $44.9 million for the 9 months ended September 30, 2017, as compared to $101.4 million for the same period in 2016.
Cash paid for capital expenditures during the 9 months of '17 was partially offset by $34.3 million in pretax cash proceeds generated from the sale of Golden State Water's Ojai water system.
As Bob mentioned earlier, we expect to invest $110 million to $120 million in capital projects at Golden State Water this year.
With that, I'll turn the call back to Bob.
Thank you, <UNK>.
I'd like to provide an update on our recent regulatory activity.
In September 2017, Golden State's water segment implemented surcharges to recover the $9.9 million revenue shortfall between actual rates billed through January 2016 through April 2017 and the new rates adopted in the delayed final decision on the water general rate case.
These surcharges will run from 12 to 36 months for Golden State Water's various water-ratemaking areas.
In July 2017, Golden State Water filed its water general rate case application, which will determine new water rates for the years 2019, 2020 and 2021.
Among other things, Golden State Water's requested capital budgets in this application average approximately $125 million per year for the 3-year rate cycle.
A decision from the CPUC in this general rate case is scheduled to be finalized in the fourth quarter of 2018.
In April of this year, Golden State Water filed its water cost of capital application.
The application recommends an overall weighted return on rate base of 9.11%, including an updated cost of debt of 6.6% and a return on equity or ROE of 11%.
The current authorized return on rate base is 8.34%, including an ROE of 9.43%.
A decision on the application is scheduled to be received by the end of this year and become effective January 1, 2018.
In May of this year, we also filed our electric general rate case for rates effective 2018 through 2021.
A final decision on this rate case is expected in 2018 with rates effective January 1, 2018.
Let's move on to ASUS on Slide 13.
As I mentioned at the beginning of our call, ASUS was awarded a new 50-year contract by the U.S. government to provide services for the water distribution and wastewater collection and treatment facilities at Fort Riley in Kansas.
The initial value of the contract is approximately $601 million over the 50-year period and is subject to annual economic price adjustments as well as an adjustment based on the results of a joint inventory of assets to be performed.
ASUS will assume operations at Fort Riley following the completion of a 6- to 12-month transition period currently underway.
While we don't expect a significant contribution from the new base in 2018 due to this transition period, we expect the contract to contribute $0.03 to $0.05 per share on an annualized basis beginning in 2019, the first full year of operations.
ASUS began operations at Eglin Air Force Base in June of this year.
After the completion of a joint inventory study conducted with the U.S. government, the Eglin contract is valued at approximately $702 million over the 50-year term subject to annual economic price adjustments.
We are currently involved in various stages of the proposal process at a number of other bases considering privatization.
This is a key focus for us as the U.S. government is expected to release additional bases for bidding over the next several years.
Due to our strong relationship with the U.S. government as well as our expertise and experience in managing bases, we are well positioned to compete for these new contracts.
Turning to ASUS' third quarter performance.
Our management fee revenues increased as a result of various successful price adjustments and asset transfer filings during 2016 and 2017 and the revenue generated from Eglin since commencing operations in June.
We also continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases we serve.
During the first 9 months of 2017, the U.S. government awarded ASUS $20.1 million in new construction projects, the majority of which are expected to be completed through 2018.
We reached a successful resolution with the U.S. government on various filings for the bases we serve.
Economic price adjustment filings for Fort Jackson in South Carolina, Fort Bragg in North Carolina, the 3 bases in Virginia and Andrews Air Force Base in Maryland have all been finalized during 2017.
An economic price adjustment filing for Fort Bliss in Texas and New Mexico was submitted to the U.S. government during the third quarter of this year and is expected to be completed by year-end.
Completion of filings for these economic price adjustments, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin.
We believe ASUS is still on target to contribute between $0.34 and $0.38 per share for calendar 2017.
In order to project for 2018, we will need to continue to evaluate the amount of capital work that we expect to complete, which includes discussions with their respective contracting officers and the Director of Public Works at the various bases.
Taking into account the $20.1 million in new construction projects awarded through September 30, 2017, with more expected to be awarded in the fourth quarter as well as operating Eglin for a full year next year, we believe ASUS' earnings for 2018 will be in the $0.37 to $0.41 per share range.
Finally, I'd like to turn our attention to dividends outlined on Slide 14.
We recently announced a dividend of $0.255 per share on the common shares of the company.
If you recall, in August, our board approved a 5.4% increase in the quarterly dividend.
The August increase in our quarterly dividend reflects our board's confidence in the sustainability of the company's earnings at both our Golden State Water and ASUS subsidiaries as well as the prospects for our future.
We believe that prudently increasing dividends enhances our ability to attract capital in the future to fund necessary infrastructure investments in our utility operations.
We're also confident that ASUS, along with Golden State Water, will be a continued source of dividends for our shareholders.
Our calendar year dividend has grown at a compound annual growth rate of 11% for the 5 years ended 2016.
American States Water Company has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 63 consecutive years.
Given our earnings growth prospects, there's room to grow the dividend in the future.
I'd like to thank you for your interest in American States Water, and we'll now turn the call over to the operator for questions.
Yes, so with any new contract we get these days, they're on an economic price adjustment model, which is different than the price redeterminations model that we had gone through at many of the bases that we currently have.
Under the economic price adjustment model, it's annual increases for inflation.
So we expect to get those annual increases without much delay.
So it won't be as difficult as it was in the ---+ as going through the price redetermination process.
Sure, I'd be happy to start, <UNK>, then you can chime in and add where needed.
Well, we did have a little bit of a drought there.
We won a number of bases.
In '04, we won 1; in '06, we won 3 or 4; and then in late '07, we won 2 bases, one of which was Fort Bragg.
And we've got a lot of bases all at once, and we took a little bit of a timeout to assimilate the bases that we had.
And back during that time, there was also difficulty getting price redeterminations done because this was new to the government as well as it was to us, and so it did take a while to get those resolved.
So we got out of the bidding for a bit at the time.
But <UNK>, as you know, these RFPs can ---+ they can be out there for quite a long time, as long as 5 years.
And so we may have taken a little bit of a hiatus there, but then we got back into the bidding and we've been pretty aggressive on our bids and have been very successful.
Though we've only won 2 contracts in the last couple of years, both of the contracts are, I think, the 2 largest contracts that we have been given.
So we're glad to win the big bases.
If we're going to win contracts, we like to win the big bases, but we'd like to as many contracts as we can win.
I don't know, <UNK>, if you have anything to add.
That's pretty accurate.
Okay.
Does that answer your question, <UNK>.
Sure.
So with regard to ASUS, it is not as cash intensive or capital intensive as the utility business is sort of on a per dollar of earnings.
I mean, it is ---+ there are certain working capital dollars that have to be committed because there are times when the government owes us money and the scheduled payment does take some time.
I'm not suggesting that they're ever late, it's just the payment schedule does take some time.
So there is some working capital that have to be devoted to ASUS but though not as capital intensive as the utility.
So we tend to look at what a representative payout ratio might be for the companies with whom we compete, and we've been talking a bit lately about whether that group should be expanded to include natural gas companies and the ---+ those electric companies that are highly regulated.
So we look at what a representative payout ratio is, and based upon that, we determine how much we can grow the dividend based ---+ also based upon what our projected earnings are.
Now the last several years, the ASUS business has paid for 1/4 of the annual dividend or 1 quarterly dividend, so we would expect that to continue going forward.
That's probably more than you wanted, but hopefully I answered your question.
Yes, so we've had a couple of discussions with the credit rating agencies over this nonregulated business, ASUS, and we believe at this point we have convinced them that it's no more risky ---+ riskier than the utility business.
It's taken some time because it's a complicated business and difficult to understand by outside parties.
But there was concern because ASUS represents between 20% and 25% of the company's revenues and income.
That was a large amount, but we believe we've got them over the hump on that.
And I think their hesitancy early on was they just didn't have a good understanding of how the contracts work, and that was probably mostly our fault for not understanding what they were misunderstanding.
I think if this ---+ I don't know what percent this is going to grow to over time.
It'll ---+ can't ever see it being 50-50 because our utility business is growing, at the same time the contracted services business is growing.
But if it got to be 30% to 40%, I have no sense that the rating agency would have a problem with that.
<UNK> does a lot of yeoman's work in terms of getting them up to curve in how these things work.
Go ahead, <UNK>.
No.
I concur with what you said, Bob.
<UNK>, we have had couple of calls with the rating agencies because they're concerned.
But I think at the end of the meetings, they were very comfortable about the business dealing with the federal government and no more risky than dealing with the state agencies at a PUC.
So I think they have a very good comfort level at this point.
I think going into this economic price adjustment model is a lot easier to get increases taken care of.
So it creates less volatility than what we were seeing historically.
And as you know, rating agencies, they do not like volatility.
So we haven't really had any pushback, I would say, in the last year from either of the 2 agencies.
Thank you, Rachel, and thank you all for your participation today.
And I look forward to speaking with you next quarter as does <UNK>.
Thank you.
| 2017_AWR |
2016 | ATGE | ATGE
#Well, we are certainly mindful of all of our options here.
And we will continue to look at those.
The direction you are going is not our plan right now.
So we think we've got a plan to continue to create academic and economic value at DeVry University, in particular, and all our institutions for that matter.
At the same time, there is nothing that is sacrosanct here and we look at all the options.
So that's something that we continue to get guidance from from our board, as well.
And so we will keep you posted.
Yes, that is something.
A lot of those opportunities can come across the desk.
We also see opportunities to help out.
We've seen some other institutions that have failed, or closed, or shut down.
And many of those transfer students have come over to DeVry University or to Carrington College.
That's actually been an opportunity.
The people who are in charge of looking at those things, public policy people, or their consultants know us and we have a good reputation so we are often on the list on the institutions that they call to see if we can help out, so that's there.
From an acquisition perspective, I would just reiterate what I said before, which is, our priority is really in professional and international education and that's where you've seen us allocating capital, such as the acquisition that we made of Grupo Ibemec in December.
Sure.
And there's two pieces of your question just to unpack that, because you said graduates.
The clerkships is the third and fourth year of medical school, or the last three semesters of Vet school.
So that's while they are still a student.
Those are what we call clerkships.
Back in the old days they used to call them internships.
They call them clerkships.
And then you mentioned graduates.
That's when they graduate and then they go on for ---+ in the medical world, go on for residency.
In the veterinary world they generally go straight into practice, there are some residencies.
So in each case, we're feeling pretty good about how our students and our graduates are doing, in those areas.
The article that you talked about, I'm not sure I saw that one, but I know the issue.
People have asked about providing resources, ---+ I can't understand why there's an issue.
It seems to make perfect sense that if we are sending our students to a teaching hospital, that we would partner with that hospital to provide the resources to teach the students.
And we also provide resources, in some cases, to help build simulation centers or do other things that help that hospital serve it's community.
That's a good thing.
So those hospitals that we've worked, some of whom we've worked with for decades actually, really view us very positively as a partner in medical education.
And of course once our students complete a clerkship in the third or fourth year with a teaching hospital, oftentimes they will put that hospital on their list for the residency match, or that hospital may put them on.
And that's what the whole match is about.
So once they get to know each other, either it works out really well for meeting their workforce needs and we become a workforce solutions provider.
And so in March we saw the residency match.
The real March madness, as opposed to the basketball.
This is one that really counts, making sure we have the doctors we need.
And we saw our two US serving medical schools put more than 1,000 new residents into the match.
And I think our two together are probably the single largest provider of new positions to the US residency system.
So, we feel pretty good about what DeVry Medical International is doing, and think it will continue to serve those students and that societal need for the future.
Good, I tried to parse the two pieces out there for you.
Sure, good question.
In this start, it was only post-licensure.
So there were no campus starts.
Just from an overall enrollment perspective, we have campus starts in the month of May, September, and January and then we have post-licensure starts every six weeks.
So, we would have July, September, November, January, March, and May.
So the 12% is a good apples to apples number.
Yes.
It's a little bit more competitive there.
Overall demand is not a strong as it was, just given the economy, the political situation, and so forth.
And so we are focused as <UNK> said in the long-term, on preserving and enhancing our share and our stature there.
One interesting fact about the FIES and it's FIES for those following along with the Portuguese acronym for the student loan system there, is ---+ for those who have been following we had an investor day last fall and Carlos Filgueiras, who we call Degas, he is the President of DeVry Brazil.
He said that he expected that while the government was going to cut the number of FIES contracts in half, and people had heard that and got a little bit concerned.
At the same time the government was going to prioritize those toward high-quality institutions and we've got strong academic outcomes and I mentioned some of those.
And on the Northeast where we are strong and in healthcare and engineering, where we are strong.
And as a result, we expected to double our share of contracts and double the share of half the number of contracts resulting in a neutral impact on the number of FIES contracts and that's just what we saw.
So I'm feeling really good about the team that we have in DeVry Brazil.
They really have their finger on the pulse and doing what needs to be done to enhance educational opportunities down there in Brazil.
Thank you
| 2016_ATGE |
2016 | ZEUS | ZEUS
#Thank you, Kim.
Good morning, and thank you all for joining us to discuss Olympic Steel's 2016 second quarter and first half results.
On the call with me this morning are President and Chief Operating Officer, <UNK> <UNK>, Chief Financial Officer, <UNK> <UNK>, President of our Chicago Tube and Iron business, <UNK> <UNK>, and President of our Specialty Metals business, Andrew Greiff.
Let me start by thanking each of our employees for all their efforts, their generosity, particularly as it relates to our Company-wide Make a Wish program, and for their continued commitment to improvement for the benefit of Olympic Steel and its shareholders, as we achieved record high market share for Olympic Steel.
And all three of our reporting segments contributed strong operating income during the second quarter and first half of 2016.
Post- the 2008-2009 recession, we, Olympic, strategically invested early in the recovery in facilities, equipment, and new products, all designed for growth in volume and margin.
Today, we are strategically adding people to our commercial enterprise leading to, we believe, ongoing market share growth.
We see it in all of our new facilities, especially in Stainless and Aluminum, in the addition of tubing via Chicago Tube and Iron, and in Carbon Steels, as well.
With our $300 million capital expenditure program concluded, we are focusing on operational improvements, debt reduction, and inventory and receivable management, which we believe at 5.2 inventory turns and 37 days outstanding in our receivables are the best in class.
As the marketplace improves, and we believe that it will, we are poised to take full advantage via our strong balance sheet and commitment to excellence to propel earnings growth in the future.
With that, I will turn the call over to <UNK> for our second quarter financial review.
Thank you, <UNK>, and good morning, everyone.
According to the MSCI Metals activity report, year-over-year industry shipments declined again in the second quarter, resulting in 2016 service center shipments declining by almost 7% compared with the first half of last year.
Our total Company shipments were off less than 2% in the first half as we continue to gain market share this year.
As <UNK> indicated, our market share is now higher than at any time in the Company's history.
Demand in some of our end markets, such as food service and auto, is healthy, while demand from other sectors, such as mining, agriculture, and related heavy equipment manufacturing, remains challenged.
While our overall volume was down less than 2% and market prices have risen in the first half of 2016, average sale prices are still 18% lower on a year-over-year basis, resulting in the net sales declines in the current year periods versus last year.
Second quarter shipments in our Carbon Flat product segment increased 2% sequentially from the first quarter to 272,000 tons.
This was 2% below shipments in the second quarter of last year due to less tolling tonnage, as our direct sales tonnage increased slightly over last year.
Revenue in our Carbon Flat product segment likewise improved 7% sequentially from the first quarter to $173 million.
However, net sales were down 17% from $209 million last year as our average selling price for Carbon Flat products declined more than 15% from last year.
Sales volumes in our other two segments grew both sequentially from the first quarter and compared with last year's second quarter.
Sales in our Specialty Metals segment increased 13% to 22,000 tons, up from 19,000 tons last year.
This was also 10% sequentially higher than the first quarter volume of 20,000 tons.
Tonnage is less meaningful in our Pipe and Tube product segment, though we don't report specific tonnage figures.
However, pipe and tube shipping activity was also higher than both the first quarter and the comparable quarter last year.
Since our acquisition of Chicago Tube and Iron five years ago, our Pipe and Tube segment has performed exceptionally well.
Successful sales efforts led to the volume improvements and record high market share in both of these respective product categories.
However, like the Carbon side of the business, the volume increases were more than offset by lower average selling prices versus last year.
This resulted in lower year-over-year revenue for these two segments, as well.
Specialty Metals net sales declined 6% from last year's second quarter and by 9% in the first half.
Sales of Pipe and Tube product were off 4% in the quarter and down 14% year-to-date.
Gross margin improved in all three of our reporting segments, which led to a consolidated gross margin expanding 600 basis points to 24.8% compared with 18.8% in 2015 second quarter.
Successfully accelerating our inventory turnover rate, rising market prices, and a higher proportion of Pipe and Tube products versus last year all boosted our consolidated gross margin.
Also, as part of our ongoing profit improvement initiatives, we improved yields and reduced the percentage of scrap produced by our Flat Product segment, which further enhanced margins.
As a reminder, about 20% of our consolidated inventory, all in the Pipe and Tube segment, is valued under the LIFO method.
There were no LIFO impacts in either the second quarter or the first half of this year, as we expect rising inventory costs in the second half to offset the inventory declines of the first half of 2016.
In last year's first half, we recorded $650,000 of LIFO income.
Excluding the noncash intangible impairment charge from last year's results, our operating expenses were essentially flat in the second quarter, and year-to-date expenses declined by $3.8 million, or 3% compared with last year.
Higher gross margin combined with our focused control on expenses resulted in operating income increasing to $8.3 million in the second quarter compared to $53,000 last year before the impairment.
First half 2016 operating income more than doubled to $8.4 million, up from $3.4 million in last year's first half, again before the impairment charge.
Interest expense declined 13% to $1.3 million in the quarter versus $1.5 million in last year's second quarter.
The first half interest expense declined 16% to $2.6 million from $3 million last year.
The interest savings were due to lower average debt balances in 2016.
Pretax income of more than $7 million in the second quarter was higher than any quarter since the first quarter of 2013.
Our 2016 effective tax rate is higher than normal due to a $700,000 state income tax valuation reserve that we booked in the second quarter, resulting in an effective rate closer to 50% for the quarter [in] the first half of this year.
Our base income tax rate is still in the 38% to 40% range before the valuation reserve.
In the second quarter, net income was $3.6 million, or $0.32 per diluted share, and that compares to last year's net loss of $22.3 million, or $1.99 per share.
For the first half, we reported net income of $2.8 million, or $0.25 per diluted share, and that's up from a net loss of $21.2 million last year, or $1.89 per share.
The impairment charge negatively impacted last year's results by $1.91 per share.
Our balance sheet remains very strong.
Accounts receivable increased $21 million from year-end, primarily the result of higher shipments versus the fourth quarter.
The quality of our receivables remains excellent.
Day sales outstanding averaged less than 37 days in the second quarter compared with 39 days in the second quarter of last year.
Inventory was higher in the second quarter at $211 million at June 30.
This represents an increase of $4 million from the $207 million in inventory held at the end of December.
Improving inventory turnover has been a focus and a contributor to our strong gross margins and profitability in 2016.
Inventory turns, which we measure in tons, reached 5.2 turns in the first half of 2016.
That's up from 4.2 turns in last year's first half.
Total debt was reduced by $4 million since the beginning of the year, and totaled $144 million at the end of the second quarter.
More importantly, in the past 2.5 years, we've reduced our total debt by over 50% from a high of approximately $300 million in 2013 when we were in the midst of our strategic expansion program.
We had $105 million of availability on our low-cost asset-based lending agreement at the end of the second quarter, and our effective borrowing rate in the first half of the year was 2.4%.
In the first half, our capital expenditures were $3.6 million, down from $4.2 million last year, and those expenditures were primarily associated with equipment and facility spending.
As <UNK> stated earlier, we have concluded our $300 million capital investment program, with the facilities and equipment now in place to drive market share and earnings growth in an improving marketplace.
At the end of June, our shareholders equity was $257 million, or $23.48 per share.
And our tangible book value per share was $21.27.
In closing, we plan to file our Form 10-Q later today, and that will provide additional details on our operating results for the quarter.
I would now like to turn the call over to <UNK> for his operating (inaudible).
Thank you, <UNK>.
And echoing both <UNK> and <UNK>'s comments, our improved 2016 performance can be traced back to our strategy emerging from the 2008 and 2009 recession.
At that time, we began a mission to diversify our product portfolio, to enhance our processing capabilities, and to expand our geographic reach.
Investments have been made in people, facilities, and equipment, and today we are much less dependent on the carbon steel market, although we're proud of our growth in the direct carbon steel sales, as <UNK> noted earlier.
In the first half of the year, carbon product comprised 63% of consolidated sales, with Pipe and Tubular Products accounting for 19% of consolidated sales, and Specialty Metals making up the remaining 18%.
Just five or six years ago, carbon flat products essentially represented the entirety of our net sales.
As <UNK> indicated, post-recession, we strategically invested in six new locations.
All of these new facilities are now appropriately staffed, inventoried, and making positive contributions to consolidated profit.
We are cross-selling tubular products with flat carbon and specialty metals products, and customers are responding positively.
These initiatives, combined with strong execution, have led to the record market share Mike and <UNK> just highlighted.
Now, should demand strengthen, we expect additional operating leverage and even better profitability.
In the meantime, we will continue to be disciplined on costs, inventory turnover, which is currently exceeding five turns, as <UNK> noted, and surpassing customers' expectations to increase our industry participation.
The supply-side dynamics that have influenced the 2016 rise in steel prices remain in place.
Raw material costs are still elevated, although moderating.
Import volume has decreased, and domestic steel mills continue to exhibit production discipline.
These dynamics have helped the positive momentum in steel prices throughout the first half of the year.
And as a reminder, the Hot Roll CRU Index, after declining more than 40% last year, reached a low of $354 a ton in December.
Since that point, it has rebounded by more than 77%, rising to $629 per ton at the end of June before settling slightly lower in July.
This resulted in higher quarterly contract resets on July 1 of this year, which should contribute positively for our current quarter performance.
Now, Operator, with that, let's open the call for questions.
Yes, <UNK>, thanks for the question.
I would say, from a capital and credit perspective, obviously a return to profitability probably has given some breathing room to some of our competitors, which would have been ---+ if you go back six months, we had a great concern about what the marketplace was going to do from a credit perspective to the industry in total back in December.
But, we've seen obviously the credit markets open up on a big scale in the debt market, and we've seen sort of a return to profitability in our sectors.
So, that concern itself is probably less germane that it might have been six months ago, and I think it really is about, while we never believe that price is not fashionable, it always is, I think performance also matters.
And so, what we've seen at Olympic is obviously our commitment to the operational excellence and performance for the customer is giving us more opportunities across all segments of our business.
Hi, <UNK>, it's <UNK>.
So, the way I would tell you to think about it is it's a typical seasonal July.
I think as you look at history, this year's July follows a lot of the seasonal patterns.
So, you said it right, there's obviously a weaker shipping environment in July due to the shutdowns and some of the transitions that the end users make.
So, that's what I'd tell you.
I think we have good momentum in terms of continued average selling price increases going into the third quarter, and we'll just start the quarter with a little slower volume.
Yes, <UNK>, Dave <UNK> here.
I would tell you that I think our customers' inventories are at the appropriate levels.
I think their concern relative to the marketplace didn't just [harbor] in the first six months of this year, but has been ongoing.
And so, they've been cautious about what they bring in.
But, relative to your first question, and then a little bit of color on the second, is that it's not our intention to give up any market share, but in fact our intention to continue to gain market share, particularly with these six new Greenfield facilities that we've brought on.
And of course, with the advent of the growth of Specialty Metals and the addition of Chicago Tube and Iron, the integration of all of these facets of our business has allowed us to penetrate markets much deeper.
Wow.
Yes, obviously we are looking to add things that are accretive and margin-enhancing.
We're looking at basically smaller, as opposed to larger, transactions.
Our appetite is relative to what we think is accretive.
So, I think our debt level today is appropriate relative to where we're starting to see our earnings.
Obviously we want to continue to reduce our debt until such time that we see those opportunities for accretion.
But, one-to-one is always a good one, but at many times in our history I would tell you debt equity ---+ we've seen ourselves anywhere from two and three, but that would be kind of inappropriate in these markets.
So, we're kind of looking at one-to-one kind of ratios that we would be comfortable with.
Average pricing related to what, <UNK>.
Yes.
<UNK>, this is <UNK>.
I think that's exactly right.
When you look at our average sell price in relation to the Index, there's definitely a lag.
Certainly on the carbon flat side where we have some significant proportion of the business that ---+ we'll call it contractual, we have a lot of that business that resets pricing in arrears once a quarter.
So, one of us commented in our ---+ I think <UNK> did in his remarks that, on July 1, we did get resets on many of our contracts where the prices went up.
So, yes, you'll continue to see average selling prices in the third quarter for us move up.
The second thing is, is on the Specialty side, obviously we're seeing some continued market price strength in the third quarter.
So, we would envision that side of the business also increasing sell prices.
And then, lastly, the Pipe and Tube business, that business, just due to the nature of the lag of Pipe and Tube off of hot roll, we've historically in our business seen about a three-month lag on price changes in that business versus hot roll price changes.
So, when you throw all those things into the mixer, we would certainly expect to see prices moving up in the third quarter.
<UNK>, you want to comment at all on Specialty.
Well, I would tell you, <UNK>, that what you'll see in the second half of the year on stainless in particular is the domestic mills, as has been reported, raised base prices approximately 18%.
That will really start impacting pricing going into the second half of the year.
So, we would expect to start seeing those numbers starting to come up.
Well, I think you're referring in particular to the Chinese.
We did see a big bump, and then we saw it come off a little bit over the last month or so.
We'll probably see it come off in the second half of the year.
And so, you're correct, that will certainly impact the strength of pricing second half.
Well, I think it could, [in truth], be higher.
Again, I mean, a 3% overall return on invested capital is not that good, <UNK>.
When you have to be realistic, there's not a 20% margin industry.
Again, nobody kind of makes 10%.
So, we try and target to get closer to 5% to 7%.
Obviously we think, from a working capital standpoint, we're about best in class there.
And so, really it has a lot to do with the dynamics of buying and selling.
And clearly we believe that, with good discipline on cost structures and an improvement on some of the things we're working on, as <UNK> mentioned, like the scrap reduction scenarios, there still is a strong probability and possibility of having continued EBITDA and net income improvements over the 3%.
Go ahead, <UNK>.
Well, I was ---+ just to echo some of Mike's sentiments before <UNK> gets into a little bit of detail there, <UNK>, remember, this is almost a two-year cycle, not just a six-month cycle.
Last year, we like to say kiddingly, if this was an EKG, we'd be dead.
But, the reality of this is that the marketplace took 12 months to ---+ and dropped $240 a ton on hot roll, and up $277 in six months.
And so, we're continuing to manage the inventory.
And as Mike and <UNK> have well noted, with 5.2 turns of inventory, we put ourselves in really good position.
And additionally, we've disbursed that inventory over the six Greenfield sites that we have.
So, [with] new geography, better logistics, things along those lines, help us mitigate the ups and downs of the marketplace, along with obviously Chicago Tube and Iron's contributions and the integration there.
And Specialty Metals, which Andrew Greiff's really being modest here, has had a fabulous quarter this last quarter, with 5.6% of the service center marketplace in Stainless flat roll.
I think all those sort of things help us gain market share and moderate any particular loss, and add to that operating margin.
Yes.
And I think <UNK> said it well in his opening comments, we've spent $300 million on investments over the last six, seven years, and I think we're poised to make those higher returns that you talk about, <UNK>, certainly as demand in the marketplace comes back.
Keep in mind, we're in a shrinking market here.
We talked about shipments for service centers being down 7%.
We're obviously focused on gaining market share, and as <UNK> said, that's going to continue to be a push for us.
But, when you're in a marketplace that's shipping less, and we're fighting it out with competitors to gain market share, it's a little bit of a tougher environment to make money versus when you have demand expanding.
And we think ---+ as <UNK> said, we do believe that the market's going to improve, going forward.
So, that's the other piece of it.
Yes.
So, I got it.
Look, criminal activity is criminal activity.
Criminals don't care about the laws and don't care ---+ there are many people who actually view the laws as a personal challenge to break those laws.
So, I would imagine you'll see, as we settle through the various cases, including the 337, that there'll be some creative people that figure on ---+ whether it's [boron-induced] steel or some other kind of misnomer that somebody had figured out because they have to make a living.
So, I would just say, yes, we would expect imports ---+ when the [suits all gets built], you would see a creeping level of imports, but that's obviously going to be greatly impacted by whether China lives up to their word of steel reduction and-or whether or not the US currency remains the only kind of real valid currency in the world.
And people are trading for dollars as opposed to trading for profitability.
So, you would have to expect that imports would pick up.
That's number one.
Number two, we still see an environment where the consumer is still kind of leading the charge, and we're seeing auto remaining strong.
That looks like it can still be that way.
We're looking at sort of a rise in what we call the baby boomer migration down to the South.
And so, that just means, as more kitchens, more opportunity for gains in our Stainless side as we see whether it is assisted living places or just fast food restaurants.
We do see an explosion of sort of the demand for appliances continuing in that consumer-related field.
And obviously, I think the election ---+ there has been a big difference between our candidates in terms of their outlook for the recreation of jobs.
And so, at this point, it's kind of unknown.
One has said they're going to continue to close coal mines, and the other one says he's going to open up coal mines.
So, sitting here today, we do think that the industrial side of the world is going to remain somewhat challenged as it relates to the balance between the environment and the environmental concerns, and the [old mine] industrial industries.
But, overall, we do think that our economy is strong, and will remain strong.
And while there are black swans out there, both candidates to some degree are talking about a rebuilding of the military.
That increases demand.
So, we're fairly optimistic about the demand side overall, recognizing some will be up and some will be down.
We also think that our mills have shown some great discipline.
We think that will continue to play out, so we think supply and demand will be more [in balanced].
And yes, there'll probably be more imports over time as our trade suits get settled and people try and figure out what that all means for themselves.
Okay, <UNK>, thank you.
Operator, let me just ---+ since there are no more questions in the queue, let me just say it's a bit unusual for Olympic at this point.
We've had our earnings release before our Board meeting, which is unusual in our pattern, and therefore I don't want anybody to misread or think that, because we did not declare a dividend at this particular point, that we either are or are not going to.
But, in reality, we have not held our Board meeting yet, and so we did not declare a dividend until after our Board meeting, which is due to take place next week, and so we did not comment on that on this particular phone call.
So, on that, Operator, is there anything else that we need to go through.
Thank you.
So, once again, thank you all for joining us and your continued interest in Olympic Steel.
Have a nice day, everybody.
| 2016_ZEUS |
2016 | DVN | DVN
#<UNK>, we look at our ---+ the entire portfolio.
So when we generate incremental cash flow, we look at the entire portfolio.
And I would suspect that the entire boat would be lifted.
We like the Barnett.
We think it's got low risk opportunities.
I think we've commented, in the past couple of calls, that we really have de-risked and completely understand the vertical re-frac opportunity.
And we've got about 30 of the horizontal re-frac opportunities under our belt, and we think we've understood how to do that.
We've got a real positive relationship with our EnLink partners there, so we would consider the Barnett.
We also have some opportunities in Cana, in the drier portion or the leaner portion of that property, as well, that would be just as commercial.
Thank you, <UNK>.
Good morning.
I think that's correct.
I don't know the exact well count, but we have about 140 data points across the industry.
We actually have an ownership position in about 100 of those 140.
In fact, we have data in most of the 140.
We've operated about ---+ I think about 30, 35 operations.
But again, it's largely being confined, at this point, to the 200 and 300.
Order of magnitude, I think we probably have less than five data points in both the 100 and the 500 zones.
But that cycles back to the comment I started to make earlier, which is how many different zones that we have here in the Delaware Basin, as well as in the STACK play.
And what we're trying to do is get an idea of what the productivity is of each of these zones, what is the optimum spacing in each of these zones.
And we're being very thoughtful about our approach to this so that we are developing and ---+ fully developing the resource and the value associated with these.
Versus the alternative of just drilling very quickly in one zone, and four wells per section or some fairly broad spacing, and essentially developing ---+ sub-optimally developing the entire inventory that we have.
We're not doing that.
We are being very thoughtful, very careful, because we are sitting on truly world class resources here, in the hearts of some of the best plays, and we want to generate as much value as we can, long term, from these resources.
We are now at the top of the hour, and while we didn't get to every caller and we apologize for that, we are going to bid you a good day.
We thank you for your interest in Devon and all the good questions.
If you have any other questions, please don't hesitate to follow up with one of us in Investor Relations.
Thank you, and have a great day.
| 2016_DVN |
2017 | HES | HES
#Thanks <UNK>
I’d like to provide an operational update for 2016 and review our plans for 2017. Clearly the past year was challenging in terms of oil prices and we responded by reducing our capital spend and operating cost
Last year was also marked by strong execution on many fronts including the continued advancement of our North Malay Basin and Stampede developments and exceptional exploration results in <UNK>ana, firmly establishing a new world-class oil province
With regard to production, in 2016 we averaged 321,000 barrels of oil equivalent per day excluding Libya
In the fourth quarter, production averaged 307,000 barrels of oil equivalent per day excluding Libya, which was above our guidance of 305,000 barrels of oil equivalent per day
During the quarter, production from Libya resumed and on a net basis averaged 4,000 barrels per day in the fourth quarter
Production from Libya remains highly uncertain therefore we’ll continue to exclude it from our guidance
As <UNK> mentioned, in 2016 we achieved a reserve replacement ratio of 119% and SG&A cost of $13 per barrel of oil equivalent
Net proved reserve additions totaled 143 million barrels of oil equivalent
About half of the additions were in the Bakken, reflecting higher EURs associated with their shift to 50-stage completions and lower cost
Other areas with additions include North Malay Basin, South Arne and the Utica
In 2017, we forecast companywide production to average between 300,000 to 310,000 barrels of oil equivalent per day
Our production has been decreasing over the last several quarters as a result of reducing our capital expenditures to manage in the lower price environment
Our production will continue to decline in the first half of 2017 as a result of this reduced spend and a high level of planned maintenance at four of our offshore assets in the second quarter
We forecast production to average between 290,000 and 300,000 barrels of oil equivalent per day in the first quarter and between 270,000 and 280,000 barrels per day in the second quarter
Production is in forecast to increase in the third quarter with the start-up of North Malay Basin to between 305,000 and 315,000 barrels of oil equivalent per day
Production will continue to grow in the fourth quarter as Bakken production increases as a result of the rig ramp up and the first new Valhall well comes online
Fourth quarter production is forecast to average between 330,000 to 340,000 barrels of oil equivalent per day, resulting in production growth in excess of 10% or some 40,000 barrels per day from the first to the fourth quarter of 2017. Turning to operations, the Bakken continues to deliver outstanding results
We continue to improve our drilling and completion performance with fourth quarter D&C cost dropping 10% versus the year ago quarter to $4.6 million
We now have enough production history to conclude that we will get an average 13% uplift in EUR per well from our 50-stage completions compared to our previous estimate of 7%
As a result, we’ve increased our estimate of ultimate recovery from our Bakken acreage to 1.7 billion barrels of oil equivalent from our previous estimate of 1.6 billion barrels of oil equivalent
In the fourth quarter, initial production rates for wells that reached IP30 during the quarter averaged a record 1,091barrels of oil per day versus 843 barrels of oil per day in the third quarter
This result reflects all wells during the quarter being 50-stage completions and in the core of the core of our acreage
Going forward we will shift our guidance to IP90 rates which we feel are more reflective of a well’s actual performance
In 2017, we forecast IP90s to average between 700 and 750 barrels of oil per day compared to 620 barrels of oil per day in 2016. Net production from the Bakken averaged 105,000 barrels of oil equivalent per day in 2016, which was at the top end of our beginning of the year guidance range of 95,000 to 105,000 barrels of oil equivalent per day
In the fourth quarter, net production averaged 95,000 barrels of oil equivalent per day, which was below guidance due to extreme winter weather which resulted in road closures and an unusually high number of shutting facilities and wells
The net negative impact of weather in the fourth quarter on the Bakken was about 7000 barrels of oil per day
With the recovery in oil prices to the mid-50s, we plan to increase our rig count from the two rigs we currently have operating to six rigs by the end of this year and expect our rig count to average approximately 3.5 for the year
In 2017, we plan to drill approximately 80 wells and bring approximately 75 new wells online over the year
We will continue to focus our drilling in the core of our Bakken acreage where our sliding sleeve completions, site spacing and higher stage counts deliver optimal value
Of the 75 wells we plan to bring on line this year, approximately 50 wells will be our new standard 50-stage design and we expect the D&C cost for these wells to be in line with the 4.8 million that we averaged in 2016. We will also be conducting two new completion design pilots this year in our drive to continually optimize the value of our industry-leading acreage position
The first pilot will be increasing the stage count to 60 from the standard 50-stage design
We plan to test this in 10 wells to ensure the reliability of the system and our forecasting well costs in these 10 wells to range between $5 million and $5.5 million
The second pilot will involve higher proppant loading
The 60-stage sliding sleeve may be approaching the technical limit and mechanical design
Therefore, we now want to test the technical limit on proppant loading in a sliding sleeve well
We plan to increase proppant loading in 15, 50-stage wells and forecast these wells to cost in the range of $5.5 million to $6 million dollars
For both of these trials, reservoir stimulation indicates a potential IP180 uplift of 10% to 15%
If successful, our future development plans and production outlook for the Bakken will be modified accordingly in 2018. The extreme winter weather conditions have persisted throughout the month of January and as a result we forecast production in the first quarter of 2017 to average between 90,000 and 95,000 barrels of oil equivalent per day
For the full-year of 2017, we forecast our Bakken production to average between 95,000 and 105,000 barrels of oil equivalent per day
With the building rig count, we expect our Bakken production to average between 105,000 and 110,000 barrels of oil equivalent per day during the fourth quarter of 2017, which would represent a growth rate of approximately 15% from the first quarter to the fourth quarter of 2017. Moving to the Utica, in 2016 net production averaged 29,000 barrels of oil equivalent per day compared to 24,000 barrels of oil equivalent per day in 2015. In the fourth quarter, net production averaged 26,000 barrels of oil equivalent per day
As a result of continued wide basin differentials, we intend to maintain our drilling pause in the Utica
In 2017, production is forecast to average between 15,000 and 20,000 barrels of oil equivalent per day
However, given the high quality of our Utica acreage position, our high average net revenue interest of 95%, as well as the first quarter well performance that we delivered in 2016, the asset will be an excellent resource to develop as natural gas and NGL price realizations improve
Now turning to the offshore, in the deepwater Gulf of Mexico, net production averaged 61,000 barrels of oil equivalent per day in both the fourth quarter and for the full-year 2016. We forecast Gulf of Mexico production to average approximately 65,000 barrels of oil equivalent per day in 2017 and to reach approximately 75,000 barrels of oil equivalent per day in the fourth quarter of 2017. This production growth reflects the addition of a new well and the restart of an existing well following a work over at the Tubular Bells field in the first quarter
A restart of a well at the Conger field also following a work over and a planned new well at the Penn State field, which will come online in the second half of this year
In Norway, at the Aker BP-operated Valhall field in which <UNK> has 64% interest, production averaged 28,000 barrels of oil equivalent per day in 2016 and 32,000 barrels of oil equivalent per day in the fourth quarter
The transition from BP to Aker BP-operatorship was completed in the fourth quarter and we're looking forward to working together with the new operator to maximize the value of the Valhall asset
Drilling from existing platform rig is planned to resume in March
In 2017, net production is expected to average between 25,000 and 30,000 barrels of oil equivalent per day
At the South Arne field in Denmark, which <UNK> operates with a 61.5% interest, net production averaged 13,000 barrels of oil equivalent per day in 2016 and 14,000 barrels of oil equivalent per day in the fourth quarter
The field is expected to average approximately 12,000 barrels of oil equivalent per day in 2017. In the fourth quarter, the Danish government awarded an extension of the South Arne license through to 2047. This secures the long-term future of this asset and provides for future phases of development
In Equatorial Guinea where <UNK> is operator with an 85% interest, net production averaged 32,000 barrels of oil equivalent per day in 2016, reflecting the drilling pause in place since mid-2015. Net production in 2017 is forecast to average approximately 25,000 barrels of oil equivalent per day
Interpretation of the latest 40 survey has been completed and has identified multiple new targets
However, the production outlook for 2017 reflects continuation of the drilling pause over the year
At the Malaysia-Thailand joint development area in the Gulf of Thailand in which <UNK> has a 50% interest, net production averaged 35,000 barrels of oil equivalent per day in the fourth quarter
Net production averaged 34,000 barrels of oil equivalent per day in 2016 and is expected to average approximately 35,000 barrels of oil equivalent per day in 2017. No further drilling activity will be required to meet contracted volumes for the year as a result of the booster compression project that was completed in the third quarter of 2016. Moving now to our development projects, at North Malay Basin in the Gulf of Thailand in which <UNK> holds a 50% interest and is operator, three remote wellhead platforms were hooked up and commissioned in the fourth quarter
The drilling campaign is on schedule with two wells being drilled in the fourth quarter bringing the total number of wells drilled so far to 13. All wells have either met or exceeded pre-drill expectations
The last heavy lift for the central processing platform topsides is completed and sail away is scheduled for the first quarter of 2017. Net production through the early production system averaged approximately 26 million cubic feet per day over 2016. Once full field development is completed in the third quarter of this year, we forecast net production to increase to approximately 165 million cubic feet per day and to remain at this rate for many years, becoming a significant cash generator for the company
At the Stampede development in the Gulf of Mexico in which <UNK> as a 25% working interest and is operator, we successfully completed installation of subsea equipment at both drill centers and completed all topsides heavy lift on to the hall
Looking forward, in 2017 we will install the TLP and topsides on location, complete the subsea installation, and continue our drilling program
First oil remains on target for 2018. Turning to <UNK>ana, exploration and appraisal drilling activity continues at the 6.6 million acres Stabroek block in which <UNK> holds a 30% interest
As announced earlier this month, the Payara-1 well located approximately 10 miles northwest of Liza discovery, was drilled by the operator Esso Exploration and Production <UNK>ana Limited to a depth of 18,080 feet and encountered more than 95 feet of high quality multi-Darcy permeability, oil bearing sandstone reservoirs
Two sidetracks were subsequently drilled to take core and further evaluate the reservoir
Both sidetracks found high quality oil bearing sands
The original well and the two sidetracks were drilled, logged and cored in 56 days
A production test is now planned to further evaluate the reservoir
Appraisal drilling is planned later this year to help define the full resource potential of the Payara discovery
After completing the well test on Payara-1, the rig will move to drill the Snoek exploration prospect, which is located approximately six miles south of the Liza-1 discovery well
The next well in queue is Liza-4 appraisal well, which will pass the eastern part at Liza field
This will be followed by a Payara-2 appraisal well
Earlier this month, we announced that the Liza-3 appraisal well, which reached target depth in the fourth quarter, identified an additional high quality deeper reservoir directly below the Liza field, which is estimated to contain recoverable reserves between 100 million and 150 million barrels of oil equivalent
This additional resource is expected to be developed in conjunction with the Liza discovery
The operator plans to continue to appraise the Liza and Payara discoveries are in parallel continuing to evaluate the wider resource potential of the Stabroek block for additional exploration drilling and seismic analysis over 2017. In closing, in 2016 we once again demonstrated strong execution performance and took proactive steps to manage through the weak oil price environment by significantly reducing our capital span and operating costs while continuing to progress our future growth options
I will now turn the call over to <UNK> <UNK>
<UNK>, it is just too early to say on Tubular Bells and that’s because we are basically increasing the chokes and not only that the well that was worked over and they came on in December 31, but also the new well they came on late December as well, so we are just in the early stages of ramping Tubular Bells back up I want to get it stable, we are also getting wider injection stables, I really want to see kind of the well results from that before I be specific on that, so potentially maybe we could provide an update once we get stable
We aren’t going to give that and again <UNK>, I am not trying to be evasive, I just really want to see these wells ramp up and see what they are at
So if oil prices come in higher you know what we are doing with the rig ramp in Bakken, we have always said that first call in cash will be the Bakken
So we will continue to look and accelerate how we will bring the rigs in and so that’s what we would be thinking about at this point
So the first call would go to the Bakken
That’s under discussion with the operator <UNK>, obviously after we take out FID, we want third drilling development wells at some point
Well, let me talk about the completions in the Bakken first, as we said in our opening remark, we are doing a couple of pilots this year
And so in the core of the core which is where we have been focused, where we have that very tight, nine in eight spacing we demonstrated that the best way to optimize value in that core of the core is by using Sliding Sleeve Technology and then steadily increasing the stage counts, which effectively kind of increases the pro-well proppant loading that gives you a nice uniform frac all the way down the well bore and as you know we have worked with our supplier to continue to engineer more and more sliding sleeves in the 10,000 foot lateral
Now we believe that we could be approaching a technical limit on the number of sleeves somewhere between 60 and 70. That’s just given the tight tolerance as between all the ball sizes
So given that we may be approaching that maximum stage count with a sliding sleeve system, we now want to push the technical limits on the per stage proppant loading
So given our tight nine in eight spacing which is only about 500 feet between the wells, we are going to pilot those higher loading to find out where the optimum point might be to further increase value while not causing significant well to well interference
So when we know what is with the proppant loading that we have, we haven’t seen any significant well to well interference so that says you can probably get more proppant in the well and still be okay
So we are going to test the limits of that this year and see exactly how much that is
And so certainly on the sliding sleeve system, in terms of your question on where we are on technology, I think again as we approach 70 stages and got a lot number I think we are start to reach the technical limit there and next things will be proppant loading for us in the core of the core
But again that sliding sleeve system because it is so inexpensive and so efficient to install it is the highest optimum completion technique in the core of the core
As you move outside the core which we will being testing that an in the later years 2018, 2019, data seems to indicate that maybe slickwater completions or even higher proppant loadings with plug and perf maybe the answer out there and that’s purely because there is a lot natural fracturing when you get out of core of the cores
So you are going to need more sand and more energy in the reservoir to connect all those fracture to that
So that’s kind of where I see it going
Yeah, so, <UNK>, the early production system, the reason the production is down slightly this year is because of well
So, we lost the well and that early production system is going to go, remember that, that goes away
So, it doesn't make any sense to re-drill a well for a very short lifespan
So, I have all the confidence in the world that the 165 is a good number
We've got a great well stock
We've drilled 13 wells already
All of those wells have come in at or better than pre-drill expectations
So, the wells are healthy
We've got a great wealth stock
We've got a large number of wells in North Malay Basin or will have, so I have a lot of confidence in the 165 number
I can give you more color on that as we get closer to actually bringing it on, <UNK>
If you ask me that in mid-year and I can give you some more color
No, we'll give you guidance on that later in the year as we get closer
So, we still have - remember what we're trying to do this year, we're going to float out the TLP and topsides, get those landed on location
We got to get all the subsea umbilicals and flow lines done and then we'll also continue drilling
So, 2018 is a big year of installation
So, we'll give you more color as those activities progress throughout the year
Sure
So, again the key is, as we've been talking about, we've been spending this capital on these development projects, North Malay Basin and Stampede and we're getting obviously closer to getting them both online and generating free cash
So, if you are looking from like a general guidance of where we are this year, if you were excluding basically North Malay Basin and Stampede’s capital, our operating cash flow would cover CapEx and dividends in 2017 kind of at the current strip prices that we have
So, it's - and then going forward, it's like <UNK> just said, I mean obviously prices are going to play an important role in this, but we're trying to balance our investment in growth and this generation in free cash flow and we've always said 2018 will be the big transition year for us
Now we're generating free cash flow from this North Malay Basin in Stampede and we can use that cash flow now to begin to generate into our development projects, say, in Liza and other growth projects like in Bakken
So, we will balance that continually going forward
Yeah, I think in the fourth quarter, you're right
All the wells that we drilled are 50-stage and that was truly in the core of the core
So, the best wells that we've drilled in the Bakken that 1091 barrels of oil, kind of IP30, those were the wells we were drilling in the fourth quarter
We will stay in the core in 2017 that will be the bulk of where our drilling is
Certainly, on average because of the 50-stage fracs, the IP90s and the IP30 rates will be higher in 2017 than they were in 2016. So, the whole inventory is not going to be the 1091 kind of IP30s
That was truly some extraordinary wells
So, it'll still be - the average is going to be higher this year than it was last year
So, good upside there
<UNK>, make sure I understand your question
Yeah, thanks for the question
I think <UNK> and I have met with their senior management twice over the course of the year as recently as a month ago and we’re encouraged by their approach and we really look forward to working together with them to maximize value from the Valhall asset
<UNK> did a lot with BP and I’ll credit BP with their progress that they’ve made in the last couple of years using many of the techniques that we develop on South Arne, applying those to Valhall both lean manufacturing and some shaft drilling and well [indiscernible] techniques that we developed in the North Sea
Acre, BP is carrying on with that and we’re excited that they can even drive more improvement beyond what BP was able to achieve with our help in the last couple of years
Now, these are all upper cretaceous, so every one of these wells has been upper cretaceous
So all of the well test, everything that we’re doing is all confined to the upper cretaceous
Even the Liza deep is upper cretaceous accumulation
Do you mind, I just want to clarify something for the group that I gave because that was - you were specifically asking before oil
I had some liquids numbers in there, so again from an oil and liquid standpoint there will be a significant increase as you go into fourth quarter
Oil again will have a significant increase, but oil will be about 190,000 barrels a day plus in the fourth quarter and then liquids will be above that
Thank you
| 2017_HES |
2016 | SPOK | SPOK
#Good morning.
Thank you for joining us for our first quarter 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 factor section relating to our operations and the business environment in which we compete contained in our 2015 Form 10-K, our first 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 statement from past or present filings and conference calls.
With that, I'll turn the call over to <UNK>.
We're pleased to speak with you today regarding our first quarter operating results and what we believe was a solid quarter for Spok and a good start for 2016.
During the quarter, we made further progress toward our goal of transitioning Spok to a growth model and long-term provider of critical communications solutions.
Our performance in the first quarter was consistent with our expectations.
We were very pleased as we saw continued reduction in the decline of our paging units and wireless revenue.
Software sales were in line with the prior-year quarter but down sequentially from the typically more robust fourth quarter.
Software maintenance bookings and related revenue, which is recurring in nature, continued to grow.
We are not yet at the point where our software revenue growth overcomes our paging revenue erosion on a year-over-year basis but we believe we are on plan and tracking with our strategy.
For the first quarter, we saw strong performance in a number of key operating measures including operating expense management, cash flow and subscriber retention.
We achieved these results as we increased our investment in our business by enhancing and upgrading our product development team and tools as well as our sales infrastructure and management.
We believe these investments will yield significant future benefits in the form of our improved integrated communications platform, Spok Care Connect, as well as higher future bookings levels supported by an enhanced and upgraded sales team.
Overall, we continue to operate profitably, enhance our product offerings and further strengthen our balance sheet with strong cash levels and no debt.
Our ability to generate healthy cash flow has allowed us to execute against our capital allocation strategy, make key strategic investments and return nearly 80% of our operating cash flow to our stockholders during the quarter in the form of dividends and share repurchases.
<UNK> and <UNK> will provide details on our financial performance and operating activity shortly, but before that I want to review some other key results for the first quarter.
First, bookings of $15.1 million in the first quarter included $9.5 million of maintenance renewals, a record high.
Software backlog was $36.8 million at March 31.
Though we are not satisfied with our operations bookings levels in the first quarter and continue to focus on generating activity through the remainder of the year, we are encouraged as bookings include sales to both new and current customers, with existing customers adding products and applications to expand our portfolio of communications solutions.
Customer demand remains strong as for upgrades to call center solutions, healthcare applications to increase patient safety and improved nursing workflows.
Also, our pipeline of qualified sales leads continues to grow as a result of excellent work by our sales and marketing team to broaden awareness of the benefits of our software solutions.
Overall, we continue to see growing demand for our software solutions for critical smartphone communications, secure texting, emergency management and clinical alerting.
Though domestic markets performed well in the first quarter, we did see sluggishness in our international markets of both EMEA and APAC.
However, we continue to expand our international presence during the quarter, as well as widen our focus beyond healthcare in such market segments as public safety, business, hospitality, education and government services.
We are already seeing results from our sales and marketing efforts.
During the quarter, we partnered with organizations across industries and geographies such as medical solutions and services in Saudi Arabia, the Polk County Sheriff's office in Florida and VCU Health in Virginia to offer critical communications support.
Combined with our strong team, solid financial platform and industry-leading products and services, Spok is positioned to build on this momentum and stimulate sustainable growth.
Second, wireless subscriber and revenue trends continue to improve.
Our annual rate of paging unit erosion for the quarter improved to a record low 6.2%, while the quarterly rate improved to 1.7%, a 400 basis point improvement from the year-earlier period.
In addition, our annual and quarterly rates of wireless revenue erosion improved.
Also, contributing to slower wireless decline was a more stable ARPU, or average revenue per unit.
In the first quarter, ARPU averaged $7.77, virtually unchanged from the prior quarter.
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.
Third, consolidated operating expense in the first quarter, excluding depreciation, amortization and accretion, was down nearly $2 million from the year-earlier quarter and improved approximately 3% from the fourth quarter.
<UNK> will provide more detail on this in a few minutes but I'm pleased to report these results and the benefits we are seeing from our continued expense management initiatives.
Fourth, consolidated EBITDA, or earnings before interest, taxes, depreciation and amortization, was $9.1 million or 20.1% of revenue in the first quarter, compared to $9.9 million or 20.9% of revenue in the fourth quarter.
Margin levels will fluctuate over time, reflecting our level of investment and aggressive hiring program in the areas of product development and sales.
However, longer term, we are focused on operating profitably once we have stabilized our revenue stream and pivot to a sustainable growth model.
And finally, again, we generated sufficient free cash flow in the first quarter 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 $2.6 million or $0.125 per share.
We also repurchased nearly 292,000 shares of common stock under our stock buy-back program.
Over the past decade, we've now returned nearly $0.5 billion dollars to our stockholders in cash dividends and repurchased approximately $80 million of our common stock.
I'll comment further on our capital allocation strategy shortly.
All in all, the Company posted solid operating results in the first quarter, and we believe this provides a strong base to build on for 2016.
We achieved the majority of our key operating goals, generated significant free cash flow, expanded our services and geographic reach while returning capital to stockholders.
We also made further progress toward our goal of transforming Spok into a company with a long-term growth trajectory.
I'll make some additional comments on our business outlook in a few minutes, but first <UNK> <UNK>, our Chief Financial Officer, will review the financial highlights of the quarter.
After that, <UNK> <UNK>, our President, will comment further on our quarterly sales and marketing activities.
<UNK>.
Before I discuss the financial highlights of the first quarter, I would again encourage you to review our first quarter Form 10-Q, which we expect to file later today, as it contains far more information about our business operations and financial performance than we will cover on this call.
As <UNK> noted, we were pleased with our overall operating performance in the first quarter.
Continued operating expense management and software maintenance renewal rates that exceeded 99%, coupled with the lower levels of churn in both paging units and wireless revenue, enabled us to maintain positive cash flows and a strong balance sheet.
We also continued to make steady progress toward our long-term business goals.
Overall, we believe we are off to a solid start in 2016.
This morning, I will review four key areas that influenced our first-quarter financial performance.
They include, number one, factors related to first-quarter revenue; number two, selected items that influenced first-quarter expenses; number three, a brief review of the balance sheet, including deferred tax assets; and, finally, number four, an update on our financial guidance for 2016.
As usual, if you have specific questions about these items or any of our quarterly financial results, I will be glad to address them during the Q&A portion of this morning's call.
With respect to revenue for the first quarter, consolidated revenue totaled $45.4 million.
Of the total, software revenue contributed $17.2 million, while wireless revenue comprised $28.2 million.
Our software revenue represents 37.9% of our total revenue in the first quarter 2016 compared to 36.2% of total revenue in the first quarter 2015, reflecting the continued transition of our revenue base.
First quarter software revenue reflected an increase of nearly 13% in maintenance revenue to $9.1 million compared to the first quarter of 2015.
Software operations revenue totaled $8.1 million in the first quarter.
As I have noted on previous calls, software operations revenue is now largely recognized on a ratable basis.
The increase in maintenance revenue reflects our continuing maintenance renewal rates in excess of 99% from our installed software solution base and the increase in new-name accounts with attached maintenance contracts during 2015.
Wireless revenue was $28.2 million for the first quarter, down only 1.9% from the fourth quarter of 2015.
The strong performance of our sales team, solid retention and stable ARPU contributed to our wireless revenue result.
Please note the additional schedule that we have included in our news release detailing the components of our software and wireless revenue.
Turning to operating expenses, we reported consolidated operating expenses, which excludes depreciation, amortization and accretion, of $36.3 million in the first quarter compared to $38.1 million in the year-earlier quarter and $37.4 million in the fourth quarter of 2015.
Cost of revenue expense in the first quarter of 2016 totaled $8 million or 17.7% of revenue.
This is down from $8.8 million or 18.3% of revenue in the prior-year period.
Cost of revenue expense reflects the costs associated with the implementation of our solutions, including third-party installation and third-party hardware and software to meet our customer commitments.
As noted in previous investor calls, we typically increase the use of more expensive third-party implementation services and third-party hardware and software in the fourth quarter to meet customer requirements.
While we continued to use third-party implementation services and third-party hardware and software in the first quarter, we continued to manage these expenses, and these efforts are favorably impacting our margins.
All other operating expenses in the first quarter totaled $28.3 million and were approximately $1.1 million less than the first quarter of 2015.
This decrease primarily reflects lower payroll and related expenses during the quarter resulting from lower headcount.
With regard to headcount, full-time equivalent employees, or FTEs, decreased to 595 at the end of the first quarter, compared to 600 FTEs at December 31, 2015, as we continued to adjust employee levels to meet the changing requirements of our business.
Looking ahead, we expect recurring payroll and related expenses will reflect the level of our investment to grow software revenues and bookings and to support the Company's goals for wireless revenues and infrastructure.
Finally, with regards to the income statement, please note that our tax rate was up this quarter versus last year.
The first quarter 2016 income tax expense was $2.7 million, an increase of $300,000 from the $2.4 million of income tax expense for the same period in 2015.
The increase in tax expense and the effective tax rate was caused primarily by two factors: a decrease in the state effective tax rate from December 31, 2015, which results in a lower valuation of the DTAs, and foreign losses which were not recognized in computing the overall effective tax rate.
Since we are uncertain whether foreign losses will provide a benefit at year-end, we are required to exclude them from computing the effective tax rate at March 31, 2016.
Our capital expenses in the first quarter were approximately $1.4 million and were incurred primarily for the purchase of pagers and infrastructure to support our wireless customers.
We do not expect any significant change to the level of our capital expense requirements for the balance of 2016, which reflect the guidance range that we had provided last quarter.
Looking at our deferred tax assets or DTAs, we had approximately $127.5 million in DTAs at March 31, 2016, before recognition of our valuation allowance of $45.8 million.
This resulted in an estimated recoverable amount of deferred income tax assets of $81.7 million.
These DTAs allow us to shelter virtually all of our regular federal taxable income, although we are required to pay a minimal amount in federal alternative minimum tax.
Our DTAs primarily consist of net operating losses that will expire in the years 2021 through 2029.
Based on the availability of these DTAs, we do not expect to pay a significant amount in federal income taxes for the foreseeable future.
Turning to the balance sheet and other financial items, the Company generated $9.5 million in cash from operating activities during the first quarter of 2016, giving us the ability to execute against our capital allocation strategies, continue to make strategic investments in our business and add to our cash balances.
We ended the quarter with a cash balance of $111.9 million.
We expect to use a portion of that cash in connection with quarterly cash dividends as well as potential share repurchases in 2016.
We also ended the quarter with no debt outstanding and continue to operate as a debt-free company.
<UNK> will comment on our capital allocation strategy in a few moments.
Finally, with respect to our financial guidance for 2016, based on our performance in the first quarter, we are maintaining the guidance we previously provided, which projects consolidated total revenue to range from $174 million to $192 million; consolidated operation expenses, excluding depreciation, amortization and accretion, of $153 million to $159 million; and capital expenditures to range from $6 million to $8 million.
Finally, I would remind you that our projections are based on current trends and that those trends are always subject to change.
With that, I'll turn the call over to <UNK> <UNK>, who will update you on our first quarter sales and marketing activities.
<UNK>.
Our sales and marketing teams delivered softer bookings of $15.1 million, down 14.8% from Q1 in 2015.
However, an all-time record number of qualified marketing leads and strong (inaudible) activity reflect the forward momentum we expect to create as the market recognizes the value of our enterprise critical communications platform.
Maintenance renewal rates remain strong at more than 99%, and clinical alerting was one of our best performing solutions with sales up 28.5% over Q1 2015.
This quarter, we welcomed more than 35 new customers to the Spok family, primarily in the healthcare and [government] sectors.
However, our largest six-figure deal of the quarter came from an existing hospitality customer in the Southeast.
This long-time customer trusts our solutions to support the comfort and safety of their patrons.
This deal is an expansion project as well as the addition of a new hotel.
Healthcare remains an important part of our growth, comprising 77% of overall bookings in the US for Q1.
While much of that business [depends on] customers who are expanding their expanding their enterprise communications and adding more of our services and solutions, nearly a fifth comes from new hospitals and health systems that have never worked with us before.
These organizations join a prestigious list of customers that includes all of US News and World Reports 2015-2016 Best Hospitals Honor Roll.
These 15 adult hospitals and 12 children's hospitals rely on our solutions to help them provide the best care.
Among our new customers is a mid-sized regional hospital in the Northwest.
This facility is replacing their existing contact center solutions because staff needs a console that supports robust search capabilities, locations and staff contact information.
This hospital selected Spok because of our contact center solutions healthcare-centric features and integration options, our excellent track record for customer support and our enterprise capabilities that make us a single source for critical hospital communications.
Our customers also recognize the value of their partnership with us, as well as our ability to offer comprehensive solutions and services that differentiate us from competitors.
A good illustration of this is a large health system in the Southeast that recently engaged our consulting services team.
They were already a customer, using many components of our enterprise critical communications suite.
We are now working with them to apply industry best practices throughout their campus that further improve their workflows and enhance the overall effectiveness of our solutions.
This consulting engagement was a six-figure deal that demonstrates customer trust in our expertise as well as commitment to the vision of a unified enterprise solution.
As part of our strategic direction for the long term, our professional services group has been working hard to offer customers an even better implementation experience.
This group's education materials, such as Spok Mobile adoption and best practices guides, are helping our customers to develop their mobility strategies and drive adoption of our secure messaging app by the Mobile Care team, including physicians.
The professional services group has rolled out a new methodology that includes unified site information and comprehensive checklists to enhance enterprise transitions at customer locations.
Healthcare comprises the largest percentage of our business, but public safety is an additional growth opportunity with a dedicated sales team.
Public safety customers around the world rely on our solutions to support emergency call handling at their 911 dispatch centers and our solutions dependability has been verified with ongoing Joint Interoperability Test Command certification.
Spok's reputation for that dependability was a contributing factor in the success of one of our largest facilities of the quarter.
An international military base selected our emergency dispatch and caller location solutions to support the safety and security of their personnel.
Looking at customers and prospects outside of the US, international bookings in Q1 were below our expectations, but our experience indicates that this will not be a trend.
We see a trend of healthcare organizations in Europe, the Middle East and Africa placing greater emphasis on communications solutions and applications, as well as more movement towards adopting US-based practices.
This was our fourth year participating in Arab Health, the largest healthcare event in the Middle East.
Conversations in our booth revolved around unified communications across the entire hospital, not just individual departments, showing that our enterprise-wide solutions approach also resonates internationally.
With our expanding relationships with key healthcare service providers and partners in the region, we see EMEA as a strong market that will gain momentum in the coming years with good growth opportunities.
In the Asia Pacific region, there continues to be a lot of interest in secure messaging and clinical messaging capabilities, especially our Critical Test Results Management solution, or CTRM.
Media attention on one of our customers in Australia using CTRM has created new interest in the unique workflows that Spok and health hospitals achieve.
This interest was also evident from the record registrations for our clinical center design Architecting for Productivity webinar with partner Cisco Australia.
We are confident this market is ready for our Mobile Solutions and our integrated platform to unify critical communications, and we remain focused on strengthening the Spok brand internationally.
Before turning things back over to <UNK>, I want to provide an update on our marketing activities.
Our marketing team is responsible for expanding our global content development, lead generation and event planning efforts.
Ongoing investment and activities in these areas, which include digital demand generation campaigns, webinars, educational eBriefs, videos and website improvements, help us drive leads and fill the sales pipeline.
In Q1, the contribution these efforts made to the sales pipeline increased 27% over the first quarter in 2015.
Marketing is also responsible for planning and coordinating Spok's presence at a large number of tradeshows throughout the year.
The most notable show the first quarter was HIMSS held in Las Vegas in March.
This event is one of the largest healthcare conferences in the US and a great opportunity for us to demonstrate our capabilities.
Qualified leads identified at the exhibition booth during the show more than doubled from HIMSS 2015, and the caliber of conversations we had made it clear our brand recognition is growing and our enterprise communications approach is resonating.
Lastly, our social reach has shown significant growth.
Quarter-over-quarter our following has increased 66%.
Engagement with our audience is up 80% and unique views of our blog more than tripled.
Looking forward to the rest of 2016, we expect strong market demand for integrated critical communications, especially in healthcare, and we are making investments in our research and development to further enhance our unified communications and collaboration solutions.
With that, I'll pass it over the <UNK>.
<UNK>.
Before we open up the call for your questions, I'd like to comment briefly on a couple of items.
First, I want update you on our current capital allocation strategy.
And second, I want to review our key goals and business outlook for 2016.
With respect to our current capital allocation strategy, our overall goal is to achieve sustainable business growth while maximizing long-term stockholder value.
Towards that end, the allocation of capital will continue to be a primary area of focus for us.
Our multifaceted capital allocation strategy includes dividends and share repurchases, as well as key strategic investments that include augmenting our operating platform and infrastructure as well as potential acquisitions that provide additional revenue streams.
As most of you know, we have spent substantial time over the past few years evaluating many acquisition opportunities to enhance our portfolio of software solutions.
As such, we have reserved capital for one or more such acquisitions.
Today, we've not yet identified the candidate that meets our acquisition criteria primarily due to what we see as unacceptable valuation expectations.
Nonetheless, we remain optimistic and will continue to review candidates that will be a good strategic fit.
As we've discussed in the past, we'll remain disciplined in our approach, ensuring that any acquisition demonstrates both synergistic and strategic value for Spok as well as being accretive.
With regard to other uses of capital, we expect to continue paying our quarterly dividend of $0.125 per share, or $0.50 annually, for the foreseeable future based on our current projections for operating cash flow.
In addition, we may buy back additional shares of our common stock from time to time under our share repurchase authorizations.
As I noted earlier, we repurchased approximately 292,000 shares of common stock in the first quarter for approximately $4.9 million.
As a result, a little more than $5 million remains authorized for purchase under the buy-back plan, which extends through year-end.
We plan to return a total of $21 million in capital to shareholders in 2016, although the exact manner of distribution is yet to be determined along with the actual distribution dates.
I'd also note that the Board may consider various other options for deploying capital from time to time.
As part of our capital allocation strategy that I outlined previously, we have several options available to us to create shareholder value in addition to returning cash.
One such option we have discussed and that we are already executing on is to increase our product strategy and development spend and growth opportunities where we believe we can generate attractive returns for stockholders.
As usual, we will continue to maintain ample liquidity to support our working capital needs.
Finally, with regard to our key goals and business outlook, we believe our first quarter activities and investments have positioned us well for another successful year in 2016.
Our business goals for the year are simple and straightforward.
They include growing our software revenue and bookings profitably across all geographies, retaining our wireless subscribers and revenue by slowing erosion, investing in our people, products and infrastructure and evaluating acquisition opportunities that are accretive to our business, can accelerate our revenue growth and use our valuable deferred tax assets.
We're going to do all of this with the ultimate goal of creating long-term shareholder value.
To accomplish this goal, (inaudible) a portion of our capital to accelerating the development, growth and expansion of our critical communications solutions and services.
This includes investing in new products and services, expanding our sales reach both within and beyond existing market segments, extending our sales in the new geographic regions and promoting our brand in key global markets.
At the same time, we'll continue to leverage the value of our paging and related wireless infrastructure to successfully meet the needs of our customer base as well as support the Company's ongoing cash flow and capital formation requirements.
Beyond that, as I noted earlier, we will continue to explore external growth opportunities through the acquisition of companies or products that will enhance our portfolio solutions as well as potentially generate new avenues for sustainable growth.
Spok continues to build an industry-leading reputation.
We remain committed to our core values of putting the customer first, creating solutions that matter, innovation and accountability.
Combined with our strong team, solid financial platform and industry-leading products and services, Spok is well positioned for the future.
At this point, I'll ask the Operator to open the call for your questions and we've asked you to limit your initial questions to one and a follow-up.
And again, after that, we'll take additional questions as time allows.
Operator.
Okay.
I know it's a real busy earnings week.
There's a lot of companies putting their numbers out today.
And I know folks and investors have a lot to focus on.
We don't seem to have any questions right now, but we're always available to take questions and you can always call Al Galgano, our Investor Relations professional, and he can get back to you as well.
So thank you very much for joining us this morning.
We look forward to speaking with you again after we release our second-quarter results in July.
Everyone have a great day.
| 2016_SPOK |
2017 | EBIX | EBIX
#Thank you.
Welcome, everyone, to Ebix, Incorporated's 2017 First Quarter Earnings Conference Call.
Joining me to discuss the quarter is Ebix Chairman, President and CEO, <UNK>obin <UNK>aina; and Ebix CFO, <UNK> <UNK>.
Following our remarks, we will open up the call for your questions.
Now let me quickly cover the safe harbor.
Some of the statements that we make today are forward-looking, including among others, statements regarding Ebix's future investments, our long-term growth and innovation, the expected performance of our businesses and our use of cash.
These statements involve a number of risks and uncertainties that might cause actual results to differ materially from those projected in the forward-looking statement.
Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions of these forward-looking statements in light of new information or future events.
Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements made today is contained in our SEC filings, which list a more detailed description of the risk factors that may affect our results.
Our press release announcing the Q1 2017 results was issued earlier this morning.
The audio of this investor call is also being webcast live on the web at www.ebix.com/webcast.
You can look at Ebix's financials beyond what has been provided in the release on our website, www.ebix.com.
The audio and text transcript for this call will be available also on the Investor homepage of the Ebix website after 4 p.
m.
Eastern Time today.
Let's start by discussing the results announced today.
We are excited by the results that we announced this morning.
<UNK>evenue in Q1 2017 increased 11% from a year ago to $79.1 million.
On a constant currency basis, Ebix Q1 2017 revenue increased 10% year-over-year to $78.5 million as compared to $71.1 million in Q1 of 2016.
In Q1 2017, our exchange revenue continued to be the largest channel for Ebix, accounting for 67% of the company's revenues.
The year-over-year revenues increased as a result of revenue growth from P&C, life, underwriting, C<UNK>M, <UNK>CS and health e-commerce services, in addition to revenue growth generated from the company's 2016 acquisitions of Wdev and Hope, the net effect of consolidating Ebix Health JV and the new e-governance contracts with a number of large clients in India.
In Q4 of 2016, we got a seasonal revenue increase of around $3 million as compared to Q1 of 2017 in the medical continuing education business and the health administration exchange business.
The increase in the continuing education area in Q4 2016 was primarily associated with doctors trying to get beneficial tax treatment by purchasing the continuing education courses while the administration exchange increase was associated with policy renewals that happened at year-end.
Considering the seasonality in Q4 of 2016, we believe that Q1 2017 top line performance is strong and in line with our expectations.
Underwriting exchange revenues grew 19%.
Health e-commerce exchange revenues grew 18% year-over-year in Q1 of 2017, while P&C exchange revenues grew 18% and life exchange revenues grew 3% in the same year-over-year period.
<UNK>CS revenues were up 30% because of new contracts in India and the acquisition of Wdev business in Brazil in 2016.
Our reinsurance revenues were down 10% in spite of higher year-over-year revenues in British pounds because of large exchange drop associated with the Brexit vote.
The company's A.
D.
A.
M.
Health content revenues were down approximately 19% year-over-year, affected by increased price competition in the sector.
Ebix's presence in life and annuity sector is presently annualized at approximately $118 million based on the Q1 2017 run rate.
I will now turn the call over to <UNK>.
Thank you, <UNK>, and thank you to all on the call for your continued interest and support of Ebix.
At the outset, let me say that we are very pleased with the company's first quarter 2017 financial results and operating performance and look forward to the rest of the year.
Q1 2017 diluted earnings per share increased 24% to $0.83 per share as compared to $0.67 in the first quarter of 2016.
For purposes of the Q1 2017 EPS calculation, there was an average of 32 million diluted shares outstanding during the quarter compared to 33.3 million in Q1 of '16 and 32.5 million in Q4 of '16.
As of today, the company expects the diluted share count for the Q2 2017 to be approximately 31.7 million shares.
Q1 2017 operating margin decreased to 32.5% as compared to 35% in Q1 of '16.
Operating income for Q1 of '17 rose 4% to $25.7 million as compared to $24.8 million in Q1 of '16.
We are pleased by the fact that the company continues to deliver attractive top line growth, cash flows and operating profit with a 33% operating margin during Q1 of '17 for the entire business and approximately 37% operating margin for the core exchange business.
Cash provided by our operating activities rose to $15.7 million in Q1 of '17 compared to $10.5 million in Q1 of '16.
Q1 2017 cash flows reflected cumulative cash payment of $8.95 million for bank interest and income tax, principally on account of certain nonrecurring advance minimum alternative tax payments in India for $4.9 million.
In Q1 of '17, we spent a total of $52.3 million on share buybacks, dividends, tax payments and on building constructions.
Specifically during the quarter, we used $40.5 million to repurchase 704,000 shares of Ebix common stock, paid $6.7 million of taxes, spent $2.7 million on building out our facilities in India and Johns Creek, Georgia and paid dividends of $2.4 million while drawing just $40 million from our bank credit facilities.
After these significant uses of cash, the company still ended the quarter with cash flow from operating activities of $15.7 million and $123.5 million in cash, cash equivalents and short-term investments, up by $52.1 million as compared to March of '16.
We are very pleased with the company's continued ability to generate cash and fund its growth and investor-friendly initiatives.
With these additional share repurchases, the company has now repurchased approximately 7.26 million shares of its common stock for an aggregate amount $215.2 million at an average price of $29.65 since August 1, 2014, when the Ebix board announced its decision to repurchase our own stock consistently over the next few years.
We expect to continue the share buyback utilizing our operating cash flows from the business.
After spending a cumulative $52.3 million on share buybacks, dividends, tax payments and CapEx in Q1 of '17, as of March 31, Ebix still had access to approximately $304.5 million of readily available cash resources from its financing arrangement with its syndicated bank credit facility, combined with cash on hand to adequately support continued organic and acquisitive growth and to expand the existing operations of the company as needed to meet the demand for our products and services.
Furthermore, our balance sheet is healthy and our company's financial position remains solid with a current ratio of 3.14, a working capital short-term liquidity position of $148 million, a debt leverage ratio of 2.6 and a debt-to-equity ratio of only 0.74 as of March 31, 2017.
We will soon be announcing the record date for the Q2 2017 dividend payable to our shareholders.
In Q1 of 2017, we paid a quarterly cash dividend of $0.075 per common share to our shareholders.
Finally, Ebix's Form 10-Q will be filed tomorrow afternoon, Wednesday, May 10, 2017.
I will now pass the call back to <UNK>obin.
Thanks, <UNK>.
Good morning.
I last spoke to all of you 2 months back on February 28 while announcing our 2016 annual results.
Our business is reasonably consistent and thus, I had a fair idea of the first quarter results on that date and thus my talk in the investor call that reflected my views about the direction of the first quarter and analysis of the year 2017 and '16.
I'll thus try not to be repetitive in my talk and focus my talk on a brief analysis of the quarter and primarily on anything new that might be on the horizon for Ebix.
With respect to the results announced today, they are in line with our expectations and where we expected to be in terms of the top line.
From my perspective, the top line performance is solid.
Sequentially, we had to deal with the seasonal increase of $3 million in Q4 of 2016, which incidentally were not predictable for us in Q4 the way when we get into Q1, we get to see how much of the business that we got from continuing education was seasonal versus continual.
So there's a little bit of a hindsight, thought process that goes into it.
For the most part, we came up with our increases in revenue from a number of segments, as discussed during <UNK>'s talk.
We agreed on material deals with a few key accounts that should continue to give us consistent revenues for the next few years.
We also made good strides in the area of straight-through processing by agreeing on new exchange deals with key clients like HSBC Bank, Ameritas, DFS, Merrill Lynch, amongst others.
We also agreed on a deal with one of the super brokers, Arthur J.
Gallagher, in Australia to implement our SaaS-based, end-to-end broker system, Ebix Evolution, in Australia.
I'm especially excited about the A.
J.
Gallagher implementation as it will serve as a catalyst for the implementation of Ebix Evolution to our other super broker clients spread across more than 50 countries, a key source ---+ which could be a key source of future revenue for us, both in terms of new license fees and consulting dollars.
Also, it further increases our dominance in the Australian market.
I was recently in London to oversee the progress of the PPL London marketplace exchange for reinsurance.
I'm pleased to tell you that the exchange is working wonderfully with Ebix design, functionality, responsiveness, attention to detail and technology expertise, winning us positive reviews from all the key constituents of the London insurance market.
I'm very excited about this as each of the pillars of the PPL exchange are a who's who of the London market, with each one being a potential direct client of Ebix for a variety of services other than reinsurance exchanges.
Ebix continues to review each of our business lines in terms of margin performance.
From this disciplined review, we are able to focus our resources on our best performing opportunities as well as possibly reduce our focus on areas where margins are under pressure.
Ebix continues to deploy increased manpower on strategic opportunities, such as our implementation of the PPL reinsurance exchange in London and underwriting exchanges in the U.S. These steps have not only contributed new consistent long-term revenue streams, but have also created tremendous goodwill for Ebix and a customer sales force that helps us sell purely on the strength of our reference base.
The growing customer awareness of Ebix's domain expertise and performance has opened up many new business opportunities, deals that we would not have known about had our customers not made the strong positive recommendations.
I talked about an area of the momentum and focus in the annual investor call.
Today, <UNK> spoke about the Q1 quarterly performance already.
So I will not talk more about it now until the Q2 investor call.
We're focused on growing our revenues while keeping our operating margins intact.
The margins from our core exchange business were strong at 37% while our overall margins were at 33%.
I'm pleased with that trend.
We've been bearing the brunt of the U.S. dollar strengthening against other international currencies for many years now.
For example, the U.S. dollar strengthening with respect to the British pound has taken our annual revenue from the PPL deal in London down by approximately $5 million from the time the deal was inked.
As and when exchange rates move our way, we're going to see handsome increases in revenue just on account of exchange rate changes.
During the annual investor call, I talked at length about acquisition opportunities and our approach to them.
So I will not say much for now except say that hopefully soon, we will announce an acquisition that we believe can be a growth ---+ can be a great growth driver for Ebix in coming quarters and years.
More on that very soon, hopefully.
In recent times, some of our decisions to walk away from prospective acquisitions that did not pass our due diligence or valuation test have proven to be right in the public eye.
We are fully aware that our acquisition history that looks fantastic today could look absolutely terrible if we are proven to be wrong on one material acquisition.
For every one acquisition that you get to know about once we announce it, we might have walked away from a few that you may have never heard about.
<UNK> talked about our access to cash and our desire to use that cash for both growth and investor-friendly activities.
In the first quarter of 2017, we decided to take advantage of the low stock price and accordingly bought 704,000 shares for $40.5 million.
We like to be opportunistic in repurchasing our stock.
And this decision is amply reflected in our purchase of approximately 7.26 million shares of our common stock at an average price of $29.65 for an aggregate amount of $215.2 million since 1st August 2014, when we announced the Ebix board decision to repurchase our own stock consistently over the next few years.
We intend to continue to be opportunistic in repurchasing our stock over the coming quarters and years.
We are presently focused on trying to achieve our aspirational goals defined earlier in previous investor calls.
Let's see where we end up in the first quarter of 2018 in terms of conformance to those aspirational goals.
Thank you.
With that, I'll hand over the call back to the operator.
So Jeff, they have started to give revenue in Q1.
Again, as you know, we can't recognize revenue until we have ---+ until we are at the right stage of implementation.
So we have to follow the GAAP rules on recognition.
So we have ---+ had taken a small impact of those deals.
At the same time, we believe that most of the size of these deals are large enough and we should see a continued impact going into the next few quarters.
As our implementation gains pace, we will see increased revenue coming from these deals.
I'll give you ---+ you see, we are under NDA specifically with these ---+ specifically with one of the larger, one client.
So I couldn't give you specifics of the name of the client and detail.
But at the same time, I'll tell you that in our book, any deal that has the potential of giving us revenue between $10 million to $30 million a year is a large deal.
And so I'll leave it at that.
Well, it will be ---+ you see, part of our effort there, frankly, that we would like to be very consistent.
So we're not looking for lump.
That's the first thing.
Meaning, from an aspirational side also, we're not looking for lump.
But sometimes, we ---+ obviously, we are governed by the GAAP rules and we have to follow the GAAP rules, whatever the technical accounting rules are.
We're going to see, as we implement some of this, we're going to see fair consistency.
You will see, there will be some lumps, which are unavoidable by GAAP rules.
But you're going to see, as we implement the larger part of these deals, you're going to see bigger lumps in specific quarters in terms of sudden pop in revenue.
Yes, that's the new deals signed.
That's basically what it is in terms of cost of goods.
But coming back to the seasonality.
Look, it's difficult.
We know it's seasonal.
We know the area which are seasonal.
And I actually talked about it in previous quarters also.
I talked about continuing education specifically because that's the main area where we had the biggest drop from Q4 to Q1.
And it's very hard to predict because what happened in that area is that you're dealing with doctors who are trying to claim tax deductibility.
Now we don't know from a perspective of, is that ---+ how much of what you delivered in Q4 is a part versus how much of it is a consistent.
The problem we have is, obviously, this is a relatively new business for us, continuing education.
And we're continuing to learn as we are implementing, as we are getting into this business.
And we are ---+ obviously, we have ---+ I think we've done well in this business.
And we're continuing to ---+ as we have a little history behind us, we will be able to predict this a little bit better than we were able to predict because it's just ---+ remember that our entire business model in continuing education is a direct marketing model.
We are selling purely through direct marketing in the area of continuing education.
So it's impossible to predict what part of it is seasonal until you have enough history behind you, which we unfortunately haven't had.
Overall, Jeff, I am quite pleased with the overall ---+ the trend of revenue because remember, I think I've been here 18 years and I know that every quarter, you're as good as what you produce in a quarter and history doesn't count.
And having said that, when I look at ---+ there are 2 aspects to it.
One, I think as a company, we want to be fundamentally strong.
We don't run a company on a day-to-day basis.
We try to make sure that what we are delivering can have continual value, can continue with it and so on.
Having said that, the key part of our thinking has always been that when you look at revenue stream, we try to point revenue streams that are consistent, that can stay, that can be prolonged.
For every one revenue deal that you ---+ that we ---+ when we present our revenue stream, what you don't hear about is stuff that we just ignore completely.
Meaning, this is something ---+ Ebix is such a disciplined company, and I feel very proud of being the CEO of such a disciplined country.
Where when you look at our margins, most companies will be very happy that they have 33% operating margins.
Here I am sitting here as a CEO conducting an exercise, and I'm saying this openly in all transparency, conducting an exercise, looking at each and every division and trying to see, maybe we need to give up on revenue sources in some division.
Even now, simply because we are ---+ we feel the single-biggest strength that Ebix had is the benchmark we have set up in operating margin, what we are able to do.
So we're going to be continually at it, trying to look at business areas where we're not ---+ where we might be generating revenue, but we might not be generating ---+ we might be diluting our margins.
And it imposes a lot of pressure on this company in terms of how we operate.
But having said that, I'm actually very pleased that a lot of the revenue that we started getting into ---+ if you look at where we were last year and how we have kept ramping up the revenue, a lot of the revenue that we got into are brand-new opportunities.
We have made them fairly consistent.
All those new opportunities have started becoming very consistent.
It's a ---+ and I feel very good about it that we are able to deal with most of the seasonality, if there is any, in our business.
But more than that, that we are not just signing deal with parts associated with them, we're trying to make those deals recurring enough or trying to focus on deals that are recurring enough.
So from that perspective, I actually feel very good about where Ebix is today in terms of its momentum, in terms of its thought process, in terms of its discipline and so on.
Sorry, please go ahead.
Yes.
So I feel actually very good about the margin profile of the e-governance deals.
We have continued to ramp up that margin profile.
Where our margins are not as good as where it should be today is the business of consulting, strategic consulting.
What has happened in the recent time also is that with Mr.
Trump taking over, it has obviously created a bit of a flurry of activity in the consulting arena.
That's going to hopefully ---+ meaning, we'll have to be prepared for it.
And we have to accordingly deal with it and see how we can improve our margins.
So we are taking various steps internally to make sure that our margins are not as low as where they were.
Those consulting margins have hurt us as of today.
So we feel that there is ways to improve that.
The second aspect of it is acquisition.
Now one request that I'm going to make to each one of you is that as Ebix gets into acquisitions, we are now ---+ Ebix has a goal of ---+ we're trying to become a much larger company and we know what our goals are.
We definitely want our operating margins to be 30% or above.
But when you're trying to do that, you're going to make some decisions in terms of, we might get into an acquisition in a particular phase where we might decide, listen, we're going to take big expenses or expenses in one quarter or onetime and try to clean the balance sheet, clean the ongoing P&L and so on.
So basically, our goal is rather simple.
Our simpler goal is we absolutely want to be 30% or above.
That's the basic goal.
Now can we be at 33% or can we be at 35%.
I will not comment right now.
All I will tell you is that we just produced a 33% quarter and we are absolutely in the midst of an exercise trying to improve our efficiency, trying to look at each and every part of our business as to what we can do better and how we can improve our margin and so on.
Our margins also frankly were hurt by some of the A.
D.
A.
M.
drop.
Because remember, what that drop has basically been, all come out of our margins.
And that we had to make up for that.
revenue out, the drop that we had, which translated into a big ---+ which basically went into our ---+ went to take our income down.
If, let's say, that was taken out, our margin profile is actually going to be a lot higher than it had been in the past.
So we're also dealing with some of these ---+ more ---+ things that we weren't predicting basically, frankly, for want of a better word, and we're ---+ I'm being transparent about it.
That's a learning process.
We're trying to improve in those areas.
So good news is, it's typically happened in one area, most of the impact.
And then we were obviously hit by simple things like margin business.
To give you a simple example, the London deal.
When we signed the deal, we had a guaranteed revenue of $17 million plus.
Today, it's translating into $12.3 million or something like that, which means we had a $5 million drop and it clearly will impact our margins to a pretty good level.
So we have to deal with those kind of things.
Good news is Ebix made up for it.
And I think we're going to continue to be focused.
At the same time, we are trying to blend our desire to be a high-growth company with our desire to be a high-margin company.
Now as you know, that's not easy.
At the same time, we are committed.
We are confident we can do it.
And we're trying to ---+ we're not trying to follow another company that we can just follow and copy what they did because nobody else has really done that in our industry.
So we're having to create our own path and charter our own path.
So we are continuing to do it.
I feel good about with respect to the aspirational goal or the margin level or the revenue number that we want to get to, I feel good about it.
I think to ---+ I would rather have investors in their own mechanism, in their own math take the worst-case scenario and say, look, maybe the margin profile I should count on is 30% or 31% or something like that.
And I'm comfortable with that as a CEO because my job in here is not to hype the company.
My job is to let the investor themselves draw the range of what they think the company is worth and also draw ---+ take some scenarios in it.
And from my perspective, if we do a lot better than that, we'll make all the investors a lot more happier.
So having said that, I think the company is today very focused on, we believe we have the ability to be the largest insurance software player in the world.
We're already the largest insurance software exchange in the world.
We believe we can be the largest.
And we can be a lot larger than where we are.
So we don't want to just operate in the manner we have operated in the past.
There is a ---+ and there's nothing bad about what we did in the past.
It's not that I'm ---+ meaning, we might have made a series of mistakes or positive things in the past, and we're going to learn from them.
At the same time, I think our thinking is we need to be a company that can blend this high growth with high-margin structure and that will take a little bit of innovativeness, a little bit of chartering our own path.
When I was trying to build this company and I remember early days when we were doing $40 million of revenue and I started talking about 35% margins, and people said, well, that's good for you to say that because you're running a $40 million company.
You're not running a $100 million company.
Here we are running at a run rate of $320 million and we're still at those margin levels.
So ---+ but one thing which I learned over these 18 years is, you don't run a company for ---+ from a quarter-to-quarter.
An investor who's short term and is looking for, great, I'm going to ---+ they did amazingly well this quarter or they didn't do amazingly well that quarter.
To me, that's not the best investor for Ebix.
The best investor for Ebix is somebody who looks at the 18-year history, the consistency of it, where is this company headed.
Is this company really ---+ are they giving growth to their stock or does this company really have the ability to get there.
Do they have the product.
Do they have the strength to get there.
And I think I would rather have investors create a SWOT analysis of their own, the negative and the positive and take analysis of, hey, the operating margin can be 30% possibly or it can be 35%.
Let me draw a range of it if it's still worth an investment.
And from my perspective, that's a good investor for Ebix, and that's what I'm here to do.
My job is to deliver and my team's job here is to deliver continued value, but we want to do it by not thinking on a daily basis or trying to be ---+ trying to just be sensitive to making people happy on a daily basis.
What we want to do is we want to deliver really solid long-term value and hopefully, in the process, create one of the best stocks in the insurance marketplace or in the financial marketplace.
So I think that's what, Jeff, we our focused on.
And I feel good about where we are.
I feel fantastic about our product.
I have been here 18 years.
And after 18 years, I would tell you, one statement that I can stand on a rooftop and make is, every product of Ebix is cutting edge, leading, works, loved by our clients.
That's not easy for people to say who are running 270 different kind of products.
And that's what we do.
And so I feel today, we as a company, we have set up the basics right.
Our margin structure is right.
We're headed in the right direction.
We have a fantastic management team in place who I give them absolute credit for sticking to the company.
And we have the new bunch of energy now coming in the company.
We have all these technical guys who are now ---+ who have stayed here for a decade, who in my view can be ---+ are well ready in terms of a technical management, the people that we have.
I feel there are a number of folks who could be the future CEO of Ebix.
And to me, that's the basic value of Ebix today that we have creating people who have been here with the energy, who understand the basic ethos of Ebix, who understand the basic adherence to customer value, the basic adherence to investor value, consistent delivery of value and have that technology excellence associated with them.
To me, when you have those kind of basics right, you are setting up the foundation of a very strong company in the future.
And that's what until the day I'm here, I'm going to be absolutely focused on making this company a leader in where we ---+ where it is and where it is headed.
So Jeff, I know I gave you a very long answer, but I wanted to do this simply because I wanted to make sure you understand that the passion behind what we have built now at Ebix and where Ebix is headed and what it's trying to think of.
Thank you, <UNK>.
So good morning, first of all.
So that's a great question.
So let me answer that.
When you look at the Australian P&C market, there are close to 900 brokers in that market.
Today, if you look at around 864 and somewhere around 864 are using Ebix for their back-end systems, which means we already have majority of the market.
But ---+ and I'll talk through that.
We did not have Arthur J.
Gallagher who, as you know, is a very large broker and has a very large presence in Australia itself, but is a very large broker across the world.
What we were trying to do, a lot of these brokers in Australia and across 50 countries, that means 50-plus countries that we are in 6 continents, actually, in 19 different languages, a lot of these brokers are using what we call a system called eGlobal.
eGlobal is basically our system that's considered a Cadillac by the super brokers.
It's a system which is multilingual.
It is multicurrency.
It's a complete back-end system for a broker.
It does everything from underwriting, to general ledger, to policy admin, to claims administration, to C<UNK>M, to sales, it does virtually everything.
It's got its own word processor built in.
It's got report writers.
It interfaces with all kinds of stuff, interfaces with exchanges and stuff like that.
So we sold eGlobal to them over the years.
And good or bad news is, the good news is that they all love it.
The bad news is they all of it.
And I'd say that's the bad news because we would like to move them to the next generation of product.
And the next generation of product is, we, over the last many years, spent a lot of effort and built a product called Ebix Evolution.
Ebix Evolution is basically, we don't call it a broker back-end system.
It's an e-commerce framework for a broker.
It does everything, exchanges, back-end system, but more importantly, it's the latest.
It's a thin technology.
It's a thin client technology.
You can, for example, a large super broker could host it in Eastern Europe in one country and then have 12 of their other subsidiary run off that system.
They save on all the licenses because one of their big cost is all these Oracle licenses and Microsoft licenses and so on.
So we've been building this up, and we have worked with a lot of the larger brokers to build this system up.
And what has started to happen is that as we deploy this, now the difficult task we obviously have is they're all our clients.
We want to move them into Evolution.
Now the good news for us is, if we move them, we can actually multiply our revenue threefold on the broker system business.
And I mean it's threefold simply because that's how the Ebix Evolution model is.
The Ebix Evolution model, we take care of everything from hosting, to back-end systems, to virtually being the server prompt kind of a provider.
So we ---+ so what we've done is we've been in front of all the super brokers.
Our first step was to try and show them Evolution and continue to work with them to see what they want.
What will basically happen is as we start working with these larger brokers, all these larger brokers will need customization.
So we think we can do a substantial amount of consulting dollars and then we can generate a lot of license.
Now when I say license, it's subscription revenue.
It's continual monthly revenue.
And it's pretty substantial and it basically has very high operating margins for us with those products.
The good news is, we've created the entire Ebix Evolution technology out of India.
So the entire design knowledge, the entire intellectual property knowledge, all the coding, the testing, the support will come out of India, which means our margins are going to be phenomenal out of this.
So what we were doing ---+ when you drop, when you deploy a product like that, you're always looking for, you need one large super broker.
But everybody is wanting.
They don't just say, listen, I'm going to just take ---+ everybody will take it on Day 1.
That's not how unfortunately the insurance market work.
There always have to be a guinea pig kind of a player.
And this is true incidentally of every product that we have done.
So what happens is you have to deploy it across this one ---+ especially if there is a broker who has size.
Because when you have size, people understand the complication of a large broker.
And if they ---+ if that ---+ if they deploy it, that becomes a catalyst to other brokers saying, great, I'm now ready.
And it's also a competitive aspect that you want to be ready for.
So Gallagher deal was a very important deal for us because they decided to go with Ebix Evolution.
Now they were a brand-new client.
They were not our client in the past.
What that does for us is now we're going to start organizing all these user group conferences and start pushing people and creating end-of-life on some of our products.
We obviously know that there is a ---+ we can operate ---+ as a company, we could have also used the pressure tactic, which is we can just declare end-of-life on our previous products.
And it so happens that most of our clients are completely dependent on this.
We have tried not to misuse our strength in any area.
We're seen as a very sincere company so we're going to try and be very collaborative with our clients in working through that.
So we feel this to us we're excited because Evolution, Ebix Evolution is basically going to replace eGlobal across the world in 50-plus countries, which means when you look at all the large brokers, whether it is an Aon, whether it is a Marsh, whether it's a Willis or whether it is a Lockton, all of them are using our products in multiple countries.
Meaning, somebody is using it in 45 countries, somebody in 18 countries and so on.
And we feel that by itself is a big opportunity for us.
And this ---+ what it has done is, it has proven that the product is real and now our job is to make sure that we implement it properly and we can create a strong reference out of Gallagher.
So that's going to be our next step as we go into it from that perspective.
Thank you, <UNK>.
So <UNK>, PPL exchange is ultimately, we got to look at, what is PPL, first of all.
PPL is a body formed by all the market players.
Virtually everybody in the market, all the brokers, all the underwriters, all the reinsurers, Lloyd's, all the associations, the underwriter association or the broker association, everybody teamed up and is in this body called PPL.
And this body basically, they fund it, all of them.
And ultimately, majority of the funding right now is coming from Lloyd's, but ultimately, all of them have to fund it.
And this is part of what is called project T-O-M, project TOM.
Project TOM is an initiative in London by ---+ led by Lloyd's.
It's a GBP 250 million initiative to modernize the London market.
It so happens that this exchange is at the center of that TOM, project TOM initiative.
If this works, what it does is that it, first of all, meaning, if you look at ---+ I don't want to say anything positive or negative on project TOM.
It's a great initiative, which will basically, which is ---+ it is having a series of hiccups as normal.
And ---+ but it is also ---+ Lloyd's is very strongly backing it.
There's a lot of effort and hardware behind it.
Having said that, when you put an exchange at the middle of it and if that exchange works the way it was supposed to and if that exchange can deliver cutting edge technology, can drive paper out of the process, it's a big win for Lloyd's.
It's a big win for the London marketplace for project TOM.
To that extent, this exchange is a very watched and a very difficult kind of an exchange.
What we have been able to do is not only have we kept delivering business lines.
So there is a ---+ we have kept delivering ---+ we are on schedule with all the business lines that we were to deliver.
There is another large business line coming, I think, in June that's going to be delivered.
And after that, there's one more.
And we would have basically improvements they want it to be, it would basically take care of most of the brokers in the market once we have deployed the additional 2 lines.
Having said that, the ---+ when you consider the overall impact of it from a London market perspective, they want to make sure that this exchange cannot only interface with all the other entities, but it is technologically far ahead in terms of what it delivers, how it disintermediates paper and so on.
From our perspective, the goals that they had set up in terms of where we needed to be in 2018 June.
I'll give you a very simple statistic why are people so appreciative of what Ebix has done.
On what we were supposed to do as a ---+ on the technology side in June of or July of 2018, we fast forwarded it and decided that we're going to deliver it in June or July of 2017, 1 year ahead.
That doesn't happen normally in the insurance market that a vendor goes in and says, no, no, no, I'm going to fast forward this and I'll fast forward this.
And so what has happened is, it's won us a lot of happy faces.
And when you say happy faces, who is running PPL.
Who is on the board of PPL.
Who are the people we're going to work with.
We're going to work with the largest of the brokers, the who's who of the market, the largest insurance companies, Lloyd's, of course, the largest associations.
So if we can do a good job on this and show that Ebix is way ahead of the curve, what we have done is we've then shown that Ebix is ready for the next big challenge.
What could be the next big challenge.
There is a lot that has to happen as part of project TOM.
And we would like to be a key player in project TOM, right.
We would also like to be a key player to all these large players, whether it is ABC broker because I don't want to just spell out names there.
If there's a large ABC super broker and there are many of them there, when they have their requirements and each one of them are ---+ have big IT budget, we would like to be a player there.
Because of what we have done, it has probably won us a lot of ---+ it's won us a lot of respect and transparency and people believe in us.
So I'd like to say that, that was what I was trying to reference.
So we're doing extremely well.
I just came out, spent a week in London, looking at what we did.
And I'm extremely pleased with where we are with respect to the London marketplace.
I'm actually headed back in the 2nd week of June again to London.
Because we feel it's not a question of this $12 million or $18 million or whatever.
There's a much larger play involved here.
Because you're talking about modernizing the London market, and there's a lot that has to happen.
But Ebix is a sincere player.
We don't just go in and say, listen, we want everything right now because we are so good at it.
We just like to pace our step.
We like people to believe in us.
We like people to understand how Ebix delivers.
That Ebix is not going to ---+ is not just another aggressive sales machine.
Ebix delivers.
And so I think that's our basic.
<UNK>ight now, we're in absolutely systematically, we have put in the best of talent across the world.
To tell you the value of how much we value this reinsurance exchange, I have folks from the U.S. involved.
I have folks from Australia involved.
Of course, there's a large team of people from India that is involved because we truly value what can happen out of this, not only in terms of project TOM, which is by itself very large.
But then, it is ---+ the entire world of reinsurance market is watching it, right.
Meaning, if London succeeds at this and London can show what it does, it's going to give London almost on unfair edge with respect to all the remaining reinsurance hubs.
And that by itself is a huge opportunity for us because we negotiate in a good agreement with PPL.
To their credit, they were fair with us.
They allowed us to ---+ we basically have the ability to make reinsurance exchanges and deploy them in various other places as long as we don't just replicate what we just did in PPL exactly.
I think in India, we ---+ I see opportunities in 3 areas.
So <UNK>, one is clearly e-governance.
I think there's a reason the Indian currency is doing so well.
There's stability in the government.
And there's a lot of effort that is happening in the digitization of the country.
So I feel that there's going to be opportunities.
When we say e-governance, e-governance can be across insurance, can be across finance, can be across other industries.
But basically, you're building infrastructure to digitize the country, to convert people into ---+ if I'm a medical patient, let's say, you're converting me into a digital patient.
That's basically the vision of the Prime Minister of India.
That you're digitizing.
You're creating a digital human being in a way that every human being is being connected digitally across from a government perspective, from an e-commerce perspective.
You can do transactions and so on.
Because India doesn't have the system of what, in terms of ---+ there was until now, until recently, until a few years back, they didn't have any system of Social Security number and now they have something called Aadhaar card and stuff like that.
So they've taken a huge step ahead.
So that's one.
E-governance is a very large opportunity and a continued opportunity because India is very diverse country.
It's not going to reach a stage in the next decade or 2 decades where they will suddenly say, our infrastructure is very good.
As you know, India needs a lot of infrastructure.
And so we think we want to be a player there and take a strong position there.
The second area is the area I feel of exchanges.
India doesn't really have an insurance exchange.
India doesn't have a reinsurance exchange.
But it's a country where there's a lot of youth, 65% of the people are approaching the age of 35.
They're creating a ---+ this is going to be the largest middle-class in the world.
You're going to have a middle-class of 400 million people, which incidentally will be larger than the population of U.S. All of these guys, that 400 million people are creating wealth.
When you create wealth, you preserve that wealth.
That's where insurance comes in.
There's a need to standardize.
When the government talks about all the standardization and providing better health care, providing some conformance, they are not able to do any of that today simply because they haven't really created insurance exchanges.
Until you do that, you're not going to have any control over or predictability on anything.
You want to predict ---+ government say they want to launch crop insurance, but how do you do that without having some infrastructure do that.
So then you go into financial exchanges.
I am a huge proponent in the area of financial exchanges.
I believe that's where Ebix needs to head.
I don't know whether you in recent time read the Wall Street.
There was a story in Wall Street almost 1.5 weeks back about a company who, I'll let you do your research.
But this company basically, for want of better numbers, I'll tell you, their revenue is around $120 million.
Their losses this year were approximately $260 million.
They were valued at $9 billion, it was $8 billion or $9 billion, somewhere in between.
And recently, some ---+ a large institution out of Japan decided to invest $1.8 billion in it.
Now why did they value it at $9 billion.
What is so great about it if they have only $120 million of revenue and $260 million in losses with 14,000 employees.
Because their opportunity.
They're looking at the opportunity of 1.3 billion people and they're saying, this is a business of financial exchanges where, if you can be a player in moving money, in providing people the ability to do what Apple Pay does or what Paypal does, making payments.
Like taking the Uber car, you're in a Uber car, you want to make a payment or buying prepaid cards or providing ATM machines because the length and breadth of the country, the country doesn't have ATM machine.
You need to get to a world where people can walk in into brick-and-mortar shops and basically have the mobile wireless machine where they can walk in and say, great, I have the security code.
I need to draw some money and the shopkeeper pays them the money while they run their security code through that small wireless device.
The whole concept of bill payment.
In India, it's not like the U.S. In India, you don't just go in and make a bill payment.
You have ---+ you want to make 30 different bill payments, you either walk up to the shop, to the power house or to the gas company or whatever and make your bill payment.
It's a very complicated country.
And so there's a need to digitize.
There is a need to create exchanges, which can be ---+ which can link the consumer with the banks and with the retailers and with the large providers.
So what I mean by that is the power companies, the DISH Network, the DI<UNK>ECTVs of the world, you name it, all the big players out there, connecting them with ---+ and connecting them with the banks and launching ---+ and providing all kind of range of financial services that are available to people on their phone, are available ideally in brick-and-mortar setups, not only on the phones.
Because India, you have villages, people want to be able to ---+ you want people to be able to walk in.
Some time, when they even want to make a digital payment.
They have cash.
They don't have digital money to send their money.
So in a country, in a third world country like that, what really happens is they will take cash into a place and then make a payment.
And if they could take that cash and convert that into digital money and then do a transaction over the net at a brick-and-mortar setup, in a shop, for example, digitally, that's another way of doing things.
So there is a lot of possibilities in that market.
So the particular company that I talked about incidentally does not do all of this.
All they do is they're basically a Paypal kind of a player who basically goes in and makes a lot of transactions happen.
But they've spent a lot of money in branding and trying to be in the midst of it.
And from my perspective, I love that play.
I feel it's a perfect fit into insurance exchanges because it's the same consumer who's running a financial transaction is going to be buying insurance, is going to be buying telemedicine that we provide and so on.
So ---+ and needs the health content, needs the knowledge of health reporting, for example.
And ---+ or could be a doctor who wants continuing education and stuff like that.
So having said that, to me that's the ---+ that's the third opportunity in India.
That's out there.
And that's a really large opportunity.
And you can sense from this $8 billion or $9 billion valuation that was reported in Wall Street.
I think it was a pretty decent story 1.5 weeks on this back on this company.
So I think those are the 3 areas that we feel are going to be important in India.
And then there's a fourth area, which we are ---+ we would like to explore and I will stop at that for now.
But there's a whole area of e-learning.
I've kept talking about it in previous calls.
That's an area that comes naturally to us.
We understand the whole concept of e-learning.
We ---+ I like the e-learning area simply because in countries like India, they are trying to educate the entire population.
They have 1.3 billion people.
Majority of them young, all of them need to be educated and you want to provide ---+ government wants to provide standardized education.
Majority of the schools are government schools.
And then you have private schools.
And how do you provide standardized education.
You can only provide standardized education digitally if you ---+ and to provide digital education, if you can do that, it's the same asset that you keep ---+ when you deliver an asset, that asset keeps generating you more and more on every month basis.
And the scope of that asset doesn't change that much.
It's not that in schools, you walk in and you basically say, every 3 years, I'm going to change the syllabus or I'll change the entire courseware.
It doesn't happen.
Government doesn't change that up easily thing.
So it means that's a huge opportunity in that area.
And again, how do we get there.
Clearly, we will choose ---+ if we had to go into opportunities like e-learning or financial exchanges, we will mainly clearly have to do things like acquisitions, partnering and stuff like that.
And to have to be ---+ because I feel that big play, that play is almost equal into creating another Ebix, what Ebix does today.
Meaning, I'm very bullish about those kind of opportunities.
So we ---+ I basically will ---+ once we get to something that is ---+ we can talk about, we'll obviously discuss it in a little bit more detail at that time.
Thanks, Les.
I think we've had a decent call.
And we'll ---+ I'd like to thank everyone for participating in the call and look forward to speaking to you again at the end of the second quarter.
Thanks, everyone.
And with that, I'll close the call.
| 2017_EBIX |
2017 | MNTA | MNTA
#Sure.
I would say we are offering any help that is needed by either Sandoz or Pfizer in this process.
I guess we're standing by, ready to help wherever we can.
This is a more challenging one for us than the other things we have been able to jump in and resolve, because this is two steps removed, this a contract and a quality agreement between Sandoz and their fill/finish supplier, and so, we're working in partnership with Sandoz to be able to do anything we need to around our line, around the product, with the FDA, whatever is necessary.
Obviously, conversations have started across all three companies at this point, but it's very hard to say exactly who is going to be doing what, because I think it's still an assessment phase, and I'm sure there will be conversations with the FDA on Pfizer's part around this warning letter, as well, so, more to come on that.
In terms of communication from us, on the regulatory review, I don't expect there will be much, to be honest with you.
What we've said is we have no outstanding questions we think the regulatory review is basically ready or near ready to be approved.
The problem is until this issue is resolved in the fill/finish facility, there is not much they can tell us, they're going to tell us that our application is pending the resolution of the facility.
They usually don't call you up and say everything is great and everything if fine, and all you need is that, because that is just not how they typically work.
Unless we got some other major questions on the application, which I don't anticipate, then obviously we would come back and tell you that.
I think their communication is mostly going to be around resolution of this warning letter.
I think in terms of communication and updates on that, I think you will probably hear from us once ---+ and if we can get comfortable with giving you a better sense in terms of the time of resolution of that.
So that's going to have to be first figured out, and then negotiated with Pfizer and Sandoz in terms of what exactly we can talk about there.
But that would be my goal, is to be able to give you a sense of resolution time once we can, and that would help you and us get the clarity we need to understand what the market potential is for the product.
The simple answer is no.
I can't talk about general or specific pricing of the product.
That is basically Sandoz confidential.
The only thing I can say is that as in any generic market the pricing varies based upon the customers and market that get set into in the individual contracts that are negotiated.
Beyond that, we haven't really talked about the specifics of the pricing for the 20-milligram.
This is a personal opinion.
Obviously, Sandoz has the decision to launch, but I think the launch here could go faster.
I don't want to undersell the 20-milligram, because we are at basically between 40% and 45% of the market on the 20-milligram, which is where you would expect first generic to get to in that range, so we are not in a bad place in terms of penetration of the 20-milligram.
If you recall when we launched the 20-milligram, we were launching into a market where we were facing two years of counter-detailing by Teva before we launched the product.
We were facing contracts that tied contracting in place, we were facing a physician and patient market that didn't understand or weren't aware of all the patient services that Sandoz had in place at the hub, as well as co-pay assistance.
Sandoz, in conjunction with they were helped by the Novartis MS sales force, they have done a tremendous job, not just of the 20-milligram, but actually in working with the patient communities to make sure that people understand the product, are confident in the product, know the patient services, get the co-pay assistance they need.
So, when we launch the 40-milligram, we won't be launching into any of that headwind.
The accounts we are in are happy with the performance of the product, if you just say we could take the accounts would just switch us to the generic, then you could see some uptick right away.
I think there is a possibility of penetrating this market more quickly, based upon the confidence that the medical community has and the patient community has, and the experience they've had with the Glatopa product, and that really is a complement to what Sandoz has been able to do in launching the 20-milligram.
You are characterizing my comments correctly.
I will give you two perspectives on it.
I think there are things that are contemplated in terms of patent reform and what happens on both the IPRs, et cetera, it could simplify that.
The consideration by the court that looks at reasonable royalties as opposed to other methods of enforcing patents.
But I also think this process could over the long term get easier, because if you think about products that are out there now and people are putting 110 patents in place for something like a Humira.
Sometimes there is a bit of a scorched-earth policy to try to protect today's products, because they're putting so many patents in place, they're creating tremendous amounts of [prior art] for future attempts at manufacturing and formulation patents.
I think this is something that's going to be challenging and could get easier based upon some things that could happen in either the courts or in Congress, but it ultimately is going to create an opening, because people will have less room to patent as they create more prior art.
Thank you.
First, on the Pfizer facility, I don't know yet.
Typically, in a warning letter, to resolve all the issues in the warning letter, you would expect another inspection to come in.
However, it was very interesting in the warning letter, and I tried to highlight it in my text, that the FDA said they may restrict approval of new products in the plant, they didn't say they would.
We don't know what that means, and we are going to try to figure that out over the coming weeks and months, but it could mean a number of things, but we just don't know if it's going to require re-inspection or not, but typically, to fully close a warning letter, you would expect to see that.
On Humira, in terms of repartnering, there are a lot of Humiras out there, you're correct.
I can say that we have had [approaches] and are in active discussions with multiple partners at this point.
I think one of the reasons is that as I talked about in the clinical data as well as the analytic data we talked about before, we have a very high-quality product.
It has really come out spectacular in the clinical results, as well as in the analytic work that we had done.
I think people see a very good and viable biosimilar here, which bodes well for us, at least potentially repartnering the program.
I want to thank everybody for coming on to the call early today.
I hope we were able to give some clarity in terms of what we know so far, and we look forward to updating you as things progress.
| 2017_MNTA |
2015 | AKAM | AKAM
#You know, Octoshape has some really strong technology.
First, when it comes to ingress of live video, where it comes from a single point ---+ and that means you have a single point of failure.
So you really want to be sure that you get that live video stream at high quality, at high throughput, and there's no interruptions.
And they have some very good communication protocols for that and some very good technology there.
They also have some excellent client-side technology, which is used in the video players for both watching events on the Internet and also watching events inside an enterprise.
And that technology allows you to do it at a lower cost point and also higher quality.
You know, they've been at this for a long time, and in our judgment had done some very special things that we are now integrating into the Akamai platform.
Some are already benefiting us and some will be part of our next-generation video solutions.
Well, certainly I mentioned that we did absorb the acquisitions in Q2, and so we have a full quarter impact in Q2.
But in general, for EBITDA ---+ I would say my caution or my statements were more driven by making sure people have a consideration for what obviously is going to affect EBITDA.
We're making in particular some pretty significant investments in the network buildout, which we believe are the right business decisions for the Company.
And while I believe we can operate the Company in the 40% to 41% range, I also want to be mindful of the fact that we are not going to not make the appropriate investments in the business that we believe are the right business decisions for the Company in the medium-term and the long-term.
And there's a bunch of things that can affect that, as you know ---+ that the media business in particular can have variability.
And so if traffic volumes downtick a little bit, you are going to be at the lower end of that range.
And I just want to make sure that I'm signaling that we intend to operate in the 40% to 41% range.
There are variables that could affect that.
I mentioned a couple of them.
It could be network buildout being kind of more substantive.
It could be an M&A that we think is the right M&A.
And if it is an M&A that is dilutive to the EBITDA model, but we think it's the right strategic decision for the Company, then we are going to do it.
But I would say what we see right now, <UNK> ---+ I think we can operate the Company in the 40% to 41% range.
Yes.
You know, it's growing in the low to mid teens.
We'd like to see it grow faster.
And we are putting a lot of development effort in terms of innovative capabilities around mobile acceleration.
That's an area that is particularly challenged in terms of performance.
And as you start to see the majority of use cases in transactions now moving to mobile, it becomes increasingly important to our customer base.
You see the rapid adoption of mobile apps.
And that's an area we are making investments in.
And we would like to see that area grow faster.
Yes, I'll take that.
You know, I don't think the regulatory environment has anything to do with an expectation about traffic growth rates whatsoever.
So I'm not quite sure what you are referring to there.
But I would say that we have certainly talked about ---+ a long-term model for the Company is that we believe that we have an ambition to hit $5 billion by 2020.
And if you do the math on that, it means you need to grow the Company around 17% on a compound annual growth rate.
And we have a pretty broad portfolio between media, Web performance, security, and some of the new emerging areas with the carrier and also in cloud networking that ---+ we might not necessarily get the pieces right, but each of those areas are growing significantly ---+ that we believe the combination of them is more than enough from a market opportunity perspective to grow the Company at 17% if you look through kind of the first several years of the decade ---+ and we've been able to do that.
And our expectation is if we execute well, that we are certainly not market-opportunity constrained.
This is about execution.
And I think with the combination of offerings that we have, that with good execution, I think that those aspirations still make sense.
I don't know.
I would say that it's all about rate and pace.
You could see an uptick in that for a period of time.
I think the media business does have variability, as we've said.
So I think that could fuel the media business.
And, yes, I guess if you hit it on all cylinders, and the media business starts to accelerate because of over-the-top, and we get an acceleration and continued growth in security in our performance businesses, and we start to get traction in the newer emerging businesses, you could.
We are not calling that, because we know that across all of our portfolio that we think there's enough that ---+ if you look at the ---+ if you flawlessly executed against every single area, yes, we could.
But I think what we are calling is that in general, we think 17% on a compound annual growth rate is probably where our aspiration is.
We'd love to do better.
Yes, the partnership is strong with Cisco.
As you know, we launched ---+ or they launched ---+ Akamai Connect, which is software, Akamai software, that's on their new branch office router.
There is customer adoption there in their sales.
The product works very well.
I would say it's been a slowish start there.
We'd like to see stronger adoption.
And Cisco is actively working towards that.
With OTT, yes, I would say there is a fair amount of uncertainty.
And that ---+ usually the buildout is at least a couple of quarters ahead.
And then you have to see: are the services launched.
Do the subscribers buy the service.
It takes time for that, so it can extend beyond a couple of quarters.
At this point we are engaged in purchasing CapEx and doing buildout for 2016.
And it's hard to know exactly if and when the services get launched and the adoption takes place that drives the traffic.
There is a lot of buzz out there.
There is excitement.
I think a lot of folks in the industry think that this is going to start happening more.
But it's hard to say exactly when, and that's certainly outside of our control.
But we want to be ready to support our customers as they make those decisions and as they do get adoption.
I will take that.
I mean, as I mentioned earlier ---+ and I even mentioned it in kind of our prepared remarks ---+ that traffic volumes are really driven by a bunch of things, but most notably they are driven by the timing and size of game releases, software updates, the introduction of new features on social media platforms.
So it's not just the consumption of social media, but it's also the introduction of new capabilities that get offered ---+ as well as, obviously, what <UNK> had referred to, which is beyond over-the-top, just ongoing video delivery services.
And I would say last year what you had ---+ it was pretty much all year, to be quite frank.
We had a 4-for-4 on all about of those.
Every quarter seemed to be some large, chunky gaming releases; large software updates.
We saw introduction ---+ not just more people consuming social media but introduction of new features on social media and continuing growth in video delivery.
So across all those areas is what fueled last year's media business to grow 21%.
So we kind of said you are probably not going to grow the media business 21% every year.
We just grew the media business 16% in Q1 and 17% in Q2.
So pretty darn healthy growth rates off of what were very strong growth rates last year.
So we are very pleased with the growth rate in the media business.
Yes, you are going to see a little bit of a moderation in Q3 of this year.
I think we are not worried about it, because traffic volumes can vary.
I don't think the trends in kind of what drives that business have changed.
It's just ---+ you are going to go through a period here where it's just a little bit lighter than maybe it was last year.
And as I mentioned earlier ---+ someone else had asked: it's too early to call Q4, because a lot of things can happen in Q4.
But I want to make sure we are clear that we are very bullish on the media business.
And just because it's going to moderate here a little bit in Q3, I don't think it's a sign of the health of the business at all.
Yes.
I think as a longer-term growth opportunity, it is very large for us.
That's why we've been placing significant investments to develop products there.
They are focused in two particular areas.
The first is for enterprise networking ---+ to enable an enterprise to have greatly increased and improved connectivity into the branch offices, both using its WAN and also using the Internet.
And, also, to be able to do that at a lower price point.
Many enterprises today need 10X the capacity they've got into their branch office ---+ maybe even more, as enterprise employees need to access video, to access the Web directly without having to go back through the WAN into the central data center.
And as they increasingly rely on the Internet, they need it to perform really well to do their jobs effectively.
And enterprise networking is very expensive.
And this is an area where I think we can really help.
And our first offer there is Akamai Connect; actually, it's offered by Cisco.
And we are working on additional offers that we hope to bring to market next year to further improve the capability of enterprise networks to be faster, more reliable, more scalable, and more cost-effective.
The other area, which we talked about a little bit before on the call, is with enterprise security.
And here, sort of two factors ---+ one is the enterprise is a huge target today.
People trying to steal confidential information, spread viruses, do very bad things.
And we've all read the headlines of the consequences of some of those bad things.
And the other aspect is that the enterprise is becoming more and more vulnerable, because the employees are accessing the Internet more and more to do their jobs.
So as you access the Internet, you need to be able to secure the enterprise from attacks coming in through the Internet.
This is an area where we've got great expertise and have enjoyed a lot of success with the Internet side of this with our Kona Site Defender, our Web app firewall, stopping DDoS attacks.
And what we want to do is now bring that capability into the enterprise to defend the enterprise employee and the enterprise infrastructure against attacks.
So whereas our existing products, like Kona Site Defender, defend an application from bad things happening, now we would like to defend the enterprise and the enterprise employees from bad things happening.
And so those are the two areas we are focusing on for our enterprise products in the future.
And I think the market is going to be incredibly large there.
And they can be very important for Akamai as we move later in the decade.
It's been going well.
We do have an overlay force, and we also train our existing sales force in security.
Our goal is that every rep ---+ whether you are a specialist or not ---+ should be able to sell security.
We are not there at 100% yet, but we have had good traction with security sales.
And as you can see, being up 44% year over year off a number that included all of Prolexic is something that we were very happy with.
And now, going from near nothing a few years ago to over a $200 million trailing run rate ---+ again, we are very happy with that.
That's a reflection of the success that the sales force has had in learning how to sell security.
It takes a lot of effort, and not everybody has done it.
But as a company we've had real success there, and that's great to see.
I'll take that.
It does obviously create a tough comp.
The channel business is actually growing faster than our direct business.
And it grew faster than our direct business this quarter as well.
It's decelerating, but it's decelerating from, I think, a very, very high base.
We signed up a ---+ all the partners that you mentioned, in particular the carrier partners ---+ they are still our fastest-growing channel.
As I mentioned last year, one of the drivers of our growth rates last year in the channel was that in order to get some of these channel partners ---+ the carriers in particular ---+ we ceded some of our direct customers to them.
And so some of the growth rate that you saw last year was ceding them direct customers ---+ that they were actually able to grow even faster than we were able to grow on our own by expanding kind of further offerings into them, just based on their relationships with them.
So yes, you are going to see a deceleration in the channel growth rates.
But we are very pleased with the performance in the channel ---+ and, in particular, pleased with the performance of our carrier partners in particular.
No, no.
I don't ---+ I think our EBITDA range reflects the fact that if you are going to have a higher weighting of media revenue, you will obviously potentially be at the lower end of that range.
But our media margins actually are very, very strong, as I share kind of annually.
Media EBITDA, media free cash flow are very, very strong for the Company.
So I don't think it changes.
Plus, you have to be careful that ---+ you know, we are in 2015, and the model is 2020.
So a lot can happen between now and then.
So yes, over-the-top is likely to gain traction.
But we are hoping that we are going to gain traction in other areas as well.
So I'm not prepared to call that our media revenue mix is going to increase exponentially, because I think we have growth opportunities outside of media as well.
Okay.
I'll take those.
First, with DSA ---+ DSA is a very successful product.
And it has been growing substantially.
Now, what we are focusing on with DSA and with Ion Standard, which we launched last year, is making it much easier to use; making it be self-configurable so that it's a more rapid sales process, and customers can buy more of it more easily.
With the Ion Premium offer, that's focused on really making it be superfast.
And as I mentioned before, we are investing heavily in the mobile environment, the cellular environment, where it's especially hard to get good performance ---+ and where that becomes a lot more important as you have more mobile apps and more transactions going online to mobile devices.
You know, with OTT, looking forward, as I said before, it's really hard to say for sure exactly when the various packages and offers will be coming online and predict how fast they will be adopted by subscribers.
As we look forward to the future now, we are confident enough that we are making the investments.
You start to see that in our financials.
And as we look towards the potential revenue, I think 2016 seems like a promising time.
But there's risk there.
It's just impossible to say exactly when these offers become available and how fast the adoption will be.
Okay.
So I think there is some ---+ it's not cannibalization per se, but as you see such great traction with security, and it's the newer thing, yes, it does take more of reps' interest.
We've got a lot of focus on training there.
And so I think it is possible that that's ---+ you know, you see such great growth there.
And actually pretty respectable growth ---+ we'd just like to see it better with the performance products and DSA.
And in terms of the product refresh, we launched Ion Standard and Ion Premier at the end of last year.
We've had strong adoption there.
Ion Standard is all about ease-of-use, rapid adoption, self-integration.
And then situational awareness, so it works in any environment with websites ---+ whether you are accessing it with a mobile device or off a desktop.
And with Ion Premium, really focused on really fast performance ---+ you know, everything you can do to make the website be faster: front-end optimization, adaptive image compression.
So a focus on the ultimate in speed.
And as I mentioned before, there's a lot of focus now on development around other things we can do for mobile devices, especially in the cellular environment.
So the product ---+ you know, the DSA is an existing product we've had for a long time.
Great product.
Ion Standard and Premier launched at the end of last year, and we are making improvements to those products now.
Yes.
China is an important market for us.
Obviously, a very large market.
And for our customers it's important.
So we do a lot of delivery into China for our customers that are based outside of China.
We do a much smaller but reasonable amount of delivery from customers in China to users outside of China.
An area that we've not really tapped into yet is for domestic delivery for domestic businesses in China.
That's a large market.
And it's a market we hope to explore with partners.
As you know, we have announced relationships with CT and CU.
And we'd very much like to work with the major carriers and the major partners in the region that do have licenses.
And that's really the only way we can go to market inside of China, being a non-Chinese company.
I would say we are very happy with the relationships that we have and are establishing with the world's major carriers.
And as we talked before about the competitive situation ---+ and I think that's one area that there has been substantial change; you know, you go back four or five years ago, and many of the world's leading carriers were either directly competing with us, or they had a do-it-yourself effort that they were using as some kind of CDN.
And many of them have now changed.
The internal effort maybe didn't work out as well as they hoped.
The competitive efforts weren't as successful as they hoped.
And they have decided to partner with Akamai instead.
And we've been very pleased to see the progress with those relationships as that's happened.
I can think of one large domestic carrier that used to be very competitive with us and is now one of our largest resellers, and a very happy partner with Akamai.
And that's really critical, I think, as we go to the future, because a lot of the people connect through the major carriers.
A lot of the enterprise do their business with the major carriers.
And it's great for us to have such a strong relationship with the world's major carriers.
Yes.
I would say that we are continuing to make investments across the business.
So it's not just sales.
As you know, we made very, very significant investments in the sales force over the last several years.
And so you can expect that probably the rate of sales adds is going to kind of moderate here.
But you can expect that across the business, we are going to continue to make investments in the business.
| 2015_AKAM |
2016 | INDB | INDB
#Good morning, everyone.
Welcome to Independent Bank Corp.
first-quarter 2016 earnings conference call.
All participants will be in a listen only mode.
(Operator Instructions) After today's presentation there will be an opportunity to ask questions.
(Operator Instructions) This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp.
Actual results may be different.
Factors that may cause actual results to differ include those identified in our Annual Report on Form 10-K and our earnings press release.
Independent Bank Corp.
cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements whether in response to new information, future events or otherwise.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to <UNK> <UNK>.
These go ahead.
Thank you, Jamie, and good morning, everyone, and thank you for joining us.
With me as usual is <UNK> <UNK>, our Chief Financial Officer, who will provide a [head account] on our financial results following my comments.
We began 2016 with another strong performance.
Core operating earnings in the first quarter were $19.1 million or $0.72 per share.
We typically experience a natural dip in income in the first quarter every year, but these results were pretty close to our strong fourth quarter and were well above the prior year.
A milder winter certainly helped but the study momentum we've been building our Company is the real driving force here.
It was another well-rounded performance market side, modest loan growth, notwithstanding the heated competition.
Core deposits that have risen to nearly 90% of total deposits.
Solid fee-income generation from a variety of sources.
Our investment management unit is performing admirably at turbulent market conditions, and the Bright Rock Quality Large Cap strategies has performed very well.
Continued exceptional credit quality and well-contained expense levels.
We are particularly pleased with the strength of our internal capital generation.
Tangible common drew to a healthy 8.25% in the first quarter.
Likewise our tangible book value per share continued its upward path, and is just about 10.5% above where it was a year ago.
The most notable event in Q1 was our reaching an agreement to acquire New England Bancorp, parent of Bank of Cape Cod.
While modest in size with $260 million in assets and a transaction value of approximately $31 million, this deal will benefit us in nicely.
It's certainly financially attractive, being accretive to earnings by an estimate of $0.05 next year and is expected to be neutral to tangible book value and improves our market position in Barnstable County from fourth to third.
It is an excellent fit for us given Bank of Cape Cod's commercial orientation with 78% of their $230 million loan portfolio in CRE and CNI.
And we will be retaining their two senior lenders who know the local markets really, really well.
We see an excellent opportunity to gain further business from their customer base with our stronger products set, especially home equity, investment management and cash management.
We view this as a low risk, easily digestible transaction given our proven track record in successfully assimilating prior acquisitions.
Turning to the operating environment, many of you have heard us comment on the rising competitive loan environment and the gradual softening of underwriting practices that accompany it.
Nothing really has changed in this regard.
We still remain in a thick-of-deal flow and enjoy strong pipelines, but our pull-through rates continue to be pressured.
As in previous cycles we have no problem walking away whenever we feel terms turn dicey.
As for the macro environment, the ongoing Fed watch as to the next rate hike seems to preoccupy and confound all the pundits.
And our crystal ball is no better than anyone else's on that score.
We try not to get ahead of ourselves on things we can't control, which is why we didn't include any rate increases in our forecast assumptions for this year.
We would welcome them of course and remain well positioned to benefit but we don't depend on it for earnings growth.
The local economy continues to show signs of strength.
The Massachusetts leading index is forecasting growth of 3.3% for the first six months of 2016 and the unemployment rate remains low at 4.7%.
In addition in 2015 the Massachusetts economy expanded at a faster pace than the national level for all four quarters as measured by MassBenchmarks.
So as I said earlier we're off to a good start this year.
Were committed as ever to our strategy of discipline growth and will continue to work hard on diversifying revenues and expanding customer relationships.
The cover our Annual Report says it pretty well, growing our bank one relationship at a time.
The confidence we have in achieving continued success is readily evidenced by the recent approval of a very healthy 11.5% increase in our common dividend by our Board.
It is likewise a sign of our commitment to the shareholder returns of our many loyal owners.
Before concluding I'd like to take the time to acknowledge the enormous contribution to Rockland Trust success made by one of our executives, Jane Lundquist.
Jane has headed up our broad-based retail and consumer businesses for the past 10-plus years, appeared at considerable expansion, brand name recognition, product development, and recognized service excellence.
She recently announced her intent to retire sometime this summer.
We're planning for the transition and the an exact date has not been set.
Jane will be sorely missed and we wish her the very best.
And with that I will turn it over to <UNK>.
Thank you, <UNK>.
And good morning.
I will now review the first quarter results in more detail.
Independent Bank Corp.
reported net income of $18.6 million and GAAP diluted earnings per share of $0.71 in the first quarter of 2016.
This compared to net income of $19.5 million and GAAP diluted earnings per share of $0.74 in the prior quarter.
There were two non-core expense items in the current quarter, $334,000 associated with the recently announced acquisition of New England Bank Corp.
, and $437,000 associated with the early retirement of $49 million in home-loan bank advances.
When excluding those items operating diluted earnings per share were $0.72 in the first quarter of 2016, an increase of 14% when compared to the same period a year ago.
Performance ratios for the quarter were strong.
On an operating basis the return on average assets was 1.07% and the return on average equity was 9.75%.
As <UNK> stated strong earnings results continue to drive growth and tangible book value per share, which increased to $21.90 at March 31.
Over the last three years tangible book value per share has increased by more than 30%, inclusive of several acquisitions we've completed in that period.
In addition tangible capital, tangible assets grew to 8.25% an increase of 27 basis points just in the past three months.
Now I'll turn to the balance sheet.
Although loan growth tends to be muted in the first quarter, 2016 is off to a good start.
Total loans are up 3% annualized with the commercial real estate portfolio leading the way.
New originations in the CRE book continue to be well diversified across our geography.
The growth in CRE was partially offset by a decrease in construction, which is a bit deceiving as both categories were impacted by the reclassification into CRE of completed projects as they enter the permanent financing stage.
The small business loan category continues to experience strong growth as our enhanced focus on this customer segment has improved awareness and increased sales.
Growth in CRE and small business was partially offset by a decline in the CNI portfolio.
The combination of intensely competitive environment and a highly liquid, comp client base has constrained our ability to grow CNI outstandings in the short term.
Total consumer real estate was essentially flat for the quarter with ongoing growth in home equity offsetting attrition in the residential real estate category.
With the Spring season upon us growth in the combined consumer real estate portfolios should begin to accelerate.
Aggregate loan pipelines were healthy at the end of the quarter as a reduction in the commercial pipeline to approximately $150 million was largely offset by increases in all other but loan pipelines.
With robust regionally economic activity we continue to benefit from substantial deal flow.
Total deposits were essentially flat for the quarter as strong new, core account volumes were offset by fluctuations in the more volatile 1031 and municipal banking categories.
Our continued effort to remix deposits has resulted in a further reduction on our cost of deposits to 19 basis points versus 20 basis points in the prior quarter.
The more expensive term deposit category now only comprises 11% of total deposits.
The five basis points increase in the net interest margin versus the fourth quarter was nice but less than anticipated.
As the benefit from the December Fed increase was partially offset by lower purchase accounting adjustments and lower prepayment penalties.
With a 10-year treasury well below 2% reinvestments rates for the security portfolio are challenging.
For this reason we felt using some of our excess cash to pay down home-loan bank (inaudible) borrowings was a better alternative.
As the quality conditions continue to be excellent with another quarter of net recoveries and a 9% reduction in NPAs, loan loss provision of $525,000 was primarily needed to support loan growth in a single credit on our watchlist.
Although we believe the credit metrics will eventually migrate towards long-term averages the strength of local economy may continue to extend that transition.
Now moving to fee income and expense.
Non-interest income decreased 3% versus a very strong fourth quarter but was up 16% versus the same period last year.
Seasonal activity decreases in most fee-income categories were offset by a 70% increase in loan level derivative income as the December Fed increase and a flattening of the yield curve provided sufficient incentive to some borrowers to lock in rates.
As mentioned in the first quarter the Company incurred costs associated with the pending acquisition of New England Bankcorp and the early retirement of home-loan bank advances.
When excluding those items non-interest expense was almost 2% lower than the fourth quarter as decreases in incentive, consulting and reserves for unfunded loan commitments were only partially offset by typical first-quarter increases in payroll taxes and advertising.
The efficiency ratio in the first quarter dropped to 61.7% on an operating basis.
As we have discussed in the past we believe we have the infrastructure to support a much larger balance sheet and we continue to expect to leverage that infrastructure.
I'll now provide some additional color on the pending New England Bancorp acquisition.
In our March 17 press release announcing the transaction we described our anticipated summary and financial outcomes, which included an expected internal rate of return of 20%, a transaction that would be neutral to tangible book value per share as of the close of the transaction, and earnings accretion of $0.05 in 2017.
The following assumptions are what drive those expectations.
Approximately 65% cost savings.
Given the level of branch overlap we expect to consolidate three of the four Bank of Cape Cod branches including the main office.
As a result of branch closures we expect to right off all fixed assets.
The anticipated net loan mark of 1% which is approximately equivalent to Bank of Cape Cod's current allowance.
Bank of Cape Cod has experienced minimal loan losses.
The core deposit in intangible of approximately $2 million to be amortized over 10 years, and one-time expenses of approximately $3 million after tax, the majority of which will be recognized in the fourth quarter.
In addition due to the relatively high cost in Bank of Cape Cod deposits, we have planned for meaningful deposit run off.
And finally shifting to 2016 earnings guidance.
During our last conference call we provided 2016 operating diluted earnings per share guidance of between $2.90 and $3.00.
And now with the first quarter under our belts we reaffirm that guidance.
Excluding the impact of the New England Bank Corp.
acquisition, the rest of the full-year guidance which I provided previously remains unchanged.
The one exception could lie with the net interest margin, which we originally guided to be in the lower 3.40%s, which may turn out to be a bit of a stretch in light of the current yield curve.
We'll have a better feel for this in the months ahead.
And again as <UNK> stated, our net interest margin guidance assumes no rate increases during 2016.
Those are my comments.
<UNK>.
Great.
And Jamie, I think we are ready for questions.
(Operator Instructions) Mark <UNK>, Sandler O'Neill & Partners.
Hello, guys, happy Friday.
Happy Fridays to you too, Mark.
Thank you.
First question I had for you was on the average balance sheet.
It looked like on the residential real estate average yields went up quite a lot, about 27 basis points from the linked quarter.
I'm just wondering was there something unusual in there that caused that flip up.
So if you backed up the interest recovery, was that sort of a couple basis point on the margin.
Not a couple basis point on the margin.
It would probably be about 1 basis point, maybe a basis point and some change.
You're probably referring to what took place in the fourth quarter.
And the equity portfolio is really just equity that we have associated with the rabbi trust investments.
It's not a bank portfolio, the rabbi trust is support of benefits.
And so those are very unusual and typically only occur in the fourth quarter.
Total is $29,000 in the first quarter.
You're welcome.
The accretion, which is reflected ---+ I think what you've asked us about in the past, <UNK>, is associated with the accretable yield.
Which is, as you know, just associated with purchase credit impaired loans, not the total purchase accounting marks.
That is pretty flat versus the fourth quarter at around $400,000.
And you recall the fourth quarter was down versus the couple of prior quarters.
But that is just a piece of our purchase accounting adjustment.
Yes, I think fourth quarter was closer to $350,000.
Sure, thanks for asking, <UNK>.
As I've said in the past banks are sold and not bought.
We would love to continue on our ---+ in a perfect world our pace of an acquisition every year, year and a half as we sort of march our was on to $10 billion.
Our criteria for the acquisitions as you know were very financially disciplined.
I mean we're not going to do a quote strategic deal that compromises on earnings or earnings accretion or has adverse impacts on that tangible book value.
We're often asked how do you plan to approach and cross the $10 billion mark.
I wish I could just sort of, I'll take that bank a, bank b, bank c, in that order and we'll get to $9.9 billion, dwell there for a year as we really are prepared, and then jump over to about $12 billion or $13 billion and continue going.
But of course the world isn't that perfect and we have to be sort of situational as to what opportunities comes up and how we think about it.
Now, there's a second part of your question, how are we preparing for the $10 billion.
We are, that is very much in our minds.
We are at ---+ pro forma $7.5 billion now, so that is a 33% increase from where we are today.
Which could come in ---+ depending on the acquisition and the organic growth, the timing could be a couple years out, it could be many years out.
Nevertheless, we're adding a number of folks and capability and robustness in the bank today to prepare.
For example <UNK> has hired a capital planning manager who is getting us prepared for DFAST.
We have added folks in compliance.
We've added folks in internal audit.
We have had some additional outside auditor types come in to help us figure out how do we make this place even more resilient.
I will say interestingly, while no regulation sort of change, until you get to $10 billion, the regulatory environment is such that regulators want you to be prepared, too.
They do not want to get to $9.9 billion and then have a transaction having not completely prepared to cross $10 billion.
So we're finding our regulatory exams to be longer, a little more robust going in deeper.
Are also helpful in understanding how we really need to get prepared.
So by the time we get to the $9 billion mark, the $9.5 billion, I suspect that we're going to be 100% ready to jump over $10 billion.
Yes.
Yes.
I think there's potentially another basis point or two, <UNK>.
We continue to have a whole lot of success in growing our core checking DDA zero interest accounts, both in the commercial and consumer side.
And we're also having a lot of success growing our traditional savings accounts, which we only pay 2 basis points on.
So I think there's the potential certainly to go another 1 basis point or 2, but not much beyond that.
Yes.
This was our strongest quarter ever for derivative income.
So I wouldn't expect us to be able to repeat this quarter on any sort of regular basis.
I wouldn't annualize this quarter and suggested that would be a number.
But there certainly is more demand for swaps given what's happened with the yield curve, with the front end coming and the middle part of the curve dropping, and so the current cost for a customer to fix a rate is less than what it has been in the last several years.
So it seems like a higher percentage of our borrowers are desiring to swap versus taking the risk of a floating rate asset.
And so if the yield curve stays where it is I think there's a chance that we'll continue to see pretty good volume there.
Anybody that desires a longer-term fixed rate of any sort of size, we require them to swap.
But some borrowers are just deciding to float.
Our crystal ball.
A crystal ball that works better than ours.
(Laughter).
Yes.
Well, you know it's interesting, we've sort of had ---+ when we start really focus on becoming a statistic like eight years ago.
Yes.
We've been wrong for the first five years or so.
(Laughter).
We are hoping that ---+ we've been really preparing for the rising rates, and we think that we believe that there's a higher probability of that happening than us staying for plumward time being, that the secular nature during the history of mankind here.
<UNK>.
Yes.
We don't have any intention of really changing our balance sheet strategy at this point, <UNK>.
We have been willing to take on a little bit more interest rate risk in the investment book.
And to extend the duration there a little bit because we're so asset sensitive in the loan book.
But we haven't exposed ourselves really to a flat rate environment to any great degree or to even a down rate environment, and we are still ---+ current earnings are pretty well protected in any environment.
While we still benefit from a rising rate environment.
Now we of course have been giving up some current income to get ourselves in this position, but we don't intend to change our strategy at this point.
Yes.
It had some environmental issue, was really the reason we had to take that reserve.
Which are ---+ it's a little bit tough to size.
We've been pretty conservative I think in what we've assumed.
But it was a very unique situation.
I don't recall offhand.
I'm sorry about that.
Thanks, <UNK>.
Thank you very much, Jamie.
We look forward to talking with everybody again in three months.
Goodbye.
| 2016_INDB |
2015 | GES | GES
#Thank you.
Good afternoon, and thank you for joining us today.
We are pleased to report that our first-quarter earnings per share was $0.04, which was above the high end of our guidance.
Earning and operating margin were above the guidance we gave three months ago, we also expanded operating margin since last year, which is one of my key priorities.
Before I update you on the progress of our strategic initiative, let me talk about the business.
In our North America retail business, the early part of the quarter was impacted by the disruption of the west coast port issue, and extreme weather in all East Coast and Canada.
Despite these two headwinds, we did not see a deterioration of the trends compared to the first quarter and finished the quarter with comps down 4% in constant currency, and down 6% in US dollars.
E-commerce, which is one of our top priorities had another strong quarter, and delivered top line growth of 14% in the quarter, marking the 15th consecutive quarter of growth.
In terms of product, we were pleased with the performance of the <UNK> product.
We finished the quarter with comps up in the middle single digits, despite the definite disruption to product flow from the coast port delay.
We were also pleased by the overall performance of our women's business as trend has improved in the first quarter, driven by dresses, denim, and wovens tops.
Going in Q2, we are seeing the continuation of the first-quarter trends in our women's business.
We believe that the design change we have made are really starting to show results.
On the accessory side, we saw footwear continue to comp positively, but we did see a slowdown in bags again as the port delay disrupted our deliveries.
However, as the new product reaches stores, we are seeing a return to positive comp trends for handbags again.
Europe, our retail stores performed well and delivered positive comps in the low single-digit in the quarter.
Our product plan is clearly resonating with our customers, as we were able to deliver this result despite soft traffic.
We're also encouraged by the trend so far in Q2, with comps in the middle single digits.
I've just returned from Spain, Portugal, and Italy last week, and was very pleased with what I saw during my trip with the products, the street had more activity but also the need of more product in the stores due to high sell through.
However, Europe continued to be the biggest source of our foreign exchange headwind, with the steep decline in the value of the euro against the US dollar and the Swiss franc, and that is beyond our control.
Moving to our guidance for the fiscal year, we are pleased to be able to raise both the low end and top end of the guidance for the year based on our first-quarter performance.
We will provide detail on this later during the call.
We're encouraged by the overall performance of our business so far this year, and believe this reflects the progress we have made in our four strategic initiatives outlined in last call.
First, omnichannel, as we said, we expect double-digit growth for the year in e-commerce, and are on track to achieve that in North America and Europe.
Second, integration of <UNK> in GUESS.
stores, the process here is ongoing, and we're on track to double the number of stores with GUESS.
and <UNK> Presents by the end of the fiscal year.
The integration enabled us to expand the distribution of <UNK> line, and provides an upgrade and natural extension of the product offering within our GUESS.
stores.
We plan to close up to 60 stores in North America this year, and have already closed 11 of these in the first quarter.
Finally, improve profitability of the Company.
This continues to be a key priority of mine, as well as the management team.
<UNK> will provide more detail on the first-quarter financial performance later, but excluding the impact of currency, we already have made progress in Q1, where we were able to deliver operating margin level above our initial expectation above last year.
In conclusion, I'm encouraged by the performance of the business so far this year.
I strongly believe this is the result of the product change we have made in the last few months, as well as a clear focus by management team to execute the strategy.
I'm confident these are the right steps to increase the long-term value of the brand, and we will discuss more on the Q&A.
With that, I will pass to <UNK> to discuss the financials.
Thank you, <UNK>, and good afternoon.
During this conference call, our comments may reference certain non-GAAP measures.
Please refer to today's earnings release for GAAP reconciliations or descriptions of such measures.
Moving on to the results, net earnings for the first quarter were $3 million, and diluted earnings per share was $0.04, compared to diluted loss per share of $0.03 in last year's first quarter.
The impact of currency on our earnings per share in the first quarter was less than $0.01.
First-quarter revenues was $479 million, 8% lower than the prior year, and relatively flat in constant currency.
Total Company gross margin increased 90 basis points to 34.6%, due to less markdowns and higher IMU in North America retail, partially offset by impacts of negative comparable store sales and currency headwind.
SG&A as a percentage of sales improved by 40 basis points versus prior year, mainly driven by a favorable segment mix.
SG&A was slightly lower than expectations, due to timing with the later part of the year.
Operating earnings for the first quarter was $4 million.
Our operating margin increased 130 basis points to 0.9%.
Foreign currency negatively impacted operating margins by 40 basis points.
Other net income was $3 million and mostly consisted of net unrealized gains and realized gains in other assets.
Our effective first-quarter tax rate was 41.5%, and up from 32% in the prior year's first quarter due to the mix of earnings distributions between different taxable jurisdictions.
Moving to segment performance, in North America retail, first-quarter revenues dropped 6% to $214 million, including the unfavorable impact of the weaker Canadian dollar compared to the first quarter of last year.
Negative comps in brick-and-mortar stores were partially offset by 14% growth in our e-commerce business.
Overall, comp store sales including e-commerce declined 6% in the US and Canada, and 4% in constant currency.
E-commerce sales improved overall comps by 2 percentage points.
Operating loss improved by $1 million to a loss of $7 million, and operating margin improved 30 basis points to negative 3.4%.
Compared to last year's quarter, gross margins were higher, primarily due to less markdowns, higher IMU, and lower occupancy costs, partially offset by negative comparable store sales and currency headwind.
The gross margin expansion was partially offset by a higher SG&A rate, due to negative comparable-store sales.
During the quarter, we closed 11 stores, ending the period with 470 stores.
In Europe, first-quarter revenues were $137 million, down 14% in US dollars, and up 8% in constant currency.
The constant currency revenue increase was driven by a shift of wholesale shipments from the fourth quarter of last year, as well as productivity improvement in our retail stores.
Operating loss improved by $3 million to a loss of $4 million, including the favorable foreign currency translation impact.
Operating margin increased by 150 basis points to negative 2.7%.
The increase in operating margin was primarily driven by the shift of wholesale shipments into the first quarter.
In Asia, revenues in the first quarter declined 9% to $64 million, and declined 6% in constant currency, mainly driven by negative comps.
Operating earnings increased 38% to $5 million, and operating margin increased 240 basis points to 7.2%.
The increase in operating margin was primarily driven by lower SG&A expense, due to the phasing out of the G by GUESS.
business in Korea.
In North America wholesale, which includes our businesses in the US and Canada, as well as in Mexico and Brazil, first-quarter revenues were down 5% compared to the prior year at $37 million and up 1% in constant currency, driven by a shift in the timing of shipments.
Operating profit decreased by 13% to $7 million, and operating margin decreased 160 basis points to 18.1%, primarily due to the unfavorable impacts of business mix and currency on gross margin.
Royalties generated from sales by our licensee partners were up 1% at $26 million.
Now, moving on to the balance sheet, accounts receivable in US dollars was 10% lower than last year at $196 million, and was impacted by the strengthening of the US dollar compared to the euro.
In constant currency, accounts receivable was up 5%, driven by the shift in timing of European wholesale shipments.
Inventories were down 12% versus last year at $327 million.
In constant currency, inventory was down 2%.
We ended the quarter with cash and short-term investments of $459 million, compared to last year's $478 million.
Free cash flow for the first quarter was a use of $2 million, compared to a use of $17 million in the prior-year first quarter, driven by changes in working capital, higher earnings, and lower capital expenditures compared to the same quarter last year.
In summary, excluding the impact of currency, we had a quarter where we were able to improve our gross margins, SG&A rate, and operating margin on the P&L while improving our free cash flow.
As <UNK> mentioned earlier in his remarks, this reflects a key priority for the management team, which is improving profitability.
We are pleased with our start to the year, and will continue to maintain the focus on all these metrics through the year.
Additionally, our Board of Directors has approved a quarterly cash dividend of $0.225 per share on the Company's common stock.
The dividend will be payable on July 3, 2015 to shareholders of record at the close of business on June 17, 2015.
With that I will pass the call over to <UNK> will take you through the outlook for the second quarter and full FY16.
Yes, this is <UNK>.
That event just finished last, two days ago so it's our first time, and it was a good event all over Europe.
We just came last weekend in Los Angeles and Las Vegas, but unfortunately, I was not able to attend there.
For family reasons.
But we don't know yet about the impact.
In Italy we see, I just came back from Italy last week and I have to tell you that I was quite pleased about what I see right now.
In fact across the country in Italy, our stores have been positive.
The last 2.5 years were not exactly easy for us in Italy.
Now I am very encouraged by what I see.
<UNK>, this is <UNK>, and just to follow up on what <UNK> was talking about and what was happening in North America, in Europe also in Q1, traffic was a definite headwind for us.
The great news for us though was AURs were up pretty significantly, and also our conversions improved.
And between those two factors, we were more than able to offset the traffic headwinds that we saw, and we were up in the low single digits, and up in almost all the markets except a couple.
So what we have saw was the only markets that declined were France which was down in the mid-single digits, and Italy was down in the low single digits, with Italy having a stacked comp because of very difficult compares last year, which were still positive.
So we're pleased with what we're seeing in Europe so far in retail.
And I think moving on to your next question on operating margins, I think what you have seen so far in the first quarter is the results of all the initiatives we have started talking about since the back half of last year, to tighten up on our inventories, manage our product margins very closely, tighten our operating expenses, and that's what you've seen an operating margin expansion in the first quarter.
And from a free cash flow perspective, this is a really good quarter for us.
We've actually improved over last year by $15 million.
So as we go forward, just remember exchange is going to be a headwind, and that can impact our operating margins, and we have called this out in our guidance, and we'll talk more about it later.
This is <UNK> again.
For FY16, we have announced that we're going to be closing between 50 and 60 stores this year, and the store closures really are more heavily back-end loaded.
And so what we did say also when our previous calls was, it really goes across all the different concepts, and the criteria we are using is whether stores are unprofitable or no longer in brand-appropriate locations.
Exactly.
So I think those are the drivers of how we decide what stores to close, and that's the visibility we have so far this year.
Hi <UNK>, this is <UNK>.
From a profitability perspective, of the unproductive stores compared to the other ones, I think what we're looking at is taking the total flexibility in our portfolio because we have almost half our stores coming up over the next three years.
And what we did say was look, in the next one year, 50 to 60 stores are coming up with the productivity of those stores wasn't meeting our financial requirements and we were exiting those stores.
Closing these stores will be margin accretive, but remember that these stores are being closed more towards the back end of this year.
So the impact on this year is quite limited, but it's already in our guidance.
More of impact will come in the coming fiscal year, but we're not ready to give guidance for next year yet.
Yes <UNK>, if I'm not mistaken, you are referring to our expense timing in what your question refers to.
What we're saying is there was some timing benefit in Q1.
Some of that's going to impact us in Q2, and that's reflected in our guidance, but the way I would really think about SG&A is across the full-year, and across the full year, we are roughly flat from an SG&A perspective on a rate perspective.
If can add on that, this is <UNK>.
The two categories we discuss is footwear, footwear for women has been picking up across the board in every region.
And watches remain soft in general, over the last few quarters now.
So we are seeing, we're looking for some stability in watches, but it's still kind of soft.
| 2015_GES |
2016 | CLDT | CLDT
#<UNK>, it's <UNK>.
How you doing.
I'll start out by answering that.
We've got something that we call a supply calendar here that we use internally, which for each hotel lays out the supply over the next couple of years.
And I will tell you that I think, for the most part, we still have a little more supply coming; not meaningful though in Silicon Valley.
Let's see, do you have that calendar in front of you, <UNK>.
Yes, so I mean, basically, if you look at, whether it's Silicon Valley, we still have some absorption in Anaheim, Savannah as well, that's coming that we've obviously known about.
But it's really the same markets that we've talked about.
So it's Silicon Valley, San Diego, Anaheim, Savannah (multiple speakers) ---+
Houston in Q4 2017 has a bunch coming on still at least on paper.
But whether that materializes or not, they'd have to be breaking ground about now or so to get there.
In Houston, you still have the 1,000-plus-room Marriott Marquis downtown less than five miles away from the Medical Center.
So those are the five markets where ---+ and again, a little bit different this cycle is the fact that the new supply early, at this point, has been in the major, major markets.
It's only, for us, about 7% of our production at the moment, <UNK>.
So it's not as meaningful at the moment.
But when you truly look at those acquisition costs ---+ and the acquisition costs aren't just for the third-party booking costs, but even with our brand costs as well ---+ those are certainly impacting not just the OTA line item.
And even though it's on a small base year over year, particularly the cost is a large ---+
It's up 10%.
Yes, it's a large double-digit cost increase.
Yes, I mean, the commission rates are not necessarily going up, but the production ---+ because those contracts have been renegotiated by Hilton and Marriott in the past couple years to lower the overall commission rate.
So it's the production that's continuing to increase that's the primary driver on the OTA side.
So for example, when you've got some hotels that are hit by less corporate transient travel, what's likely to occur and what we see occurring and what we're looking at very carefully is the e-channel gets opened up by the revenue managers and by our hotels in order to keep that occupancy and in order to fill up the hotel.
But there is a cost, and the net ADR is really what you got to think about and consider the increased cost to push that business into Expedia or otherwise.
So that's kind of, I think, an industry-wide phenomenon that you'll see occurring over time.
Yes, Pat, that's the one that's in Washington, Pennsylvania, which is very much reliant on nothing but oil and gas production.
So it's certainly been pretty decimated by that one.
Well, not very good, Pat.
Probably a negative month here in July, and I'm not sure we're going to throw the number out there now.
But July, I think for the industry and for us, was not a good month.
We're seeing some little better numbers here in August.
Yes, I mean, some of that obviously was the July 4th shift that benefited the last week of June.
But yes, we certainly are expecting better improvement in August and September.
Yes, I mean, I think when you look at our third-quarter, August and September are some of the better months.
We don't have as much visibility in the fourth quarter.
So typically October is a strong month for us, but we just don't have enough on the books to confirm that that's definitely going to be the case.
But those three months are typically, at least as we kind of look at where we're forecasting based on what we know, August, September, and October.
I will say this ---+ I mentioned it on the call, Pat ---+ our July results in our Houston hotels is very bad.
And we're not going to throw a number out there because it might spook some people, but we're definitely considering that in terms of a large drag on this overall portfolio, which heretofore, has not existed.
So it seems like that contagion has really spread to our West University and Medical Center assets.
So we're, again, just kind of with a very short visibility and short booking window, can't tell you exactly where it's going to be, so we're going to air on the conservative side there without a doubt.
Oh, you've done a great job in terms of sorting through some of the other conversations as well around the industry.
Hey, <UNK>.
This is <UNK>.
But I certainly don't see anything like that happening in the next 6 to 12 months.
Certainly as you get to the end of these agreements with Marriott, Hilton, Expedias, we would certainly think that over time, the industry is able to have a little more leverage in those negotiations to lessen the impact of those fees.
In terms of investments, whether it's acquisitions, we have the Silicon Valley expansions, which are, in essence, an acquisition that is going to product double-digit returns.
So we do believe that that is still a meaningful investment and the right thing to do.
From a dispositions perspective, the market's pretty quiet other than for some headline assets and some of the ---+ primarily New York City that are garnering some attention.
But other than that, the market's pretty slow.
So not sure it's the right time to be selling our assets at this point.
(multiple speakers)
I was just going to say, I mean, we don't ---+ even though we're getting hit pretty hard here, we certainly don't think our fundamental business strategy of owning the best brands in the best locations where there's strong identifiable corporate demand generators is the wrong strategy.
We think that's the best strategy for the long haul.
Obviously corporate travel, though, is experiencing a lot of softness here, as everybody's commented.
But this portfolio with absolute ADRs and occupancies and debt coverage and dividend coverage of what it produces and, frankly, GOP margins that are over 50% makes us smile.
So we don't ---+ we see probably great long-term value in the assets.
Putting them into the marketplace today, I don't think you're going to be able to realize that value.
Absolutely.
We believe in the portfolio.
I mean, whether we would try to offload Washington, PA once the world stabilizes or not just because it's so reliant on whether the Marcellus Shale is producing natural gas or not is one thing.
But it's a small 70- or 80-room hotel.
Yes, we're going to ride it out.
We're going to add to our Silicon Valley presence because the returns there are very strong, and the customer base there is only growing.
So yes, that's where we're headed.
We have not identified specifically any business we think is going to go away as a result of that.
But obviously ---+ and we don't think there's really a lot of compression that's coming our way from that part of the world.
So I guess the long answer is no.
But there is a little more supply coming out there because of the absolute high ADRs and occupancies.
So I would expect our RevPAR growth to be muted even though the business is strong.
Not much on the horizon there.
Really no debt to refinance.
The preferred market's definitely attractive, and it's something we look at sometimes.
But no plans to do anything right now.
Well, thank you all for listening and participating.
And again, thanks for being on the call.
As I indicated, we do firmly believe in our fundamental business strategy here and the hotels and the locations that we're in.
And we will do our best on the operating side, and the team is working on fine-tuning whatever strategies there can be on particularly revenue management and direct sales side to get as much growth out of these hotels as we can.
And we look forward to our next conference call with you all.
Thank you.
| 2016_CLDT |
2016 | INCY | INCY
#Concerning the Lilly relationship, you have to remember that the way it works is we will be asked at some point when the program is going to Phase 3 to either obtain or not the co-financing of the Phase 3.
Before that, we are literally in a position where we give our opinion and our advice, but we are really not in any kind of decision-making position.
I cannot comment on their willingness to go for any of these indications.
As you said, I think we are dealing with a very broad list of possible indications for this mechanism.
Lilly, and we are discussing this with them, is looking in multiple places where baricitinib could be applied.
The decision to drop diabetic nephropathy recently is something that was not a huge surprise from our side.
On financial health, you can see the numbers yourself.
We are in a position where the growth of the top line is giving us a lot of flexibility to invest in our own portfolio and if Lilly would decide to go in an additional indication, which I wish, we would be able to do the co-funding.
To give you an idea from last year to this year in terms of co-funding, the Lilly program has gone down because of the cycle in rheumatoid arthritis.
If we were to go in a new indication, there would be no problem to do that.
The way we are thinking of our resource allocation is obviously top line growth is what is giving us all of these opportunities.
We spoke about ruxolitinib but we have also now hopefully if baricitinib is approved next year there would be a new line of top line growth from the royalties and some of the milestones from Lilly.
We think about portfolio kinetics, how to move the portfolio as fast as possible in the right indication, obviously, based on the scientific understanding we have.
We are not limiting our clinical program because of resource constraints at this point.
Based on what you have seen this quarter you can see we have room to maneuver and obviously stay in a positive cash flow from operations.
That's important because that is what makes us stable from the financial standpoint and able to do this operation.
Of those 3 criteria that we are using and up to now it has been something we have been able to manage very positively.
So the answer is yes if there were opportunities to do co-funding with Lilly, we would probably participate assuming the indication is reasonable.
Okay.
Thank you for your time today and for your questions.
I'll just conclude saying that we look forward to providing you with further updates with the Q3 call in early November for now thank you and goodbye.
| 2016_INCY |
2016 | KMT | KMT
#Good morning, <UNK>.
Okay <UNK>, let me take that.
I'm not sure we're going to provide forward views on each segment.
Because when we report, those segments are going to look differently, okay.
But in a company ---+ in the Company overall we expected our forward tax rate to be in the 22% to 25% range, and we expected that until we had to book the valuation allowance in the United States.
Because we booked that valuation allowance in the US, it reduces our tax rate going forward.
Therefore, the benefit of 13% to 17%, that range, with a midpoint of about 15%.
That will continue until we demonstrate, which we are confident we will, sustained profitability in our US legal entity.
That will take a couple of years.
So the go-forward profitability from a tax rate point of view will be impacted from a beneficial fairly lower rate.
If we did have a capitalized US tax asset, we'll return back to that 22% to 25% tax rate - so that kind of frames that.
From an operating point of view, we're ---+ 2017 is a year where we have to recover a substantial amount of cost.
We had savings for the wrong reasons in 2016 ---+ because we didn't pay bonuses, because we were restricted in some of our merit increases, because some of our benefit costs are going up.
So we're going to have to recover, in a non-inflation oriented environment, a lot of those costs in planning.
But despite that, we are seeing a fairly meaningful increase in our operating profit, even including recovering some of those costs.
Will be like it to be greater.
Yes, we would ---+ so therefore that's why we initiated some of the additional cuts we've made.
Okay Widia is going to be breakeven at best, maybe in that range but our expectation is to expose it and grow it.
The operating profit from industrial probably will be north of double digits.
And we expect pretty meaningful increases in our infrastructure business.
Don't want to quite dimensionalize that right this minute, but pretty meaningful increases.
The headwinds we're facing are in the range of $30 million to $40 million for those extra costs that I mentioned earlier.
So pretty substantial additional costs that we're having to overcome.
So that's the reason why we got all these basic cost savings programs from the corporation overall, but why only ---+ why the profitability isn't going up quite as much as perhaps it should be.
It will be in the segments.
All right, <UNK>.
Well, do you want to talk about that.
Because <UNK>, you've probably got the biggest European business.
I have a view but you're closer to it.
Sure ---+ Europe was our top performing unit within industrial for 2016 which was slightly under planned, and we see a flat to slightly down market.
Again, there's some currency changes that we haven't planned for Europe that may dampen out the volume delta that we see.
Again, the currency is a negative to industrial for 2017 versus what could be in pieces, a slightly higher build rate.
So perhaps a little different than 2016, where we saw Europe at least a little bit positive, and the Americas quite a bit negative.
The outlook there is a little bit negative for Europe with perhaps the Americas being a little bit more positive.
But I want to add this, before <UNK> comments ---+ we also expect Eastern Europe to be a lot stronger.
There's some parts of the East, where either through Widia or some other places we will capture some new business.
Maybe there's some offset that will be positive there.
<UNK>.
For the infrastructure business we do expect a year-over-year, some slight growth in EMEA.
Most of that is coming from the success we've had in the construction business, as well as expanding into the Middle East ---+ which we saw the benefit of late in FY16 and we're expecting it to continue in 2017, as well as actions that we're taken to improve our cost base in EMEA with localization of manufacturing and leveraging our Asia manufacturing to support our new sales.
We're pleased that we continue the second half we sold at the rate that our distributors were selling at.
That's counter to our first half, where we definitely saw destocking in our distribution channel.
Our sales into the channel were far below what our customers were selling.
Our initiatives around direct to indirect and focus on our large bars in our large national chain here in the US have definitely generated some additional activity that we're seeing in increased sales rates in our distribution channel.
So I think if you reflect upon the trends inherent in what <UNK> said, was our year-over-year organic decline may not be quite as big as it was because I think we shift a little bit more into the channel at the end of last year than we did at the end of this year.
But despite any of those kind of readings, what I'd say is ---+ we're just focused on growth.
We want to gain share, even among our distribution partners.
We're aggressive with them, we're talking to our distribution partners in a way they haven't heard Kennametal talk to them.
And I think that's positive.
So I'd encourage you to ask MSC what they think of Kennametal, ask other partners what they think of the Kennametal of today versus the Kennametal of six to nine months ago.
Great.
Hello <UNK>.
Okay so Walt, we put our plan together, looked at the plan, the plan looked like a reasonable plan but the outcome of the plan was we were working really hard to only get a little bit further ahead.
So we took a hard look at what was possible and we said we need to have fewer people and fewer costs within the company and we started at the top of the Company.
One of the important comments I made was more than 20% of our top 100 paid people in the Company are no longer with the Company.
And while any headcount program and change like this is painful, frankly it's necessary.
And a lot of the headcount is also taking place, changes at our manufacturing operations which were becoming inefficient because the revenue, frankly, was substantially lower.
We didn't include it in our outlook because at this stage our outlook includes flat sales, so what happens if our flat sales aren't flat.
We'll need to be able to get some of that benefit from other places.
So what we wanted to do is to assure ourselves, and consequently our investors that we were doing everything we could to deliver the $1.10 to $1.40 EPS range with the potential of possibly exceeding it if the revenue comes in at about the flat level, and we can execute that headcount reduction program efficiently.
Now, that headcount program is going to take a little bit longer in different parts of the world.
So while we are about halfway through it, at this stage we also have a lot of work to do in some of our European operations.
And we're really not emphasizing reductions in force in Asia; China, and India in particular.
Many of these are proven automation processes that are readily available and we, for whatever reason, have not implemented over the years.
We just approved a $10 million capital investment to automate our packaging.
It will take somewhere in the 18 month timeframe for that to be effective, but we're on our way on that and there are a number of additional programs and initiatives that have been developed by our team for a number of years that we think are pretty proven.
Hello <UNK>.
5% at group level.
No I don't think so <UNK>, because we basically excluded that in our view.
The business, if you exclude the piece that JK mentioned is about $2 billion in revenue, versus the $2.1 billion that we reported.
So we're looking at about $2 billion in revenue in 2017.
Halfway through isn't halfway through like we're saving money today, it's ---+ we've identified the people that participated in a voluntary separation plan, they will roll off the Company's ranks through the first quarter and into the second quarter.
So timing, cost, all those things are in process of being worked through.
So in an ideal world you're right, but I've never seen an ideal world kind of come true like that very ---+ very crisply.
Perhaps we will, but right now I'm not sure.
So <UNK>, we will report obviously with a Q1 and Q2 earnings calls ---+ we'll report on the progress.
I think you might have been in our office yesterday when we were talking about this, <UNK>.
[laughter] Seriously, this is something we want to do, probably late October.
We' love to have people come out to our technology center, where we can actually show them some of the automation projects that are planned and underway.
And when we can kind of tick and tie a little bit ---+ in a little bit more detail, some of the $200 million to $300 million of productivity improvements that are possible with the enterprise.
So we will keep you posted on that.
Thank you, <UNK>, for that question.
The reason we're breaking out Widia has little to do with what we think investors will gain, and a lot more to do with getting greater focus within the enterprise on that brand and on the potential that exists in that brand.
The SEC rules are pretty clear ---+ how you manage, how you should report.
So it is my feeling that Widia has been an under managed brand for this Company for some time.
We've owned it since 2003, I believe, and the business has shrunk and it used to be a premier product.
We think it can grow and we think it can return the Company a substantial amount of new business over time with focus.
When it is combined with Kennametal, it gets the second child syndrome and we need to have it be a first child and a first player.
And if you see this in our competition, you see a number of our competitors have multiple brands with specific value strategies and we think Widia can develop that way.
It is a great brand in India, it has a good reputation in the United States, it has a very good reputation on some places in Europe but it's waned in terms of importance and I just think with a little bit more focus we will bring it back to prominence.
So if I had my druthers, I would have done this internally and not separated it out in terms of external reporting because it's kind of small to do that.
But that's not what the SEC rules, I think, allow.
Good morning, <UNK>.
Yes.
I think you are reading that correctly.
New products have always been part of the fabric of Kennametal and we're going to continue to develop proper new products.
We're also going to continue to solve our customers' toughest problems.
Kennametal's the company people come to when they have tough problems to solve because our engineers know how to get that done.
But that's only a piece of the market it's not the whole market.
And for us to be successful across the range of the market, we need to have better sales execution, which means we need to have a really good initiative for the major customers, and great service level for mid to smaller customers.
We need to have great product availability.
We need to have competitive pricing, and in general we need a service mentality that takes a backseat to no one.
These are areas where intensity and focus and leadership and empowering people closer to the market will make a really big difference.
I think <UNK> and <UNK> have already seen specific impacts of where that can happen, where they can make the decisions, or their people can make decisions that historically might have gotten bogged down a little bit in this Company.
So I hope I've answered your question there.
You want to comment, <UNK>.
Relative to product development, and looking at the markets, we've seen in my business in particular migration from the toughest conditions.
Certainly, as <UNK> said, its always going to be a part of our DNA, but we are going to provide solutions.
But there's another outstanding portion on the market now that requires something ---+ some cases are just good enough we've looked at this from a standpoint of developing products that aren't extremely better but are better than what's out there in the market.
But most important, we will produce those in a competitive cost structure and be competitive from a pricing standpoint.
We've seen success with that in recent introductions in my continuing that with our new product development plan.
Geographically, and I'm talking relative to construction now, the most recent product introductions we've had, in FY16, great success in EMEA and North America.
Year over year growth in construction specifically, that broken crack that we talked about in Q4 was 18%.
Was huge and we haven't even introduced the project in Asia yet.
We are in the process of doing that as we speak and localizing production.
I'm so looking forward to having success in Asia.
<UNK> this is <UNK>, I hope you can come visit with us at IMTS.
We have some major new platform launches we'll be announcing at IMTS.
There's a new duo-lock turning drilling platform that will launch IMTS' new milling 411 platform.
We'll be announcing a significant expansion of our already successful Beyond Evolution group and cut off platform.
And then some exciting new grades in our top-notch grooving platform that will all be rolled out at IMTS, showing significant benefits to customers.
Okay.
Good morning Sam.
Yes.
That's after completion of, materially completing phase 1, that is still the target yes.
( Multiple speakers )
In fact, let me just state it more directly.
I think we want to do better than that.
I think we've added additional cost savings program so we can exceed that.
Sam, we typically don't provide the breakout for this.
Raw materials are a larger portion.
Well, I think the inventories for the company have improved, we're making progress on our working capital.
We've got a little bit more progress to make, but I don't think that's where our today focus is going to be.
We've got to get the cost down, we want to make sure our customer services at the levels that they have to be maintained at, and I wouldn't forecast a tremendous amount of change in our working capital.
We don't report utilization rates and frankly I don't think it's ---+ that's critical for us because depreciation for us is 4% to 5% of our total sales.
In fact, they probably should be a higher percentage.
Our problem in this Company is that we have underinvested in our fixed plant and equipment.
We have too many plants perhaps from a macro perspective, but our depreciation expenses and our biggest challenge.
I'm going to let <UNK> answer that.
<UNK>, this is the biggest change I've seen in my seven months with Kennametal.
We have implemented our direct to indirect strategy, which basically says we're not going to compete with our indirect partners at small direct customers that Kennametal used to hold so close they would never allow our indirect partners to participate in those sales.
We also have continued to invest, as <UNK> mentioned, to address our inventory levels.
So we are continuing to have high fill rates and high availability of product to make it easier for us to do business with.
This direct to indirect change has driven a response from our customers, our indirect partners, that we really want to be their partner and we want to stop competing with them.
I can't explain how positive that is that our indirect customers no longer think of our salespeople as their competitor, but instead they think of them as their partner.
I spend a significant part of my time dealing with our VARs globally and with MSC here in North America, to find any way we can continue this path where they see us as their partner instead of their competitor.
VAR stands for value-added reseller, and I guess what I would say is one of the big customers that <UNK>'s referring to and I won't mention which one ---+ when I visited with them they said we have to look at <UNK>'s card to see whether or not it really said Kennametal on it because he fundamentally understands that we are partners and dedicated to growing our business.
And that's an attitude change, and it starts from the top.
<UNK>, its going to come from everywhere in the organization.
We have some limitations ---+ I mentioned India, Asia, and probably the IT finance and HR organizations which were targeted in our business excellence initiatives that were already underway.
And let me just say it this way ---+ you can't take 1,000 people out of an organization and not have various parts of the organization affected.
Certain levels of work has to change.
And there's got to be a concentration on the most important things.
But at the end of the day, it's probably going to be a preponderance of operational folks with some sales and marketing.
But also, let's be clear, a large portion of the costs is coming out of the highly paid.
As <UNK> mentioned, we changed six people out of nine in DLT.
20% of the highest-paid 100 employees of the company are leaving or have left already, so there's a considerable effort being made to make sure that from the top down, these initiatives are implemented.
I think most of the free cash will be in the latter half of the year, but negative I'm not entirely there yet in the first half.
In other words, probably neutral in the first half and most of it in the second half.
All right, <UNK>.
I think Rocco ---+ I think that probably is it on the call, correct.
So couple of final comments ---+ I appreciate everybody participating and their interest in Kennametal today.
Obviously, please follow up with questions, <UNK>, <UNK> <UNK>, myself and other members of the management team would love to engage with any of your interest in Kennametal today.
Thank you very much.
| 2016_KMT |
2017 | ACET | ACET
#Yes, Matt, I'll field that question.
There ---+ we look at the WAC prices and we look at each molecule virtually every month and every quarter.
There ---+ the low-hanging fruit and the more impactful WAC changes have occurred a few months ago, and we reaped the benefits this quarter.
During this quarter, there were a few, but they were not ---+ they were just opportunistic and not ---+ likely not moving any dials.
Yes, and if I could add to that, Matt, as Doug said, this is going to be a part of the routine ongoing cadence that Rising performs.
And as we see continued AFP declines, we're going to have to closely manage our WAC to a net spread.
So in order to even keep a straight line across on that DSO, we're going to have to continue to modify those WACs and continue to manage it.
So it will be an ongoing cadence and an ongoing process.
Hi, Steve.
Yes, sure, Steve.
Thank you for the question.
Look, I think, as you know, our R&D is milestone-based, and we have a budget, and we've just lowered the ---+ we've put it at the lower end of the guidance based on what the spend is in the first quarter.
So if we need to flex up due to some additional opportunities, then we'll take a look at that.
Thank you, <UNK>.
Well, thanks, <UNK>, I appreciate the question.
I think it's really 2 parts.
One is, are there some short-term opportunities that we can look at that haven't been explored in the traditional model.
And I would say that there is some activity going on in that area, to try to think out of the box in terms of how we can deliver business at a higher gross profit.
But I think in the longer term, the way we probably need to look at it is, relative to the comments I made about the partners that we work closely with and enjoy that working relationship.
Our asset-light model is a primary driver for the lower gross profit as compared to some of our competitors, so what is it that we can do to increase our gross profit when it comes to having more control over our business.
And that really relates to looking at bringing on the capabilities inside the company, perhaps on the R&D front and/or perhaps even on the manufacturing front.
So these things will help us to ---+ if we can do those, and execute against those, it will help us improve our situation.
You probably have me a little tongue-tied on that one, <UNK>.
I can tell you that I haven't been candidly surprised by a lot.
I mean, I've had a lot of leadership experience historically.
I think people in general are trying to do the best job that they can.
I haven't seen any hinting of problems in that area.
I think my experience as a leader has kind of prepared me for really just about everything that I've experienced in the first 30 days.
Yes, sure.
You got me a little tongue-tied on that, <UNK>.
Hey, <UNK>.
Well, <UNK>, look, I appreciate the comment, and I want to thank you for your suggestion.
Thank you very much.
No, Lester, let me answer the first question first.
The EBITDA for the quarter was $15.8 million versus last year, $12.1 million.
And that ---+ and in terms of the outstanding shares, we do ---+ we have included the 5 million shares that were issued to the seller.
Well, they weren't technically issued yet, but we ---+ for accounting purposes, we do need to include them in our ---+ in the basic and the diluted share count.
That's been consistent from the transaction.
No.
Correct, the 35 million and change, yes, that should hold true in the future.
Well, Lester, thank you very much for your comments.
It's much appreciated.
And by the way, I'm Bill, not <UNK>.
My wife calls me <UNK> when she's angry at me from time to time, so I don't want you to be angry at me.
So I think you made some great comments, and look, one of the things I do plan to implement soon is taking a look at our strategic plan and then not necessarily ripping it up, but adding to it, to the ---+ in line with what your expectations might possibly be.
Because if you don't have a plan, you're not going to get where you want to go.
So I think many of the comments that you made are part of my whiteboard opportunity that's out there, and what you're asking for is exactly what we need to do, and that is put pen to paper, discuss the strategies that we plan to bring to the company in the intermediate and long term, and then implement.
So I take your comments under advisement and I appreciate them very much.
Well, I certainly hope so.
And thank you very much for your support of the company.
Thank you.
Thanks, Anita.
I appreciate it.
Nice job today by you.
And for everyone on the call, I wanted to thank you for joining us today.
It was certainly a pleasure participating in my first quarterly conference call, and I hope I was able to provide you with some clarity regarding what I can bring to the company and how I intend to manage our operations going forward.
I look forward to meeting all of you in 2018 and speaking with you again in February on our second quarter fiscal 2018 conference call.
And I hope everyone has a great day and a good weekend coming up.
See you later.
| 2017_ACET |
2015 | CEVA | CEVA
#So since you ask about specifically LTE, we are basically all of ---+ all the tiers, so you mentioned Samsung which is a premier model, we are at the mid low end, that's a very active and dynamic area as we see today, growing very fast mainly in China where people are replacing the 3G on the high-ends is almost done, but in the low mid-tier there is ---+ it's an untapped area and that's one area, this one elements of it.
We are seeing tablets with LTE connection coming in.
We see also by the way 3G there, but we see tablets as well.
So basically we are in presence in all the different LTE tiers today.
And on top of that I would add that Samsung is planning on introducing few different other models later this year, this year starting from next month more or less and that could be the Note 5, that could be some other model that will be also designed in.
So we're not counting only in one socket as <UNK> ---+ as <UNK> just explained, but multiple sockets both within Samsung and within Xiaomi tablets and many others.
And it's a market share story for us.
And I think we're not building our business model and growth in LTE on a specific socket or in specific success of one design or the other, but more the trend across the industry.
In 2G, right, the market is declining and that's a positive move from our standpoint.
Bear in mind that there are still significant amount of holders of 2G feature phone.
I think in my prepared remarks, I put about 58%.
Still out of the 7 billion connection are still holding 2G and this is the potential for us to grow when those people are moving to smartphones.
Now when it comes to 3G what we see today, good dynamics in India.
The 3G phones going there are relatively pretty much advanced in terms of the processing power that they offer.
Spreadtrum has a quadcore offering there.
That's where we see good demand and growth.
Another area for 3G which I mentioned in my previous ---+ in my answer to the previous question is tablet.
Rockchip and Intel are progressing very nicely on the 3G tablets and we have other customers getting there from the smartphone going to the tablet.
By the way, in emerging markets today or tablets for emerging market, most of them are cellular connected and this is how the landscape is changing, well, Chinese companies like Rockchip or Spreadtrum or MediaTek are getting share there.
Sure.
So I think we've been able to demonstrate over the last three years ---+ or three quarters or so that we are somewhere around $10.9 million non-GAAP OpEx per quarter.
At least for Q3, I guided about $100,000 lower than that, the mid-range, and I think somewhere around that neighborhood is something that we are very comfortable with and at least for this year see it as very reasonable and we'll aim to maintain these types of level.
Next year I leave it a quarter or two from now to look into next year and see what other ideas and investments we want to invest in and what are the opportunities for us, but I think we're very comfortable and have been for a while in this type of expense level.
So here in licensing, we ---+ it's a good environment.
You're right that in the last four or five quarters we are exceeding high end of our guidance model which is at the high end, $7.5 million per quarter.
Whether it's sustainable as you know licensing is a lumpy business, it could go up and down in a specific quarter, but in general the licensing environment is very strong.
You can see it from the numbers, you can see for the numbers of this that we are able to conclude every quarter.
By the way, the way we built it is that we used this average in the mid-range of the guidance that you refer to as the base and whenever things pop-up or we see different opportunities flowing in, in specific quarter, of course we guide either higher or lower and have been higher recently like the guidance now for Q3.
But I would keep Q4 in the normal range that we are comfortable with and if things evolve it will give more color that we could either be higher like we're referring to specifically about Q3 or take it one step at a time and see what deals could go through and hopefully be on the better side of the guidance.
See Q4, which is Q3 shipment, is our strongest growth quarter from seasonal standpoint.
It's post ---+ pre-Christmas is really Q3 is our ---+ Q4 royalty is the highest from our standpoint, and we believe that this year it will be same.
I mean the pace of it is yet of no doubt good sign.
If you think as people mentioned Samsung Galaxy S6 and they post the results yesterday and they say that one of the reason that they want to fix now is putting mobile [phone] and on S6 Edge which is they see high demand for this one and they were unable to supply what people wanted.
They are going to come out even earlier with Note 5, S6 Mini.
That's one thing we believe in China the momentum will continue, there is a demand.
So overall we believe Q4 ---+ our Q4 royalty will be sequentially higher, how much is it, we'll have to see.
They exceed our expectations.
There is ---+ people are speaking about IoT.
It's not just talking.
There is a demand, lot of companies coming, trying to build IoT devices, whether it's a Wi-Fi, whether it's Bluetooth, low energy stuff.
And RivieraWaves is the incumbent.
I mean they are the leader in this space.
I mean people are not questioning the technology competency.
So there is a demand for Riviera in licensing.
We stopped seeing shipments coming in, royalties coming from [older bills] of Riviera.
So things look very promising.
Thanks <UNK>.
Let's start with the last.
No, the last quarter Q2 that we just reported, we had a bit more design activity and therefore moved some R&D expenses somewhere between close of $200,000 from R&D to cost of goods, and that's the reason for the slightly lower OpEx.
It's just the presentation, but the overall expenses are at same level as before.
So that's the reason for ---+ it should continue also into next quarter or two because these agreements and these design cycles usually take two to three quarters and then get back to normal, but again it's a small amount, but it does effect by 1% or 2%.
No, just because of the simple revenues that are significantly higher than the prior quarter.
The $15 million to $16 million will get you to pretty nice ---+ the 92% more or less margin with those same expenses that I just referred to [inside] already included.
Regarding the questions about TD LTE, I would say the following.
First of all, all our key customers, <UNK> mentioned four currently shipping, all of them are shipping what is called five-mode, I mean have solution that is five-mode available for mass production.
Whether ---+ today I think three-mode TD LTE is China Mobile.
We don't know the extent to get to that granularity how many of the customers that ship China Mobile are disabling the other two modes and stay with the three-mode.
But in general the shipments, the desire for the chips in production are all five-mode.
Thirty million were Bluetooth devices, so quite robust compared to previous quarters in prior years.
Those legacy is something we have talked about a year ago and that's declining from one quarter to the other, eventually disappear.
And then the idea is that over the next ---+ whether it's couple of quarters or whether it's a couple of years depends on what products and what design wins that we have signed over the last couple of years, two years or so in the non-handset base will kick in.
So I don't think we'll see a big change this year, maybe in Q4 something, but maybe beginning of next year, but we for sure if our target is to reach 700 million to 900 million including Bluetooth, but it's not going to be only Bluetooth, that will kick in as we go.
Of course, every single one.
It's hard to say in LTE right ---+
No, what we report in the 30 million devices that we get paid on and improved device, whether it's a fixed cent or a percentage more or less around the cent or so and lower than LTE rates of course, but still huge market opportunities in the tens of billions over time.
Well, we don't have statistics about it.
The only thing that I can say is that there is a strong growth there, strong demand of ---+ at the mid and low tier and I'm saying this between $100 down to $48 now and these are ---+ don't misunderstand it, these are very advanced phone.
I mean LTE, it's got four processor, right now it's still [815] (inaudible) and they will go to 64 bits very soon.
So this is good phones.
Yes, it's ---+ there is a big difference between the Cordio, ARM Cordio offering and the offering that Riviera has.
Cordio is one-size-fits-all.
It's a solution based on our ---+ all TSMC 55 nanometer and that's it.
If you want to go another foundry or another process, it doesn't fit.
If you want to get an upgrade to 5.0, it's not.
The RivieraWaves is RF agnostic.
We work with many other partners or customers so far are doing their own RF and their own process whether they integrate it on a big SOC on like application processor or they do a single chip IoT device.
I mean we're agnostic in this respect.
That's one thing.
The other thing is we are more advanced in terms of looking into the next generation, Bluetooth 5.0.
We have customers for this already.
And the second and the third one which is more important is that we are offering what is called dual mode or people are using the smart ready.
70% of today Bluetooth market is dual mode where you have both data and voice or audio supported.
So all the headsets and all the smartphones, it's all fall into the dual mode thing.
ARM does not offer this one.
This is much more complicated technology to deal with.
On the guidance for Q3.
Sure.
I think that we are comfortable, the $30-ish million non-baseband type of numbers.
They will probably continue to increase next quarter, but the bulk of the royalties and the dollar figures for sure is coming from the LTE, this mix that we have been talking about of more than doubling sequentially the amount of LTE chips, the gaining market share from existed incumbent players in the industry which are hurting and suffering because of their offering and pricing in the market.
And our customers that are gaining the market share because as <UNK> said, they already have the working solution, something that we have been waiting for, for the last two years for them to catch up.
So for us the main theme, short theme in royalty growth is all about the handset.
We're back to handset business.
And on top of that, but I would say in the second gear ---+ this is first gear ---+ the second gear of growth will come from non-baseband with much, much higher type of numbers a year or a year-and-half from now.
But right now, we could focus and put the magnifying glass on the handset.
And with that said, let's take the $30 million and annual ---+ $40 million and annualize that and you are already to shy a run-rate of $200 million non-baseband.
The majority for now is Bluetooth.
It's too early to say at this stage how we see it.
From what we ---+ the trend that we see today, it looks like that in the pricing point today in LTE and the need from the consumer to have a better Internet experience, the challenge that they face there, whether it's in the stock market or in general, does not really imply at this stage.
The value proposition that companies are coming now in China is very substantial and there is strong interest in China.
We ---+ for now, we don't see too much of LTE going there.
3G is coming in a very fast pace.
Today the only two companies that really competent to supply ---+ it's a very price-demanding market.
The only two companies that are paying in this field are Spreadtrum and MediaTek.
Thanks <UNK>.
Hi <UNK>, it's <UNK>.
Let me take this question.
First of all, since you ask a long-term question and long term for us is between now and 2018, Bluetooth is not just one of them, Bluetooth is evolving now.
But what we see is vision.
We have several, I think 15 licenses which are ---+ 15 licenses that are designing us in vision.
This is a very lucrative space and we are expecting to see growing contribution from vision.
All sort of ---+ just the last quarter, an example of DSLR cameras, smartphones, automotive (inaudible), these are areas that our vision gets into.
We have Wi-Fi, lot of activities, and now they're very lucrative space.
Small sales activities, audio activities, audio mails, also audio and all sort of sensors, and of course the Bluetooth area.
So CEVA today is not as we use to be back in 2011 that you mentioned, kind of a one-trick pony, one company that rely on the baseband market in the handset market.
Well, we have much broader portfolio and we have much broader customer-base in the quarter.
The second quarter results is a good example where you have 14 days of which 13 of them are not handset market.
So going to summarize your question, we are expecting OLT revenues in the next few years coming from different vectors, not just Bluetooth or cellular.
I don't think ---+ CEVA offering is completely different than what ARM is offering.
I mean they can ---+ we meet them in few occasion, but we are among cooperating with them than competed.
Our offering is more vertically integrated.
We are offering platform, we are offering hardware and software.
ARM is offering a CPU and ecosystem.
And number one, with CPU you cannot do things in vision or Wi-Fi that you do with CPU.
Number two, people want one-stop solution and not start paying twice for ARM and for another third-party that provide the software.
So in terms of competitive landscape because CEVA is so diversified in every segment, we have different competitors.
We compete with Imagination in Bluetooth and connectivity.
We compete with Cadence in audio and vision.
All of the ---+ we compete with other companies in Bluetooth.
It's ---+ in every market we have the different, but you know as when we do something we always want to be number one, the clear leader.
And we're offering one high-quality and full solution.
So just a ---+
Yes, go ahead.
In China, it's very interesting market in these days.
Number one, there is the incumbents that you mentioned, Spreadtrum and also Intel is active there and of course MediaTek.
But there are newcomers getting into this market because they see not just the handset market, but other segment of the market machine to machine, tablet.
Rockchip is there which is a newcomer.
Even this quarter, we licensed to a company that is associated with eventually a newcomer to this phase.
They are small mid-range companies that are looking.
So I think in general when you look on the cellular market, it's not just handset.
There are usage models, machine-to-machine and tablets that are evolving.
And Chinese market find room to get into this one.
And in the handset space, also one example is Leadcore.
It's a company that can take also significant share in this market by specializing in one of the segments there.
Thank you.
Thanks.
Thank you Emily and thank you everyone for joining us today and for your continued interest in CEVA and in support of the Company.
We will be attending the following upcoming conferences in August, the Oppenheimer 18th Annual Internet & Communications Conference on August the 11th in Boston and Canaccord Genuity's 35th Annual Growth Conference on August 12th also in Boston.
Please visit the Investor Relations section of our website for more information and additional conferences and events that we will be attending.
Thank you and goodbye.
| 2015_CEVA |
2017 | AIR | AIR
#Thank you, sir, and good afternoon.
Thanks for all for joining us here today to discuss our third-quarter 2017 results.
We're pleased with the growth coming from our inventory program's activity supporting commercial airlines, and during the quarter we captured several important new contracts.
Let me start with Allegiant.
Allegiant has a fleet of A320 aircraft, currently 36, with a plan to expand up to 100, and we signed a contract with them to provide Power-by-the-Hour component support in support of that fleet.
Also SkyWest we built on our relationship that dates back to the 90s, whereby we signed a three-year agreement to provide landing gear overhaul and exchange services for SkyWest.
The agreement covers landing gear assemblies and sub-assemblies its fleet of more than 400 Bombardier CRJ aircraft.
It is a contract that has an option to expand up to five years.
Subsequent to the end of the quarter, we signed an agreement with India's largest airline, IndiGo, to provide landing gear overhaul services on their fleet of A320s which is 49.
These will be for full ship sets.
The agreement expands both our footprint in the Asia Pacific region and our relationship with IndiGo.
These contract awards build on the momentum from earlier in the year, as we were successful winning work across a broad geographic footprint in addition to expanding our customer base and the aircraft capabilities.
Last quarter, we announced a new five-year contract valued at $125 million with South African Airways to provide Power-by-the-Hour component inventory management repair services across their fleet of aircraft.
We also previously announced a new long-term contract with Air New Zealand to provide nose-to-tail, cost-per-flight-hour rotable inventory support for 15 of their fleet of B777s.
We have started providing services under these contracts, and are excited about the opportunity that these wins provide to the Company.
Our geographic reach expanded during the quarter, as we opened a parts warehouse at Dubai World Central Airport.
The supply chain hub closed the gap between essential aircraft components and a growing list of commercial and regional carriers operating in the growing Gulf States region.
The warehouse enables us to leverage our partnerships with industry-leading OEMs such as Eaton, Unison, UTAS, Meggitt and Lord to stock the warehouse with a wide array of factory new aircraft components.
So when an operator has an aircraft that is grounded, we can get them the needed part to the aircraft quickly.
We're starting to see an uptick in activity around our businesses that are impacted by the government's operational tempo.
We've had a pick-up in business in our pallets throughout the whole fiscal year and that work continues, and we are getting noise coming out of the commanders in the Middle East about need for support in the regions there as well.
Before we begin our financial recap of the quarter, I would like to give an update on the INL/A contract that awards AAR airlift by the US State Department.
The incumbent contractor continues to protest the award.
It is currently being heard by the US Court of Federal Claims for final resolution, and we expect the final decision from the court no later than August 2017.
We're highly confident that the court will dismiss the claims made by DynCorp, and will stand by the state department's decision to award AAR the contract.
You may recall, we were originally selected by state on September 1.
We cleared the first protest with a ruling by the GAO in December.
The lawyers in the COFC case remanded the decision back to the state department contracting officer who then reaffirmed his decision once again in the selection of AAR as the contractor for this contract.
And as I indicated, the ruling is now in front of the COFC and we do expect a ruling before August is out.
Now back to Q3 results.
We had another solid quarter, as diluted earnings per share from continuing operations increased 31% from $0.29 last year to $0.38 in the current period.
Revenue was up 8.4% or $34.6 million for the quarter, primarily as a result of increased sales in our Aviation Services segment.
We had considerable strength in our supply chain businesses to commercial airlines, partially offset by the downsizing of our Lake Charles facility and the reduction in sales from our phase out of the KC-10 program.
So as we sit here today, overall, we're very pleased with the progress during the quarter.
And we have strong momentum coming into our fourth quarter, and feel really good about our overall positioning in the market.
With that, I'd like to turn it over to <UNK> for a little bit more detail.
Thanks a lot, <UNK>, so I will give a little bit more detail on the quarter.
As <UNK> mentioned, we had a strong quarter with earnings per share of $0.38 compared to $0.29 last year, which is a 31% increase.
Good sales growth, 9.6% growth in Aviation Services.
Income from continuing operations was up by $3.2 million in the quarter.
The gross profit increased $4.8 million at Aviation Services segment due to the increased sales volumes.
And gross profit in Expeditionary Services increased $4.9 million, with improved profitability across our businesses there.
SG&A expenses increased $4.3 million in the quarter.
Reflecting increased legal fees related to the INL/A program that <UNK> talked about, as well as investments in other business development activities.
Interest expense in the quarter was $1.4 million, down a little bit from last year, primarily as a result of retirement of some of our convertible notes.
CapEx in the quarter was $9.1 million.
Depreciation and amortization $17.4 million.
Also during the quarter, we paid dividends of $2.5 million or $0.075 a share, and we repurchased approximately 52,000 shares in the open market for $1.7 million.
As of the end of the quarter, we had $66.1 million remaining available under our Board authorized share repurchase plan.
Our average diluted share count for the quarter was 34.2 million, compared to 34.4 million in the third-quarter last year.
Net debt increased $22.4 million from the second quarter, as we continued to make strategic investments in our business, including access to support our new multi-year supply chain management programs supporting our customers.
Thanks again for your interest, and now I will turn the call back over to <UNK> for concluding comments.
Well done, <UNK>.
Once again, good quarter, and what I'd like to do now is open up to any questions that you may have out there.
So we're getting traction from some of our program wins, but I believe we're doing really good job across all the different businesses in that segment.
Nothing that stands out.
I think we had good results throughout the businesses.
I think we're starting to benefit from some of the investments we have made and some of the actions we've taken in prior periods.
So yes, I think you can see, hopefully continued performance coming from our parts businesses.
Right.
<UNK>, so there's a lot of noise coming out of the market that is indicative of demand about to come.
We haven't seen it yet, but we're getting a sense that there may be some positive stuff out there for us.
We have had that before, but at least currently at least there is some noise indicating there may be some interest in our services.
Yes.
That's correct.
We've had legal expenses throughout on this program, but we are pointing it out.
And that's correct, that's already absorbed in our results.
We are very driven to get ---+ to bring our SG&A down to historical levels below 10%.
So we would be happy being in the 9% and 9.5% range, today we are 10.6%.
If you take out the legal expenses, you get a few basis point reductions.
But basically, what we're counting on right here is to get some sales growth.
Yes, I would say so.
We have been led to believe no, but obviously the current planning is outside of our purview, if you will.
But we've been led to believe that there will be little to no impact.
I think you what you're seeing from our vantage point is more of a market share grab on our part.
You have seen some new wins and growth with new customers.
So I think the spending patterns with our customer base ---+ there hasn't been anything noticeable in that regard.
I just think in AAR's case I think what you're seeing is growth in our market share.
We made a significant investment in BD capability around this program activity, and you are seeing some of the fruits of that effort in energy.
And I think we're just doing a better job geographic dispersion of our ---+ the balance of our supply businesses.
There is a reason for opening up a plant in Dubai, and I think our guys and gals are executing beautifully.
Our relationship with Boeing, which would be similar to some of the other large OEs, would be in some cases we compete, in some cases we supply, and in some cases we purchase.
So to date, our relationships with Boeing have not really been impacted by any of their announcements in any meaningful fashion and we would anticipate ---+ we don't see much in the way of change.
We're very cognizant of their statements, and we are focused on execution here at the Company and expanding our capabilities and continue doing our thing.
So yes, we are aware of them, we are aware of their ambitions, but yet we have not seen any change in terms of our relationship with them.
Let me first start by saying that I think what you're seeing in our announcement is a bullish attitude around our aviation service business, particularly supporting commercial customers.
We also see opportunities supporting government customers, and awaiting hopefully some positive news on a few different fronts that we are working on.
In terms of our expeditionary service work last year, you may recall that we expanded with the search and rescue contract down in the Falklands in support of the British MOD, and we continue to look for opportunities of that nature pretty much around the globe.
Our BD team is working fairly aggressively.
I'm not a position today to report on any progress per se, but I would be hopeful that a year from now or so that we would have some successful stories to communicate.
We would be hopeful that most of ---+ in terms of the contracts that we've announced, that most of the spend has already taken place.
So we would anticipate positive cash flows coming from those investments.
That said, I wouldn't want to limit us to the ---+ around new contracts that might be in the pipeline as well.
So we have been growing at a fairly significant clip, some of these programs through prior capital, some programs require less capital.
But we are, to answer your question in terms of the current order book, we would anticipate positive cash flows, and then we may be making similar investments if we're successful in other contracts of this nature.
Yes, I think that's a good way to look at it, yes.
Hello, <UNK>.
Yes.
So the IndiGo contract is more of a labor contract.
So it's a maintenance contract to support their landing gear, and that would have been a business we won away from competition.
I believe we have 16 at the end of the quarter, and I'm not sure what we had in 2016.
We can get back to you on that, <UNK>.
We will get back to you on that.
So there is a little bit of volatility quarter to quarter just based on how the other businesses within that segment performed.
So I would say plus or minus, we should be in that range.
It is.
Yes.
So we haven't seen the details of the budget related to spend on the type of things we produce.
We are seeing an uptick in activity around some of our container product lines, and there's noise elsewhere in that business as well.
But the influx of orders ---+ we have had steady flow, not a huge influx of orders for that business.
In terms of the mobility, the airlift business which is the other part of our expeditionary services, there is where we are seeing noise coming out of the theater from commanders looking for support.
No.
That would be stuff that we would own, and that would be in the operational budget of the DOD.
Thank you.
Thank you very much and thank you for your participation today.
And I wish everybody a pleasant afternoon.
Thank you.
| 2017_AIR |
2017 | BLL | BLL
#Thank you, Jennifer, and good morning, everyone
This is Ball Corporation's conference call regarding the company's third quarter 2017 results
The information provided during this call will contain forward-looking statements
Actual results or outcomes may differ materially for those that may be expressed or implied
Some factors that could cause the results or outcomes to differ are in the company's latest 10-K and in other company SEC filings, as well as the company's news release
If you don't already have our third quarter earnings release, it's available on our website at ball
com
Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release
The release also includes a table summarizing business consolidation and other activities, as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations
Now, joining me on the call today are <UNK> <UNK>, Senior Vice President and CFO; and Dan <UNK>, Senior Vice President and Chief Operating Officer of Global Beverage
I'll provide some brief introductory remarks, Dan will discuss the beverage packaging performance, <UNK> will discuss the key financial metrics, and then I'll finish up with comments on our Food and Aerospace businesses and the outlook
We achieved improved third quarter comparable operating earnings, particularly in South America and despite lower performance in our North American Metal Beverage business in the latter part of the quarter
First, given the devastation caused by the hurricanes, earthquakes, and recent fires that raged in our Fairfield, California facility, we're thankful that all our fellow coworkers, their families, and our physical assets in Florida, Texas, California, and Mexico are safe
Thank you everyone at Ball and beyond who lent a helping hand to their colleagues, families, and communities who are personally impacted by these natural disasters
Candidly, the hurricanes were a perfect storm that ripped through Ball's supply chain late in the quarter and then two of Ball's largest North American regions
To put the hurricanes into perspective, while our Conroe, Texas and Tampa, Florida plants suffered some downtime, they recovered in relatively good shape
However, the downtime at our key customers' filling locations continued well beyond the aftermath of the storms and resulted in a combined seven days of lost production due to lack of orders for us in the regions and meaningfully lower can sales
For example, industry sales in the alcoholic category were down 12% in September with much of that happening in Texas in the southeast filler locations
In addition, significant spikes in freight rates and out-of-pattern freight across our southern and lower Atlantic plant network accelerated after the hurricane events and negatively impacted our results
We understand that FEMA, for example, consumed nearly 10% of the available freight hauling capacity after the water subsided and freight surcharges increased materially during this time
Freight and fuel rates continue to be higher than before the hurricanes and we're attempting to offset this high cost freight expenses with existing passthroughs and additional surcharges where contracts allow
To state the obvious, this has been challenging and frustrating and it has overshadowed an otherwise good performance across the rest of our company, but we'll push through, Ball folks always do
Dan <UNK> will provide additional color on the overall Global Beverage Can business in a moment
Moving on and highlighting some of the great work being done during the third quarter
We began to see results from some of the actions taken in our European Beverage business with margins and profitability improving year-over-year
Our South American Beverage business experienced meaningful volume improvement with growth equally spread throughout all of South America
We further improved our G&A cost structure with the launch of our shared service centers in Queretaro, Mexico and Belgrade, Serbia
We transitioned beverage can production from Reidsville, North Carolina to Tampa, Florida and Rome, Georgia; however, this was impacted a bit during the hurricanes in Florida
We significantly improved manufacturing efficiencies at our Canton, Ohio metal service center
We hired additional staff in our Aerospace business to service existing and future contracts, while staying on time and on budget with important facility expansions
And year-to-date, we acquired a net $85 million of our stock and paid out $93 million of dividends
Our multi-year, value-capture plans are on course
And while we're disappointed in the third quarter performance of our beverage North America and Central America segment in light of the hurricanes, we have a clear line of sight to all of the synergies identified when we announced the transaction
Our plans are on track to capture cost savings and to grow comparable EBITDA, cash flow, and EVA
And with that, I'll turn it over to Dan
Thanks, <UNK>
Our Aerospace business reported improved third quarter results driven by solid contracts performance and the continuing ramp-up on new contracts
The team at Ball Aerospace is winning
All of it hasn't translated over to meaningful operating earnings improvement or contracted backlog yet
However, staff is being added weekly to be positioned for the ramp up of these key wins
The aerospace team has done a wonderful job managing through the ever changing winds of Washington D
C
We have an exciting launch of JPSS-1 scheduled for next week and we remain more constructive today regarding the United States budgetary process and how it can help translate programs wins into profitable earnings growth
Now, as we look forward, we are on track to achieve the financial benefits of the acquisition
Our Aerospace business is poised for another bump up
Our food and aerosol team has attacked costs and improved manufacturing efficiencies to Ball standards and our Metal Beverage Packaging businesses are preparing for further growth and cost-out initiatives
When we closed on the acquisition in June of 2016, we expected 2017 EBITDA to be in excess of $1.75 billion and free cash flow to be in excess of $750 million
As mentioned in the press release, we will likely be short of our original 2017 EBITDA goal due to our beverage North and Central America performance this quarter and the manufacturing inefficiencies we experienced early in the year in our Food and Aerosol segment, which is now behind us
However, our cash flow continues to show up at or above our goals at that time despite higher capital expenditures
We still expect that by 2019 we can generate $2 billion of comparable EBITDA and in excess of $1 billion of comparable free cash flow
So when we announced our intentions to acquire Rexam, we said that we would rapidly de-lever, capture synergies, spend any necessary growth capital on high-returning projects, and then returning our remaining free cash flow to our fellow shareholders through share repurchases and dividends, and that's exactly what we're doing
And with that, Jennifer, we're ready for questions
Question-and-Answer Session
I'll just add, <UNK>, on that very last point that some of our contracts, commercial contracts, are clear of what we can and cannot do with respect to passing through these higher freight charges and we are, as Dan said, focused like a hawk on where we're able to go after that
Rest assured we are going after that
Why don't I attack the first – last part of the question and Dan can could talk about timing of them
With regard to the overall capacity, we're going to be net flat to slightly down, but there should be a big shift because majority of the capacity we're closing is standard capacity and we're adding in a lot of specialty
Specialty continues to grow for us
The Southwest is an important market for us
And so you should expect net 12 ounce to be declining, while specialty is increasing in that region
Dan, do you want to talk about timing?
Yeah, what we've said in the past was we're going to be focused on in the range of about $500 million of CapEx as we go forward over the 2017, 2018, 2019 time period
And as you recall, our maintenance CapEx we believe to be about half of that
So embedded in that $500 million assumption is things such as Arizona
So, I don't think there's any appreciable more capital other than what we've said
There's always a timing issue, and I think that the slight raise in terms of what we expect for CapEx this year has to do with accelerating some of those – some of that CapEx, particularly for Goodyear because, as Dan mentioned, we need to get the capacity up and going before we can get – start getting those savings out
Not at all
It was separate and apart from anything to do with the synergies
And when you think about it, it had to do with the – in the Food and Aerosol, and I'm happy to report that that is behind us
And you see that one of the things I didn't mention in my prepared remarks, but overall food can volumes were down about 10% in the quarter
Aerosol was roughly flat and so you see very good cost performance in that business
That obviously had nothing to do with the synergies and then as <UNK> just pointed out in terms of the lost sales absorption because of the lower inventories we had and then the higher freight, both in terms of out-of-pattern and overall freight rates, that's what really affected it
So there's been no change at all to our synergies
Thanks
Why don't I take that first part
There was a meaningful impact
Let me give you some statistics here
Year-to-date through August, overall beverage cans in the United States were flat
In the month of September, they were down 6.5%
When you break that down between alcoholic and non-alcoholic, alcoholic they were down 2.5% year-to-date through August and they were down 12% in September
And in the non-alcoholic side, they actually were up 1.5% year-to-date through August and were down 2.5-plus percent in the month of September
So you can clearly see what happened
I do think that there was a lot of good heads up around these hurricanes in the days, if not week or two prior to it
There was able, perhaps, to be some stock up, although we don't see weekly data like that, so it's not – I don't think it's appreciative
But when you have total communities underwater for, I won't say weeks, but certainly a week plus at a time and you don't have the ability for your customers to be filling and you don't have the ability to be shipping either our product to our customers or our customers to their distributors or retailers, it does have an impact, and I think those statistics show
Yeah, I did answer your last question
I think, in October, what we've seen is they have bounced back as the supply chain starts to normalize
And so we've seen back to normal improvement yet – but as we've said all along, I think longer term we expect flattish demand in North America and we can happy to go through some of the trends
They've actually reversed because you recall over the last five to seven years, actually, cans – beer cans have been up and soft drink has been down
It has reversed
We've benefited candidly from some customers down in Mexico that have helped us in that whole segment, but I think it's no surprise
Big Beer here in the United States has been struggling
The cans have been doing well
Actually, it's been taking share from glass
It's just overall Big Beer in America has declined and it's encouraging to see the soft drink has started to get some growth back in the can as well
Yeah
And let's not forget we're experiencing duplicative costs now
I mean, we talked earlier in the year about the G&A and we were able to get in the short-term G&A out through the closure of Millbank and the closure of Charlotte, but then we are reinvesting and we just stood up in this quarter two shared services centers, one in Serbia, one in Mexico
So we are having duplicative costs
I think to <UNK>'s point, what we've told people is we expect the next chunk of SG&A to come out as we transition many of these back office services from the various plants in regional locations to the shared service locations, but it's hard work
There's a lot of process, there's a lot of process redesign, there's a lot of manual efforts going on right now that we are going to – we'll be looking to automate, and that's probably a second half 2018 event as well
So, we are experiencing duplicative cost now
Yeah, I think it comes in three or four different areas
Number one, volume was up low-single digits, as Dan had mentioned on this conference call on his prepared remarks, I think a little over 2% or so
So obviously that helps
Cost side, we're doing a much better job on that
We did inherit some contracts that had some pricing challenges for us as we went into 2017. So that's kind of a headwind relative to it, but to be up in that segment, as you said, about $10 million or so given that we really haven't gotten much
If any of the benefits from some of these larger strategic actions around the plant in Germany, et cetera, we have a long way to go
We recognize that, but we are on the path that we expected
Well, it's – when you – I assume you're largely talking about beer
because it's really what we actually do
But when you think about it, you're right, in terms of Big Beer in the United States, that's been challenging
I don't have the exact numbers in front of me, but as I mentioned before, I know the can is taking share from other substrate, such as when the beer market is down 2.5% or so it's challenging particularly when the base is so big
We have been a beneficiary in Mexico of a couple of customers and we've been very strong in that region
But let's also not forget the craft beer side that we've talked about for a while where, I think, in the third quarter again we were up close to 30% in that segment
So you combine those three together and that's why we're able to offset many of these things
I may just add on to that that we've been, candidly, pleasantly surprised by the can growth down in Brazil
I think we see all the trends that Dan just mentioned
The economy, it's flattened out, but it certainly hasn't improved
So whether you look at GDP is flat, now that's better than down 3%, but unemployment is still too high, it's still in the teens, the 11% to 12% range and we really need the middle class to be growing to get that leverage (34:35) growing, because think of the logarithmic opportunity we have if we can get the leverage (34:39) going and the pack share changing
No, we said from day one that we're not going to go into that level of detail because you end up parsing things out and you hire a bunch of accountants to do what? It doesn't make us any money by doing that
Yeah, the only caveat I would put on that, <UNK> is we said freight rates remain elevated
We're going after them where we can, but obviously we're not saying we've covered them off yet right now
So the longer they persist, the little bit more headwind we have in that, but that's the only thing
Volumes have bounced back, the plants have bounced back, the supply chain has bounced back, it's just the freight is a bit higher
Yeah, and <UNK> specifically just to give you some data points, around the world, Dan mentioned we have 2% volume growth around the world
We had almost 9% specialty volume growth around the world
And so it was a bit impacted here in North America for the exact reasons Dan just mentioned, but we continue to push this and it's part of our strategy
All right
Well, <UNK>, a couple of things, and you've been a long-time student of Ball in our Aerospace business, so this may not be surprise you
But number one, you first got to follow the revenue growth and then just look at year-to-date what we've seen in the revenue growth and I think that's terrific
Number two, as you well know, as we start up new contracts that the margin profile of those always starting is lower than when you're finishing if you perform well because what you do is, as you accrue, you buy down the risk
The technological risk subsides and you start to – you're able to accrue more as those programs go on
We have a lot of new programs going and that's why the margin, if you look at just pure margin it's come down
There's nothing in that other than we started a bunch of new projects as we go forward
Lastly with your question, we look at several different metrics
We look at funded backlog, we look at won not booked, which is programs that we have won, but have not been booked, because they haven't been funded
And then we also look at bids and proposals that are outstanding and all of those are at record high for Ball
I mentioned in my prepared remarks about the – we're much more constructive on the budget process right now
I know Congress or the House is putting out a tax plan now, but let's not forget both the House and the Senate approved a budget, and I think that's very important because that gets the funding on some of these won not booked
And so I would expect, I don't want – don't pin me down to the exact timing, but I would expect over the six to nine to 12 months that you're going to see an improvement in our backlog, and then you could see continued performance improvement as we translate these new and existing contracts, buy down that risk and perform on them like we typically do
Thank you
Yeah
Well, let me first by start to say Hubbard and Baltimore we actually sold those facilities
We did not close them and so actually we sold – and they were both profitable
So, actually our results on a apples-to-apples basis, perhaps, might have been even a little bit better than what we suggested
I think really what you're seeing, to answer your question, it's difficult to partial out, because many of our manufacturing facilities are comingled, but what I would tell you is that the projects that we had in place over the last 12 months to close our Weirton, West Virginia facility and bring up the new Canton – or expansion of our existing Canton facility, we had some short-term pains in the first quarter and second quarter
We worked those out and the team has done a very good job and we are getting the benefits that we expected currently
We weren't in the first half of the year, but we are certainly currently
We also – as the Aerosol business continues to grow and it is continuing to grow, I said it's relatively flat around the world
In North America, it was down a little bit
Again, we can't specifically determine why, but I think some of it had to do with these hurricanes, but in Europe was up for us and in India, which is a relatively new plant for us, that is growing very strong
So from a big picture perspective in that segment, as you continue to see our Aerosol business growing and our Food business, which is a small business and getting smaller in that, you should see margin improvement in that business
Right now, I think we're in around the 9% year-to-date
We would expect that to improve
It all has to do with the amount of pass-through of steel and we do expect increases in steel going into next year, which means the margin may look lower, but the overall profitability of that segment ought to improve as we move forward
Yeah
We're looking into that
The issue is you've got – these are two storms and so we have insurance that covers both downtime in our facilities and then contingent downtime at customers' facilities, but you have to satisfy deductibles in both those
So we're looking it up, but it's probably negligible
And just to give a little color and context
It's not a big bang event that you go from zero to one and just put all those things in
We have new processes, we have new systems, we have new people in place
And so each of those various work streams, as <UNK> mentioned, in addition to many others, we have a specific game plan of when to roll those out
For example, at the beginning of October, we turned on a payroll system on a global basis for the first time
Are we getting the benefits right now? No, because we're going through the typical debugging issues when you go from a bunch of different systems to one much more standardized system
But now we have people in place in these two shared services to be implementing that and we're able to relieve ourselves of some of the higher costs G&A elsewhere
You're going to see over the next year or so a lot of this, I call it two yards and a cloud of dust, to use the football analogy, because that's what it is
It's hard work, but you're going to see it and it's – we really expect to start to meaningfully see the benefits as we get in the mid to late 2018.
And the only thing I'd add, we're also mindful we have debt covenants
So as our leverage comes down, we have to make commitments
We're well within that, but we have to be mindful of that
So, we're trying to be good long-term stewards of our capital
Yeah, well let me kind of start and ask the others to jump in
Let's start and talk big picture about the various synergies and where we are with them like the footprint
We've announced upwards of $130 million of cost savings through the footprint and we haven't gotten really anything year-to-date
And so that's all on the comp we will start to get in the fourth quarter
Dan mentioned Recklinghausen, Reidsville here in North Carolina in the United States
But then really going into 2018, so that's a big chunk of it
We also announced – on the sourcing side, we announced I think in the first quarter that we expected to slowly start getting it in the second half of this year and as we enter the fourth quarter we'll start to accelerate, but we're really going to get the full-year benefit of that in 2018. And then on the SG&A side, I just mentioned that, through our shared services that we expect to get a kind of half of our original expectations, but it won't be coming till mid to late 2018. You add all that up and you quickly see how we've gotten some good synergies
Now it's been the SG&A, we've gotten some sourcing, and you can see in the progression, but really going into the fourth quarter and going into 2018 you're going to get a lion share of that
You layer that on top of Aerospace growth that I talked about before, you lay it on top of the growth capital that Dan talked about and whether it's the new plant we have in Spain, what we're doing here in North America, some other regions as well, and that's why we remain confident of getting to $2 billion by the end of 2019.
Well, yeah
What I said was the $500 million was the original placeholder when we announced the transaction and it included $250 million of growth capital
As time goes on, you get more specific plans around that and we'll adjust up or down
Dan had mentioned that in Mexico we've been investing to keep ahead of the demand
Down in South America, we have some opportunities
We'll let you all know when it's appropriate, but I think that as a placeholder it may be a little bit more like we're doing this year
Some of that's pulling ahead
But as opportunities come forward, and we think they're good projects, we're compensated to earn returns in excess of 9% on that
And if we think we can do it, we're going to do it
Please go ahead, Jennifer
Yeah, Debbie, I think I might have mentioned it earlier, but the quick summary is we've had volume growth of 2%, 2.5%
We've had good cost and efficiencies at the plant level
We really haven't benefited from any of the strategic moves we made, although we start to in the fourth quarter and we also inherited some contracts that had lower year-over-year pricing
So that's been a bit of a headwind
So despite all that, we've been up and been able to improve margins
I think in real short summary, it's the regional nuances that occur here
Brazil is such a large country
Its supply chain is very different and its transportation is very different than what you see in more developed markets, and so it really is a region by region
And where the new capacity is coming in, we have facilities there and there has been some growth, which has been helpful
But the question that Dan alluded to is, is it enough growth to offset some regional supply demand imbalances and it's premature to tell
The only thing Dan was signaling is that the competitors' plant we understand is up and running now
And so it does create a little bit of headwind
Thanks
Well, what we said is at – about a year ago, we said that we believe that there's 250 basis points of margin improvement in that business, but it will take some time
And we now – we closed at the end of July, early August the Recklinghausen, Germany facility
We really haven't seen that much of benefits of that and so you're going to start to see that with some other things in terms of G&A, the shared service concept that we talked about earlier
It's Europe and you have to work through Union
You have to work through Works Council and it just takes longer than what you would like to do, but we've got a three-year game plan to get back to the margins that we think ought to be achievable in Europe
Jennifer, assuming there's no other questions, we should probably finish up
Why don't we take one more?
Okay
Thank you, <UNK>
Jennifer, we could wind up, please?
| 2017_BLL |
2016 | GPOR | GPOR
#Well first of all, when you look at our hedge book for 2017, according to consensus, its close to 50% of our expected production.
Maybe on a six rig program, a little less than that.
And that's at $3.08.
You know with that base wedge of hedges in place, <UNK>, I think it's unlikely that we would look at anything less than a six rig scenario.
We obviously think that later this year there's going to be an opportunity to layer in some additional hedges.
Obviously as a Company, historically we've shown that we take as much risk off the table by having these solid hedge books, anywhere from 40% to 70% hedged.
In fact, this year we're 82% to 85% hedged, just because of our bearish view on the commodity.
But that being said, fundamentally we don't see anything that's going to cause gas prices to go down between now and the end of the year.
And so I think our view is let's wait and layer in some more hedges when there begin to be some spikes in gas as we approach winter and get those first cold snaps.
So again, I think unlikely we would be less than six rigs.
With the hedge book we have started already and the ability to layer in additional hedges on top of that.
Thank you.
Thank you, Audrey.
We appreciate your time and interest today.
Should you have any questions please do not hesitate to reach out to our investor relations team.
This concludes our call.
| 2016_GPOR |
2016 | FIVE | FIVE
#You bet.
Thanks, Ed.
It was certainly contemplated but I would tell you for us it's really not material.
Halloween is not a big holiday for us.
If anything, it's probably a benefit as we pick up that last Saturday but it's so small, <UNK>, that it wouldn't move the needle either way for us.
Back-to-school is a bigger holiday for us than ---+ a bigger piece of Q3.
I might just add just for everyone's reference on the call, of all the quarters, Q3 is our smallest quarter.
And honestly what's on our mind and what's most important in Q3 is getting set up for Q4 and being prepared for Q4.
But the Halloween shift is not material at all.
As we mentioned, we have been very pleased with new store performance to date, and I think implied in our guidance, I'm sure you will be able to do the math on that.
It is ongoing similar type performance in the back half of the year.
Thanks, <UNK>.
Yes, probably not too surprising, but I think probably won't get into the details of all the learnings.
I think that's somewhat competitive in nature, but I'll share one example with you.
Mobile is where it's at.
I think even if you look at our new e-commerce site, we built that site to be mobile only.
And it's not to be desktop, be really focused on the mobile device, and that's where our traffic is coming.
As it relates to TV, to digital, we talked mobile social, all our ads are really being focused to tie into mobile, whether it's watching YouTube clips or anything like that.
But I think mobile is clearly with the teen/tween customer.
That's kind of their device and that's where they live and I think the marketing team has done a great job of pivoting and shifting and playing that up.
Having said that, I think I've shared in the past, we have learned a lot about circulars.
And I was probably too aggressive candidly in my first period of time to cut out too much circular, and I think we have learned that circulars still play a role.
And they are especially good in protecting the base, and so I think we are working to make sure we remain a nice balance of that as we understand our base customer from that perspective.
But those are just a couple examples of some of the things we've learned.
Vinnie, it's obvious you have been on the site and shopping and checking it out.
I appreciate that.
Sure.
Having spent a few years in e-commerce, you never want to let perfection be the enemy of great, and what I mean by that is speed is more important than anything.
And the teams got focused on it this year, and anything that was a hurdle that would delay, we pulled out of the feature set.
And we launched with a few hundred items.
You'll see us begin to ramp that up.
We've had zero issues with the site.
When I say feature set, you can't use a gift card today.
We will have that before holiday.
You can't ship to California today.
We will have that in conjunction with our launch next year.
Those are just two examples of features that aren't there today that will come.
And expect to see more product.
We're testing what's the right elasticity on shipping and handling fees, what's the right threshold at what level, minimum orders, et cetera.
So you hit it and found a couple of those.
But you've done a great job.
It's been a quick launch.
It's great to see no issues.
And as <UNK> has shared from day one, minimal impact on the bottom line for us.
Very helpful.
Thanks, <UNK>.
Yes, you bet.
<UNK> <UNK> with RBC Capital Markets.
Good afternoon, guys.
Two questions.
First, I think you mentioned you are looking for a slight increase in EBIT margins this year but when you look at your guidance and obviously the strong first-half performance hit the margin line.
Are you anticipating flat or down EBIT margins in either 3Q or 4Q.
And secondly, can you help us understand the drop in payables given the increase in inventory.
Thanks.
Yes, it would normalize to what we've seen in prior quarters as we move forward.
You are right.
We are getting ---+ when you dig a little bit deeper, we are getting returns on those investments that we made in the past but they are being offset by e-com and California because they are really in the back half of the year.
That is the key driver there to ---+ that's getting that operating margin at a flat level for the back half of the year.
Thanks, <UNK>.
You mentioned it, <UNK>.
Historically, we would rather not open up stores in Q4, and when we say Q4, we are really talking about the first week, maybe two weeks in Q4 so it's really just after the end of Q3 and that's really what we are expecting for this year.
From a go-forward perspective, I would expect that to be consistent as we move forward.
There is a potential for stores or for us to open up stores in that early part of Q4 but really for the most part probably in those first couple of weeks.
Yes, let me take those and <UNK> can add any color to that.
On the store in Michigan, I think at the end of the day, when it is all done and said, I don't think you should adjust your model at all on that.
And certainly if we begin to see upsides to that, we would share that with you.
But I don't think ---+ we certainly didn't go into it expecting to see a downside in it.
As I shared on a call earlier, it's 5% to 10% larger but it's considered relatively the same size from that perspective.
And then the ---+ what was the second part.
Oh, the new headquarters.
We are still finalizing that lease and the exact timing.
A lot of work to do on that, but as we get closer and certainly as we look out in 2017 and all that, we would have all the specifics for you.
But I think the biggest reason we wanted to share with on everybody on the call is this was part of our original plan.
We have been looking for a couple of years now, and as we would send out a press release in a couple of weeks, we didn't certainly want any of you that followed us for a long time surprised, kind of wondering what this is.
Initially, we don't see any significant impact.
Thanks, <UNK>.
We look forward to talking to you soon.
When you are looking at the back half, <UNK>, that is the key driver when you are in SG&A for the back half.
There really isn't anything else meaningful to call out that's driving that.
Again, because all those costs are really embedded in the back half.
Obviously, there is no increase in the first two quarters related to that.
So that is the key driver of the delever.
No, no, no.
I think, <UNK>, actually if you look at our overall marketing spend in Q2, it was, on a rate basis, was flat to last year.
In fact, it might even be down 10 basis points or so.
There was overall, really no increase in marketing spend year over year.
Yes.
Yes, <UNK>, for obviously comparative purposes, I don't really want to get into the specifics there.
But I think what I'd must remind you and everybody, what's continued to make Five Below so unique and special and lead to those 41 consecutive quarters of positive comps is the eight worlds.
And <UNK> and the merchants are constantly shifting the worlds, leaning in on worlds that are trending, and shrinking down worlds that aren't, and I think that is what has really allowed us to pivot the concept wherever the customer is or wherever the trends are.
And I think as quarter by quarter goes along, we certainly share with you what drove the quarter.
In the quarter we just finished, we talked a lot about seasonal and room, and we will do that as we go through the quarter, but we've got a great lineup for the holiday season, and it will stay in those eight worlds.
It might shift around from quarter to quarter.
Obviously, when you are growing at the size we are growing, it will constantly create opportunities for us.
We announced Christiane joining us.
That's the first time we have had an in-house IR person.
A year ago, we brought on our first loss prevention group.
As we continue to grow out and become a large retailer, we will fill those out but there is no glaring gaps that concern us.
It will just be the necessary headcount growth to stay ahead of and in line with our annual growth of 20% or so.
Sales growth, that is.
Oh man, you answered the question for me there.
That's still the strategy.
I think <UNK>'s team has done a great job in that area, and as we do find margin opportunities, we do plan to reinvest that back into the product and continue to bring newness and wow and you have seen that in some of the stuff that came out last year, and I think you will see some even more impressive [items] as we get into the fourth quarter here.
<UNK>, as a poli-sci major in college and worked on the Hill, I thought you were going to ask for my opinion on who is going to win.
(laughter) History would tell you there is always volatility at this time of year.
But history would also tell you regardless of who wins, the markets just want certainty, and that will all be defined and decided barring any hanging chads in Florida in the first week of November.
As it relates to Five Below and what matters for us, the fourth quarter is the most important quarter and that all happens after the election.
So I think any choppiness or worries that happen in the third quarter here will largely be immaterial for us specifically.
And we will stay hunkered down and focused on the fourth quarter.
All our TV starts after the election and I think all the uncertainty will be done by then so largely for us, knock on wood, thankfully we don't really have to worry about it.
Sure.
We only have one member of management in our stores, our general manager.
We are largely on average at the threshold there.
Because it doesn't start until December, it's very immaterial for this year.
I think we forecasted for next year it probably has about a $0.01 impact on the overall year.
There's still possibly some legislation that could happen on that to change it, but I think worst-case scenario we kind of believe there's about a $0.01 impact in 2017.
This year, it's not much at all given how late it's coming.
Thanks, <UNK>.
Thank you, operator, and thank you, everyone, for joining us today.
We look forward to updating you again with our third-quarter results in early December and talking about the all-important fourth quarter.
Have a great day and thanks for the questions and the support.
Take care.
Goodbye.
| 2016_FIVE |
2015 | MTD | MTD
#Thank you.
This is an ongoing topic.
I often say it's a journey.
So this is not completed within a few quarters.
It's going to take many, many years.
Progressing well.
We have actually really good initiative in all major countries going on.
One of the key elements of it is also having good training, good marketing programs to support the salespeople that we sell service at a point of sales.
So when we sell the instruments initially.
But then we have also a lot of activities after sales that where we leverage the so-called I-base.
This is a huge effort that we have ongoing to have better transparency on the installed base.
And then understanding which products are under contracts, which ones are not, and running dedicated programs to bring the maximum possible on the contract.
So all in all, good progress but I want to really make the point that this is a journey.
This is not something that happens overnight.
No.
I think we had in the past a significant change which makes recalls for companies actually really very expensive and very complicated.
That's actually the key driver today, that companies really want to avoid recalls.
And we see that top management, CEOs of these companies recognize that physical contamination detection is actually a key factor also to recalls, and that's driving now the increased attention to metal detection and x-ray in particular.
| 2015_MTD |
2016 | A | A
#Hello, <UNK>.
How are you doing.
Yes.
Why don't you talk a little about our share repurchase activity in the quarter and how we're thinking about it going forward, <UNK>.
We filed it back in, now what, November 20, I think, of last year.
A 10b5-1 on an annual basis and we intend to file a new one, to register a new one also in November of this year.
And it is a formula-based instructions that we have provided between buying 350,000 shares a day under certain conditions to buying zero kind of thing with a cap as you can imagine.
We don't know exactly how it's going to play out in Q4, and the only thing that we know is that, if there is any kind of shortfall at all in our intended buying in Q4 because of the formula in the 10b5-1, it will all be carried over into the following year.
So do we intend to spend exactly what we committed to spend.
I think probably the best way to think about it, just look at the respective business groups.
You had the LSAG results of down 2%, and then the---+
ACG up 8%, and DGG up 8% also.
Minus 2%, plus 8%.
And that's why I, again, as you think about 2017 for the Company, if you really want to look at the growth rates of those two business units in the recurring revenue space, ACG and DGG, perhaps differently than you might think about how you model the risk profile for revenue projections for the instrument side of the Company.
Absolutely.
That is why I made a few comments about that earlier, because, as we said, if we can be in that 4.5%, 5% kind of growth range, perhaps even [low 4%s], it makes it a bit more challenging, but we see the path to 22% is not just around margins, I mean, excuse me, not just around margin improvement from volume, but there are specific real programs.
It's something we review once a month and we have active programs and the cost will continue to come out on some of these big programs.
Actually, I must say, I'm really pleased with the team because we've went through and did the, what we call, project [NUNU], is the finance program we just finished up.
Right on the heels of that, we're going to go live in early 2017 with our integration of Dako.
So the teams are still energized and working hard and I think these are going to have a material impact on our results in 2017 and that is why we have confidence about, assuming no major change in terms of the macro environment, that we can reach what we think are pretty challenging goals, but we have got a path to get there.
Well, thanks for the question.
I can give you only a general flavor here on what we think is going on in the market.
I will not comment on the individual competitors, but your assumption that the smaller suppliers probably take a larger hit is also our observation.
The major projects under way haven't been cancelled, but what we're not seeing there are any major new projects under way.
There is a lot of positive news by a lot of studies about where this market's going, but we're not seeing, just to clarify here, the major projects that we knew about, whether it be the one I mentioned in Saudi, or there is a major project down in Texas, these programs, they're going to come on line.
So people aren't cancelling capacity increased projects, but we're not seeing a lot of new projects, and that's why we have taken a fairly conservative, pragmatic view of that marketplace.
Again, I would like to reminder everybody, too, when we talk about chemical and energy, over 50% or so is actually chemicals, or chemical processing, not directly tied to the exploration and production of oil.
You're welcome.
Well, thanks, <UNK>, I appreciate the question.
And as you probably will understand, I'll give you a more high-level resolve because we don't actually comment specifically at a product category level, beyond I think I would just reemphasize the point that <UNK> made when he characterized the chromatography market, that business is down relative to last year, because the chemical and energy market is down.
And we have seen no movement at all, downward pressure on our share position.
It is really a market phenomenon we're dealing with right now and that's why, when that replacement market does turn, and we've been through these cycles before, when it does turn we will be in a strong position to capture that growth as given the strength of our position in that market, which right now happens to be down.
We actually don't think about it that way because the big segments of the market, like your food and environmental testing, we think, are independent, to some extent, of GDP.
The only way I think that we really think about that as relative to it is our chemical and energy space.
So if you could just kind of think about tying GDP to that sub segment of the Company, I think that would be a good place to start.
But I would not apply it to the whole of the core applied markets because these are being driven by quality of life investments in the food and environmental area and I think that's why ---+ I think that this composition of our end markets is the reason why we have been able to put up these kind of growth rates even when our number two market as a Company has shrunk this year.
Yes, I think the confidence level is the same as it was back in May, and again, I'd maybe just share a few points here which are we have this confidence of delivery on that given our belief that we can get that growth rate, that we're putting up growth rates right now in that territory.
We've got this pipeline of new products coming out.
We've got this nice recurring revenue stream with ACG and DGG that will carry this momentum into 2017.
And that, where our instrument business is going.
Pharma still looks good.
Of course, you have these double-digit compare issues.
China looks to continue to be strong.
Chemical and energy has got to turn at some point in time because the market requires these tools to support production.
Our thinking is, when we look at chemical and energy is, we know our customer is looking for productivity improvements to help improve their company profitability.
We think that's a value proposition that Agilent has.
We think, as they go through their budget justification processes and their budgets start in calendar in 2017, that this is why we can say this and the decline in this business after 18 to 24 months will start to turn and we could see low single-digits by the end of 2017 for the chem and energy market.
If that happens, which we believe it will, that will give us the confidence to get the growth and then we know we'll get the margin, given both the volume, but also in terms of gross margin improvement initiatives as well as our SG&A cost.
<UNK>, do you remember the total Japan numbers I think were ---+ .
About 5% of our overall (multiple speakers).
Just give you a sense of 5% of the total market.
Historically, we have been stronger, and I can share this from my experience having been the country manager for Japan for a few years in the early part of my career, we tend to be much stronger in the chemical and energy segment of that marketplace.
We're doing well in the life science research and in genomics, but the majority of the business sits in the chemical and energy space, which has been down.
I think Japan has been part of that story.
Pharma, the pharma business for us is a relatively smaller portion of the market for us.
I think they're doing well in pharma, but not enough to really drive significant overall growth rates for Japan.
<UNK> happens to be sitting right next to me in this conference room.
I don't think he's ready to sign up for more than 20% because it is quite an improvement from where we started, but I think he remains quite confident in the 20% achievement of that goal of an OM perspective.
You saw, we had 18.8% operating margin this quarter, up 200 basis points over last year.
And the big next wave of integration efforts will really be starting in our Q1 2017.
So we have a major program, we call it Project de Gaulle.
We seem to like a lot of these French names, <UNK>.
I'm not sure why that may be the case.
But, and that really will be the next big step to move the former Dako company into the Agilent environment.
It will take a little bit of while to get the cost out, but as you think about exiting 2017, you are going to have a much lower SG&A spend than you started the year.
And, <UNK>, I don't think you'd share anything else.
No, I think you encapsulated very correctly.
I just want to reinforce what you said that the path to 20%, of actually delivering 20% in 2017 is a significant turn around of where we were a few years ago.
Right now, that is our full aim and I'm very happy where the team is in executing this right now.
Thanks, <UNK>.
Thank you, <UNK>.
And on behalf of the entire Management Team, I'd like to thank everybody for joining us today.
If you have any questions, please give us a call at IR.
Thanks, again.
Bye bye.
| 2016_A |
2017 | MKTX | MKTX
#Good morning, and thank you for joining us for the second quarter earnings call.
Our earnings report this morning reflects a solid quarter in a difficult trading environment.
Second quarter trading volumes of $362 billion were up 7% year-over-year.
Volume with international clients increased by 24% to $92 billion, and our emerging market product area had a strong quarter with a 39% increase in trading volume.
For the first half of 2017, global trading volume totaled $756 billion, up 17% from $648 billion in the first half of 2016.
Total active trading clients increased 15% to approximately 1,300 firms.
Open Trading continued its momentum with record client participation and a new high in percentage of global trading volume.
Revenues for the second quarter were up slightly to $97.3 million.
Expenses of $47.7 million were up 4%.
Diluted EPS of $1 was up 14%, primarily driven by a lower effective tax rate of 23%.
Second quarter U.S. high-grade estimated market share of trades increased to 17% from 16.1%, and our competitive position continues to strengthen.
In a soon-to-be released research report, Greenwich Associates will estimate that our share of electronic trading in U.S. high grade and high yield increase to 85% this year from 80% a year ago based on their 2017 North America Institutional Investor survey.
Slide 4 provides an update on market conditions.
Second quarter credit spread volatility was at the lowest level we have seen in many years.
At the same time, the trend of heavy inflows into fixed-income mutual funds continued, much of it driven by overseas investors searching for yield.
The combination of variable market volatility and investors chasing scarce bonds create a difficult environment for electronic trade.
In spite of this environment, we have been able to consistently grow market share.
With 4 important trading days remaining in July, U.S. high-grade and high-yield estimated market share is running well ahead of Q2 levels.
Overall TRACE high-grade market volumes in Q2 were flat year-over-year, while high-yield TRACE volumes were down 12%.
Reduced volatility in the high yield has caused a reduction in trading by some market participants, including ETF market makers.
New issue activity remains elevated but slightly down from last year's second quarter.
Slide 5 provides an update on the global regulatory landscape.
Changing regulation continues to have a significant impact on the global fixed-income markets.
In Europe, the implementation of MiFID II is less than 6 months away.
We expect that MiFID II rules will increase trading on regulated trading venues, including MTFs in order to comply with new best execution and trade reporting requirements.
The new regulations provide benefits for both dealers and investors when trading on a regulated venue.
Our Brexit contingency planning is well underway, and we are in the process of registering a new EU MTF in The Netherlands.
We expect to be well ahead of the March 2019 Brexit date with our business and regulatory changes in order to prevent any disruptions in trading for our clients in any jurisdiction.
In the U.S., new SEC Chairman Clayton recently announced plans to establish a Fixed Income Market Structure Committee similar to the one that exists for the equity markets.
We believe that MarketAxess is well aligned with the SEC's goals of furthering the efficiency, transparency and effectiveness in the U.S. bond markets.
We also continue to monitor developments from Washington relating to tax laws and bank regulation.
In both cases, there's a potential for significant positive changes to the current framework.
For example, proposals to amend or eliminate the Volcker Rule could increase the market-making capacity of our dealer clients.
Finally, we have recently seen signs that central banks may become less accommodative to reducing central bank balance sheet bond holdings and gradually increasing rates.
We believe that any move to begin removing historically high monetary stimulus is likely to have a positive impact on fixed-income secondary trading.
Higher interest rates, lighter bank regulation and greater market volatility have the potential to increase market turnover in global credit markets.
Slide 6 provides an update on Open Trading.
Open Trading volumes were $57 billion in the second quarter, with average daily volume up 42% from the same period last year.
Approximately 157,000 Open Trading transactions were completed in the second quarter, up 68% from 94,000 in Q2 2016.
Liquidity providers or price makers on the platform drove a 104% increase in price responses in the second quarter.
Liquidity takers saved an estimated $22 million in transaction costs through Open Trading on the system.
Participants benefited from average transaction cost savings of approximately 2.1 basis points in yield when they completed a U.S. high-grade transaction through Open Trading protocols.
When compared to our Composite Price real time mid-market estimate for corporate bonds, we believe that liquidity providers are achieving similar savings in transaction costs.
Dealer-initiated open trades reached a new high of 23% of total Open Trading volume in Q2.
Dealers are increasingly using Open Trading as an additive distribution channel to increase trading velocity and reduce balance sheet usage.
The percentage of trading on MarketAxess taking place through Open Trading protocols reached a record this quarter.
Open Trading accounted for 38% of U.S. high-yield volume, 15% of U.S. high-grade volume and 13% of emerging market volume.
Slide 7 provides an update on our international progress.
Our increased investment in geographic expansion is driving significant gains in client engagement across all major regions.
International client volumes were up 24% year-over-year, driven by a 31% increase in the number of active clients to 579 firms.
Emerging markets volumes jumped 60%, and U.S. credit was up 38% with international clients.
Local emerging markets' trading volumes were up 42% year-on-year.
The number of active emerging market client firms increased by 14% to 854.
On a related note, we are pleased to report that during the second quarter, we completed our first trades in Chinese government bonds on the platform.
The number of active Latin American firms has more than doubled over the last year, while the number in Asia has increased by 50%.
Europe continues its growth trajectory, and active firms rose a healthy 19%.
We are pleased with our progress on the international front, and we continue to invest heavily in both people and technology solutions in order to capture a larger share of trading in global credit markets.
Now let me turn the call over to Tony for more detail on our financial results.
Thank you, Rick.
Please turn to Slide 8 for a summary of our trading volume across product categories.
Our global volume increased 7% in spite of continued lackluster market environment.
The underlying trends remain positive as we had double digit year-over-year increases in active clients for each of our core products.
U.S. high-grade volumes were $204 billion for the quarter, up 8% year-over-year, resulting from an increase in estimated market share.
Volumes in the other credit category were up 10% year-over-year.
Emerging markets was a standout again this quarter, with trading volume up 39%.
Our high-yield trading volume and overall market volume were both down around 10% year-over-year.
We believe that low volatility negatively impacted our high-yield trading volumes.
Our eurobond trading volume declined 15% year-over-year.
In addition to the generally unfavorable market conditions, we experienced lower eurobond hit rates and inquiry volume.
We had a nice pickup in municipal bonds trading activity on the platform.
Approximately 240 investor clients traded during the second quarter, up 14% from the first quarter.
Trading volume was up 30% sequentially, and we executed more than 8,000 trades, up 36% from the first quarter.
On Slide 9, we provided a summary of our quarterly earnings performance.
Quarterly commission revenue and overall revenue were both up 1% year-over-year.
On a constant exchange rate basis, information and post-trade services revenue increased by 4%, with data revenue up 10% year-over-year.
Operating expenses were up 4% year-over-year, leading to a small decline in income before taxes.
The effective tax rate was 23% in the second quarter and reflects excess cash deductions of approximately $5.3 million relating to the new standard per share-based compensation accounting adopted effective January 1, 2017.
The full year effective tax rate is trending towards the lower end of our 26% to 28% guidance range.
Our diluted EPS was $1 on a stable diluted share count of 38.1 million shares.
On Slide 10, we have laid out our commission revenue, trading volumes and fees per million.
Total variable transaction fees were consistent with the prior year as the 7% increase in trading volume was offset by a mix shift, causing a decline in overall fees per million.
U.S. high-grade fee capture was little changed on a sequential basis.
Years to maturity and the percentage of volume in our tiered-size buckets were consistent with the first quarter.
Our market share in block trading reached another record high in the second quarter.
Our other credit category fee capture was down slightly on a sequential basis due to a mix shift.
Fee capture for high yields, emerging markets and eurobonds were all fairly consistent with the first quarter levels.
Effective August 1, we'll be implementing a new high-yield fee plan for our disclosed request-for-quote protocol.
Similar to our high-grade plan, we'll move to a market model and automatically adjust the dealer quotations by its standard fee.
At current volume levels and current protocol mix, we expect the new plan will be mildly positive to high-yield revenue, although the line item geography will change.
Based on the dealer contract signed to date, we expect that high-yield monthly distribution fees will aggregate around $1.4 million, and the all-in variable transaction fee per million will range from 350 to 400.
Slide 11 provides you with the expense detail.
Sequentially, expenses declined by 1% as lower compensation and benefits costs were offset by an increase in marketing and advertising expenses.
A reduction in the variable bonus accrual, which is tied directly to operating performance and seasonally lower employment taxes and benefits, accounted for the $2 million drop in overall compensation and benefits costs.
The marketing and advertising spend tends to vary more than other line items quarter-to-quarter.
We believe the second quarter level is more indicative of the run rate over the next 2 quarters.
We still expect full year 2017 expenses will be within our original guidance range of $192 million to $208 million, albeit we're tracking towards the bottom half of that range.
Year-to-date headcount is up 22, and we expect to add 20 or more personnel over the balance of this year.
On Slide 12, we provide balance sheet information.
Cash and investments as of June 30 were $366 million, and trailing 12-month free cash flow was a record $160 million.
During the second quarter, we paid a quarterly cash dividend of $12 million and repurchased 65,000 shares at a cost of $12.4 million.
As of June 30, approximately $27 million was available for future repurchases under our share repurchase program.
Based on the second quarter results, our board has [indiscernible] regular quarterly dividend.
Now let me turn the call back over to Rick for some closing comments.
Thank you, Tony.
We are pleased with our progress to build a broader and deeper foundation in global credit markets in Q2 in spite of the quiet market environment.
Our investments in Open Trading and our international business both show strong momentum.
Regulatory changes continue to have a positive impact on adoption rates for electronic trading and credit.
Now I would be happy to open the line for your questions.
As I mentioned, Patrick, we feel pretty good about our competitive position, and we believe it's done nothing but get stronger in the first half of 2017.
We have seen a few press releases, as you point out.
What is notable about them is there is no consistency in the reporting of actual electronic trading volumes in most of the rest of the space.
And we think it would add great value if recording became more consistent with established platforms and e-trading venues because, as you know, we see platforms commingling straight through processing volume with retail volume, with institutional volume and changing the time periods of their reporting on consistently.
We don't think that really helps to really understand the underlying trends in those businesses, so we think it would serve the market well if reporting was done monthly across all products and in a consistent way so that you and others could better understand the trends.
But we take great confidence in the Greenwich Associates survey.
As you know, they do a very thorough job of institutional investor surveys in North America and Europe, and we were very pleased to see their confirmation of our anecdotal feeling that our share has done nothing but get stronger relative to the competitors over the last year.
The other platforms really are at earlier stages, and that also comes through in the Greenwich Associates survey.
You hear from time to time as the protocols are interesting.
However, I think the other platforms are generally at early stages in terms of client connectivity and have not yet had a significant impact on electronic trading volumes.
Our feeling is that the high-grade fee model has really served institutional investor and dealer clients very well, and it's also worked for our shareholders.
So on the back of that success, we feel the time is right to move to a similar model in high yield, and our feeling is that it is both a fair model and a scalable model.
And the dealer response has been very good in terms of moving towards that model in high yield and given the market share numbers that I mentioned earlier of our share of electronic trading in both high grade and high yield, the major dealers who are signing on to the new high-grade fee plan were very comfortable making those commitments.
Sure.
First of all, let me say that our European business is much broader than just euros.
Our European clients are actively trading emerging markets, U.S. credit and euros within a system.
In totality, we're still very pleased with the growth momentum we have in the region.
We moved out in front with the MiFID II requirement to standardize our euro fee schedules.
And in that standardization process, you have some winners and some losers in terms of dealers that saw fee reductions versus some that saw fee increases.
And we are working through those changes specifically in the euro product.
It is possible that we will revisit a couple of elements in the fee grid to reduce any concern about any of the fee components in the euro schedule.
But also remember, the European environment was not any different than the U.S. credits rating environment in the second quarter.
The region saw incredibly low volatility throughout the quarter, and that clearly is also having an impact on overall trading growth rates.
Yes, I think in terms of their focus, what we've seen from other regulatory initiative is focus on best execution, transparency and trade reporting, and we would expect going in that those are some of the areas that the SEC will focus on as well.
It's a little early to know what their primary emphasis will be.
We are in regular dialogue with the SEC about all developments in fixed income and market structure, and we continue ---+ we expect to continue those dialogues with them.
I think it's too early to know how they will constitute the advisory committee, but we're available to help the SEC in any way that we can.
Sure.
<UNK>, it's Tony.
You had 2 questions there: the first one on high yield and then around the high-grade distribution fees.
In the high-yield side, what I mentioned the prepared remarks were based on the current volume and based on the current protocol mix that we expect that the high-yield change will be mildly positive to revenue.
In those assumptions, what you see is almost 40% of our high-yield volume is in Open Trading.
We're not changing the fee plan in Open Trading.
And maybe a little less than 10% of our high-yield volume trades on spread, and that's a different protocol.
We're not changing the fee plan there.
So you have around 45% of our high-yield volume that when I mention again, that would be mildly positive.
45% of our volume, we don't have any fee plan push through.
I will caution on one thing and I did mention that it was based on dealer contracts signed to date, and we still have several dealers that are considering the alternative plan.
And this one, similar to high grade, we have a plan that has a distribution fee, plus the markup, and then we have a plan which is all variable.
It has an execution fee for each trade, plus the markup.
So depending on what dealers elect, you could see some swing in the distribution fee and you could see some swing in the fee capture.
So we'll have to see how this plays out over the next several months.
But based on what we know right now, we think the distribution fee will be around $1.4 million a month, and that fee capture will range from 350 to 400 per month ---+ per million.
The second question you had there, <UNK>, was on distribution fees for high grade.
And Rick mentioned the beauty of the high-grade plan, the plan we put in place 12 years ago, and it scales incredibly well.
And it promotes responses and promotes liquidity.
We think we're in the right range.
And you could argue that we have pricing power because the dealers are seeing multiples of the volume that they saw 12 years ago.
But we have no current plans to change the distribution fees.
Again, it is something that scales well.
We're introducing it now with high yield, and we believe that will be an impetus to promote liquidity and promote more responses on the high-yield plan as well.
Yes.
So a couple of things on that.
First, Tradeweb is primarily a rates platform, so it is notable that they're talking about everything except their rates business.
Secondly, when you really do try to decipher what they put out in press releases and split out phone trade capture, which is really trade processing and not electronic trading from their retail business and their institutional business, you clearly come to a very quick conclusion that we continue to grow much faster in the institutional credit business than Tradeweb or any other competitor.
And if you look, Rich, at the first half of this year, our total volumes are up $180 million from the first half of last year, and our high-grade volume is up about $56 billion or $450 million per day in increase year-over-year.
So there is no question that we are widening the lead.
And I think if Tradeweb wants to provide transparency, they would show a consistent and long-term trend of their retail business, which they are now commingling with institutional business in their press release.
As you know, they bought the retail platform, BondDesk, which is now Tradeweb Retail, 4 years ago.
I think the market would benefit from knowing what those trends are.
Anecdotally, people say they're down, not up.
Including phone trade capture is something that we do not do.
We have more than $40 billion additional volume in U.S. credit and phone trade capture that we do not confuse with electronic trading volume and our reports to you.
And when you really get down to what is actually institutional trading volume, yes, it's slightly up from where they were in the first half of last year but that growth rate is not anywhere near the MarketAxess growth rate year-over-year.
And that is confirmed by the Greenwich Associates survey as well.
So Rich, are you referring to ---+ I gave some revenue sensitivities on the high grade.
Yes.
So what I talked about in the first quarter was if we had a 1-year change in maturity in high grade for high-grade trading, it could change fee capture by somewhere between $10 and $20 per million.
If there was a 1% change in yield across the yield curve, that's going to be $10 to $20 per million.
I think just following up on that and just to provide a little bit more transparency, right now, on high grade, the high-grade fee capture has been $162 per million the last 2 quarters.
We think we're in the middle of the historical range of high-grade fee capture.
So it's been as high as $200 per million.
And if you look back historically and you overlay what we're doing in Open Trading and you overlay with our all variable plan, probably the low end of the range would be something like $125 or $135 per million.
So we think we're somewhere in the middle right now.
Just hoping you could give a little more color on what you think drove the market share improvements given ---+ and I think the overall market environment has kind of been pretty similar to 2Q.
Just wondering what's changed.
<UNK>, it's hard to point that anything has changed from a market environment standpoint.
And you can see that it's still strained from a volatility standpoint.
Market volumes are down.
New issuance, the best we can track right now, looks like it picks up a little bit in July.
I think it's somewhat what Rick said, when you look at the underlying trend, with more clients engaged and more flow on the platform and Open Trading, percentage of volume conducted in Open Trading picking up, those underlying trends are all positive.
Hard to point anything discrete right now that's moving that market share up right now.
That's helpful.
And then just one on MiFID II.
Do you have a sense of how quickly you would expect behavior to change.
Should we think about increased adoption of electronic trading quickly following the January implementation date.
Or do you think it takes a little bit longer.
And I just want to get your updated thoughts on what this could mean for the data part of your business.
I think that the percentage of trades that are traded or processed through regulated vendors will grow early in the new year.
As we make the rounds with dealer and investor clients, the combination of best execution requirements for both investors and dealers and the onerous trade reporting regime has most market participants coming to a conclusion.
That's just going to be easier to comply with those regulations when the trade goes through a regulated trading venue.
There is a gray area which is basically phone trade capture, which trade takes place off venue and then be processed through a venue and achieve the same benefits in terms of trade reporting.
And I think that remains to be seen, but there is some optimism that, that will be acceptable with the MiFID II rules as well.
So a lot to be determined on whether this radically change the amount that's traded electronically.
But at a minimum, more trades will be going through MTFs.
On data, we are ---+ we have invested in and expanded our regulatory reporting offering to be both an ARM and APA in a new environment.
We're especially pleased with the progress that we're making with large institutions within mandates for their trade reporting for MiFID II.
So the set of data that will be available should be broader.
Over time, I think there will be more and more transparency requirements where all regulated trade reporting entities have to participate in a consolidated tape.
But our base of data should continue to be strong post January with MiFID II.
And then just ---+ sorry, just one last one, if I could sneak it in.
I just want to circle back to <UNK>'s question.
Is there a certain level of volume where the price changes are negative.
Just trying to get the sensitivity and kind of some of the breakpoints around high-yield fee change.
Yes.
So <UNK>, there is ---+ with the new plan in place and again, remember, we're going to have a ---+ for our major dealers, a distribution fee and then what is in effective fixed markup.
As volume increases, if you were simply comparing fees under the old plan to fees under the new plan, revenue under the new plan would be lower as volume increases.
But I'll give you one big caveat there.
If you ask me what do fees look like if volume doubles in high yield, Rick and I would sit here and tell you, we're not sure what the current fee plan and if that scales that well.
And when you have individual dealers receiving bigger and bigger bills every month under the existing plan, we don't think that, that plan scales extremely well.
But if volume doubles, for example ---+ and again, I'm saying all things equal, protocol, mix the same and the dealer roster on the distribution fee plan versus the all variable fee plan, you could see something like a 5% or 6% decline in overall revenue if volume doubles.
And again, a lot of assumptions in there if volume doubles and simply comparing the old fee plan to what we have on the new fee plan.
Yes.
So I did mention that for block trades, we hit a new record high.
And it's been ---+ we've seen a steady march up in our market share in over $5 million in trade size and went from a year ago in the second quarter a little over 7%.
First quarter, we were at 8%.
And now in the second quarter, we hit 9% in block trading.
We've got all of the new protocols that we've launched over the recent years has been ---+ have been addressed on how we break down those resistance points in block trades, and it's been a historical resistance point.
We are trying to address the concerns about information leakage.
We have different trading styles and abilities to contain that information leakage in, and client adoption is picking up.
We think it's a big area for us.
It's a big opportunity for us.
And I think everybody would have discounted our chances years ago.
We feel much better about the share opportunity and definitely treat the block trading area as a big addressable market for us.
I think what's coming through is that both dealers and investors are seeing execution benefits on the MarketAxess system across all trade sizes.
What we have done to really connect the global credit markets and introduce new and valuable counterparties to dealers, investors is really valuable.
And people are seeing the transaction cost savings and the efficiency gains in block trading in the same way that they always have in $5 million under trades.
So the percentage of volume that we're doing north of $1 million has moved up to around 70% of our volume.
We think this is a very encouraging sign for future growth.
We're pleased with the progress on munis.
I know we went with this with open eyes.
We knew it wasn't going to be easy, but we continue to make progress.
And we had comments in the prepared remarks that we have more clients engaged, more inquiry flow on the platform, we're executing more trades.
We did close to $2 billion in the first half of the year in muni trading.
And one of the positive things there, almost 50% of the volume was in Open Trading, so this was one of the reasons that we felt confident and comfortable launching trading municipal bonds.
We thought we had something to differentiate our platform.
Open Trading is serving that purpose and half the volume has come through in Open Trading.
There are significant transaction cost savings.
Just like Rick talked about on the transaction cost savings in U.S. high grade.
On the municipal bond side, we're measuring transaction cost savings in Open Trading, it's almost $0.50 or almost $500 per million in transaction cost savings when trading takes place through Open Trading.
So we do feel good about it.
It's a big market opportunity.
Are we ---+ do we wish we were further along.
Yes, we do.
There are challenges there.
There's some headway in doing this.
We need more flow on the platform.
There's some dealers that we need to prep and connect to the platform.
So we're still as enthusiastic as we were a year ago about the opportunity and the ability to pick up share.
Thank you for joining us this morning, and we look forward to updating you again next quarter.
| 2017_MKTX |
2017 | SPSC | SPSC
#Thanks, <UNK>, and welcome, everyone.
We had a strong start to 2017.
Our solid Q1 performance was driven by the continued growth of the SPS Commerce network and demand for our comprehensive cloud-based platform.
For the first quarter, revenue grew 14% to $51.9 million.
Recurring revenue grew 15%, and adjusted EBITDA grew 43% to $8.5 million.
Today's retail economy is driven by a generation of consumers who expect a consistent personalized omnichannel experience and retailers are being challenged to continuously address their ever-changing demands.
The retail environment is more complex than ever, and retailers need to exceed that merchandising and operations across a growing number of channels.
Consumers continue to shop both in-store and online.
They don't see the difference between online or in-store channels, but they do expect an engaging shopping experience, whenever and however they shop.
For further context, last year, total retail sales in the U.S. grew 4% to $3.5 trillion.
In-store sales grew 3% and represented 89% of total sales.
Online sales grew nearly 16% and represented 11% of total sales.
Drop-ship represented about 10% of online sales.
Consumer shopping habits are increasingly complex.
While all retail channels continue to grow, services such as Amazon Prime have led consumers to expect fast and free fulfillment with an endless selection of goods, and the in-store experience must equal or exceed the digital experience for retailers to remain relevant.
In 2016, 53% of in-store sales were web-influenced.
It is no longer sufficient to have an online strategy or a drop-ship strategy or an in-store strategy.
It is imperative that retailers and suppliers have a truly omnichannel strategy and achieve real-time collaboration to be able to adapt to the always-on retail environment.
Omnichannel and retailer is working.
A recent HBR studying found that within 6 months of an omnichannel experience, customers logged 23% more repeat shopping.
As the importance of having an omnichannel business strategy continues to increase for the retail ecosystem, the need for retailers and suppliers to partner with world-class technology providers is becoming even more significant, and this continues to drive demand for our platform.
Red Wing Shoes is an example of a company which developed an omnichannel strategy to be able to address consumer demands now and into the future.
Founded over 100 years ago with just one store, Red Wing now has 500 of its own retail stores and also sells its shoes at over 4,000 stores.
Best known as a maker of work boots, Red Wing has worked to continually evolve its brand beyond industrial footwear to tap into the consumer market and engage more shoppers.
To keep pace with the rising expectations of today's consumers, Red Wing needed to grow their online business and align their strategy with their brick-and-mortar stores while continuing to support their retail partners.
They were quickly outgrowing their legacy EDI system and turned to SPS for both fulfillment and analytics to draw their operations online and in-store.
Through our fulfillment solution, Red Wing can now onboard a training partner in weeks rather than months.
They are also using our analytics solution to make fact-based decisions about product performance and inventory, ensuring that the right inventory is in the right place at the right time.
Retailers are increasingly adopting omnichannel strategies to remain competitive, and suppliers must follow suit to grow their businesses.
Legacy processes are no longer sufficient to achieve the agility that is needed to address ever-changing consumer demands.
The need to have an end-to-end solution that enables real-time collaboration between trading partners is more important than ever before.
Fulfillment enables retailers and suppliers to communicate quickly and efficiently, while analytics provides the visibility necessary to optimize inventory at the store level.
Additionally, analytics allows trading partners to collaborate to track product performance and identify opportunities to grow sales while enhancing fulfillment performance.
Due to our broad-based solutions, retail expertise and leadership position, we continue to grow our network.
A recent example is Reinhart, one of the largest Tier 1 food service distributors in the U.S. With $7 billion in annual revenue, they deliver more than 170 million cases of food and products.
They recently hired a new CIO, whose ultimate goal was to move away from legacy EDI software and automate their supply chain across the entire enterprise, enabling real-time communication with their suppliers.
In partnership with SPS, Reinhart ran a successful community enablement program.
Holiday Stationstores is a recent retailer addition stemming from the ToolBox acquisition.
One of the largest convenience store chains in the U.S. with over 500 locations, Holiday prides themselves in utilizing data to optimize their performance, but much of their internal solutions they developed were resource-intensive and couldn't easily integrate multiple data sources and be shared in real-time across the organization or with strategic partners.
In their continuing effort to improve insight and collaboration with their strategic partners, they selected our analytics solution with its robust capabilities such as item performance, assortment and promotion opportunities to deliver sales growth while improving efficiency.
Comprehensive cloud-based platform and broad-based retail network enable thousands of trading partners to communicate real-time and adapt quickly to ever-changing consumer demands in the complex retail environment.
SPS sits at the center of the retail ecosystem, which allows us to act as a strategic adviser to retailers and suppliers on their omnichannel strategies, and we continue to grow our market leadership.
We had a successful first quarter, and we continue to believe we have a multibillion-dollar opportunity in front of us.
With that, I'll turn it over to Kim to discuss our financial results.
Thanks, <UNK>.
We had a great first quarter.
Revenue for the quarter was $51.9 million, a 14% increase over Q1 of last year and represented our 65th consecutive quarter of revenue growth.
Recurring revenue this quarter grew 15% year-over-year.
The total number of recurring revenue customers increased 5% year-over-year to approximately 25,000.
For Q1, wallet share increased 9% year-over-year to approximately $7,700.
For the quarter, adjusted EBITDA was $8.5 million compared to $6 million in Q1 of last year.
We ended the quarter with total cash and marketable securities of approximately $157 million.
We ended the quarter with approximately 275 quota-carrying sales headcount, in line with our expectations.
As we mentioned last quarter, due to the increased sales force productivity we expect to realize in 2017, we anticipate adding approximately 15 salespeople by the end of the year.
Now turning to guidance.
For the second quarter of 2017, we expect revenue to be in the range of $53.4 million to $53.9 million.
We expect adjusted EBITDA to be in the range of $7.3 million to $7.8 million.
We expect fully diluted earnings per share to be approximately $0.06 to $0.07, with fully diluted weighted average shares outstanding of approximately 17.7 million shares.
We expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20 with stock-based compensation expense of approximately $2.5 million, depreciation expense of approximately $2 million and amortization expense of approximately $1.2 million.
For the full year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016.
We expect adjusted EBITDA to be in the range of $31.8 million to $32.5 million, representing 19% to 22% growth over 2016.
Our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business.
We expect fully diluted earnings per share to be in the range of $0.36 to $0.39.
We expect fully diluted weighted average shares outstanding of approximately 17.7 million shares.
We expect non-GAAP diluted earnings per share to be in the range of $0.83 to $0.85, with stock-based compensation expense of approximately $10.1 million, depreciation expense of approximately $8.3 million and amortization expense for the year to be approximately $4.9 million.
For the remainder of the year, on a quarterly basis, investors should model a 40% effective tax rate calculated on GAAP pretax net earnings.
As a reminder, we have begun tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017.
Non-GAAP income now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to non-GAAP income.
A reconciliation of the impact of historical periods can be found on the financial data sheet we have posted to the IR section of our website.
In summary, we have a strong start to the year, and we look forward to expanding our market leadership and remain confident in our ability to achieve our long-term targets.
With that, I'd like to open the call to questions.
Yes.
So I think as far as our change in go-to-market strategy, I don't think that's had, really, an impact.
Fairly marginal.
I mean, somewhat, but fairly marginal.
And the deals in retail tend to be longer sales cycles.
So it is somewhat in the enablement campaigns, which is a large driver of our growth rate.
And from a customer account standpoint, it's through the retail enablement campaigns where you're going to get the largest number of customer accounts.
So it is more reflective of enablement campaigns.
Sure.
So first, as it relates to the EBITDA, we have reiterated what our expectations are for the year, and our expectation is that we will make sure that we are reinvesting appropriately back in the business to hit that EBITDA.
As it relates to the favorability in the quarter, most of the favorability of the EBITDA in the quarter just was related to timing of hires and investment in the business.
Specific to your question on the R&D side, you are correct.
You did see the Q1 R&D down sequentially from Q4.
A portion of that reason is that a portion of our R&D ---+ a small portion of our R&D, we actually capitalized for product enhancements.
And in our business, we tend to do less of that type of activity in Q4 because we're really focused on the holiday season, and more of that happens in the Q1 time period.
So that's part of the dynamics you see there.
The second part is that more of our hires are now going to be coming in, in the Q2 than we saw in Q1.
So as you're modeling R&D, you should expect to see the R&D spend increase for the remainder of the year relative to where it was in Q1.
Yes.
So obviously, bankruptcy is where they don't continue operations and they actually close down.
That is a negative.
We saw that last year, where we had 4 or 5 go bankrupt, and we ---+ it cost us a point-or-so of growth.
So that does have an impact.
Store closings, for the most part, don't.
What's interesting is, when you look at the underlying retail environment, if you have an omnichannel strategy as a retailer, you are seeing that brick-and-mortar stores are growing 3% last year, and that is 100 outlets.
About 120% of that is because of web-influenced sales.
So store sales are up but you need to be in the right standpoint.
So there's a lot of uncertainty, obviously.
Some of the players just didn't have omnichannel strategies.
Some of the players just ---+ you need to be very strong operationally and merchandising-wise in today's retailer environment to compete, and some of them aren't doing that.
So one of the things that we've talked about internally and et cetera is one of the things with the uncertainty in the retail environment, I will tell you that it is uncertain when we'll get back to that 20% number, but we see good traction.
We see a huge total addressable market in front of us and a big opportunity.
So with the customers we're helping and surviving, we're really adding a significant amount of that.
Sure.
So we ---+ for most currently, approximately 275, that's in line with Q4.
So the way can think about it is in the quarter, there was a pretty typical amount of attrition that we see as a business, and we hired to offset the attrition.
That was in line with what our expectations were for the quarter.
We also did reiterate that our expectation is that we would add about a net 15 by the end of the year.
That amount is lower than what we've added historically based on the efficiencies and the productivity changes that we put in place with the sales force.
As it relates to the mix of hiring of that sort of net 15 people, to your point, there's a portion of that, that are going to be more experienced or seasoned reps or seasoned sales executives to go after some of our larger customer opportunities.
As you would expect on those types of hires, those do take a bit longer to hire those folks, but we are right in line with what our expectations are relative to hiring them during the year.
It's pretty varied.
To the extent they're retail reps, senior retail reps, it helps if they have some background in retail.
They've been an enterprise rep.
And some of them aren't experienced to that extent.
They might have 2, 3 years experience if they haven't in some type of non-commodity type sales, that's ---+ so it's pretty varied among the sales groups between channel and supplier sales and supplier sales, enterprise and retail.
So it's pretty varied.
It's ---+ we are still hiring out of college, and we still are hiring.
We've already hired extremely senior sales reps.
Sure.
There's really no ---+ nothing as it relates to the pricing dynamics, <UNK>.
The growth rate is pretty similar to last quarter, when you look at it on an organic basis.
So just keep in mind, this is the first quarter we're lapping the acquisition of ToolBox last year.
So if you look at it from an organic perspective, we're 9% this quarter, and we're a little bit closer to 10% last quarter.
So pretty similar dynamics within the 2 quarters.
Nothing specific to highlight relative to pricing dynamics.
Well, Australia is a pretty good strong market for us, and we're seeing pretty decent growth.
Obviously, Amazon just announced they were going in to Australia.
So I think you'll see the mindset there.
They do have some extremely sophisticated retailers, just like the U.S. does, and some that are (technical difficulty) It feels pretty similar to the U.S., except without the ---+ it had not had the Amazon impact.
It's had the opportunity of e-commerce but not the threat of Amazon.
But obviously, Amazon (technical difficulty) a big announcement there.
Sure.
So Tim, we provide update on analytics on an annual basis.
So I don't have an update to tell you specific within the quarter.
You are correct.
We did highlight some examples, one being on the ToolBox side.
So now that we're just about a year into that acquisition, we really are pleased with what we've seen there.
And so we feel very good as it relates to the analytics business.
Do keep in mind, relative to some of the bankruptcies that <UNK> had referred to that occurred sort of in the latter part of 2016, the negative impact that's having in 2017 is more skewed to the analytics business.
So that's nothing particularly new in the quarter, but that's just sort of a reminder.
Overall, we think there's lots of opportunities to grow both the fulfillment business as well as the analytics business.
Sure.
So as it relates to the user conference, you are correct.
That's in Q2.
And the dollars associated with that are already reflected within our guidance, very similar to last year.
What you saw last year and what you're also seeing this year is our expectation for EBITDA goes down a little bit sequentially from Q1.
Partly that is to reflect the cost of that user conference.
So nothing really different relative to what you would have seen last year.
Yes.
I think the ---+ to address the first question on the time lines on the retailers.
Obviously, there's a lot of uncertainty in the retail environment, et cetera.
So I don't know that with the uncertainty, I'm going to project how long it'll stay longer or whatnot, but we are seeing uncertainty.
But obviously, we're seeing a lot of traction as well.
So I don't ---+ it's not gloom and doom.
We've had significant traction, but we have a lot of great activity going on with the retailers, and we add a ton of value to those retailers.
With that uncertainty, we are pulling any long-term forecast.
I think to be able to give guidance more than a year out just doesn't seem prudent at this time, saying we're going to hit 20%.
I think that's right, Jeff.
And just saying, it just seems ---+ I don't know.
In the retail environment, we feel very optimistic about our business.
We're very optimistic about how the reorg has happened and how the ToolBox acquisition, feel very upbeat about the business.
But the uncertainty looming out there just doesn't feel like to give long term ---+ to give guidance more than a year out just doesn't seem like a prudent thing to do.
Yes.
First ---+ the first part of the question, we're not seeing significant changes in who we're going after, how we're doing enablement campaigns.
It's still pretty similar on that front.
From a drop-ship standpoint, we do drop-ship with over 300 retailers today.
So it's an important ---+ our story is really about the network and supporting you as a supplier regardless of who ---+ what channel you sell into.
And it's the really the life cycle of the order and the life cycle of the item to able to address your concerns or needs as a supplier.
I'd say the biggest difference, CommerceHub is 100% focused on the drop-ship.
It's really not a network play.
It's a drop-ship play a lot of on the order management system for the retailers, for about 40 retailers, I think, is their thereabouts today.
So in those deals, where it's a large retailer looking for the drop-ship component of their e-commerce business, CommerceHub is in those deals.
If they have an order management system and they've solved that problem, we're in really good standings.
If they're looking to purchase CommerceHub's order management system, then they're going to have a competitive advantage.
That's an ---+ Pat, we look at that on an more of a ---+ we think about it like an annualized or a TTM basis.
So we'll provide an update on that on ---+ as we exit this year on an annual basis, consistent with what we've done before.
Within the quarter itself, we had a nice healthy mix of enablement campaigns and leads coming from retailers.
However, the same comment that we had mentioned on the last earnings call, the expectation in this year, we're not having as many as we had initially anticipated because of a subset of retailers, but the dynamics that we saw within the quarter was pretty much what we're expecting as we entered into the quarter.
What we do is, on an annual basis, we'll provide how many retailers we do some activity with on its community enablement campaigns and how many we do all with.
And that's a metric that we track on an annual basis.
Yes, we feel good about the tone of the business.
We feel good about the total addressable market.
We feel good about what happened with the ToolBox acquisition.
We don't feel good about the uncertainty in the retail market.
But I mean, we think, Pat, we're set up for the long-term and plan on continuing to execute on that.
For recurring revenue or for ---+ what numbers are you looking for, Pat.
Yes.
Since we've lapsed the ToolBox acquisition, the reported inorganic are one and the same.
So GAAP revenue, 14%; recurring revenue, 15%.
Well, this is really, Pat, what we anticipated.
Obviously, we talked about it.
We did a pretty significant reorganization in the beginning of the year.
So to hire into that environment, to be recruiting heavily in December with that out there and then having people come in to that new environment, just ---+ we anticipated more back end of the quarter hiring.
So January was nonexistent for the most part.
So it is what we anticipated from a headcount standpoint.
And I think you'll see, as we go through the quarters, we'll be on about 15, where we think we'll be.
So I feel pretty confident in that number of 15.
Yes.
So first off, I think it's extremely early, but I think what we'll take victories on is the turnover has not been significantly different than what it's been in the past.
I think the pipelines are growing and people are past the changes, and they're ---+ we have a very, very strong sales force with very committed people that I think are embracing the change in the new world.
So ---+ and I think they're going after some of their territories extremely aggressively.
So early signs of pipelines, et cetera.
I feel very good about the stability in the sales force, the leadership of the sales force, all the ---+ unfortunately, those are softer things, but the pipeline is growing and the pipeline is strong with the changes.
Yes.
So from ---+ we look at it from a couple of different ways.
Australia, we continue to have nice success there.
We continue to expand our sales force there.
We continue to make progress there.
And I think, frankly, Amazon coming in that market will give a more sense of urgency on some of the initiatives for retailers, so very much what we saw 3, 4 years ago at the impact of Amazon more so 3, 4 years ago in the U.S. So I feel Europe has been more around the working with the analytics play, and we continue to expand our network there.
And then Asia is really more around the North American supply chain.
We continue to expand our footprint.
We continue to let the viral nature of our network expand our business, and that's the way we'll continue to execute on that opportunity.
| 2017_SPSC |
2018 | NWL | NWL
#Good morning, everyone.
Welcome to today's fourth quarter conference call.
On the line with me today are Mike <UNK>, Newell Brands' Chief Executive Officer; and <UNK> <UNK>, our Chief Financial Officer, who will discuss the company's financial results and management outlook for 2018.
Before we begin, I'd like to point out that we will refer to certain non-GAAP financial measures, including, but not limited to, core sales and normalized EPS.
We provide a reconciliation of non-GAAP financial measures with the most directly comparable financial measures determined in accordance with GAAP in today's press release and in the slide presentation on the Investor Relations section of our website at newellbrands.com.
Let me remind you also that we will include forward-looking statements in today's discussion.
Actual results could differ materially due to a number of risks and uncertainties, which are described in our press release and in the Risk Factors section of our filings with the SEC.
The company undertakes no responsibility to update any forward-looking statements.
Thank you.
And I'll now turn it over to Mike.
Thank you, Nancy.
Good morning, everyone.
Thanks for joining our call.
Our fourth quarter performance was in line with the preliminary results announced on January 25 with a particularly strong outcome on operating cash flow, yet work to do on some other metrics.
The entire board and management team recognize what needs to be done.
And we've taken a set of decisive actions designed to deliver the results and value shareholders expect.
2017 was a transformational year for Newell Brands.
We restructured the company from 32 discrete business units to 15 operating divisions.
When coupled with procurement benefits, this resulted in over $350 million in savings and synergies that have flowed to the P&L.
We broadened our competitively advantaged design and innovation capability and we tripled the value of the innovation funnel on the legacy Jarden businesses with ideas that will begin to flow to market in the second half of 2018.
We invested to scale our new enterprise-wide e-commerce division, opening our e-commerce offices in the talent-rich New York metro area.
This new team doubled the budgeted growth rate at our leading e-commerce retail partner and has already established a profitable $1.6 billion global e-commerce business that grew over 25% this year.
In 2017, we further sharpened the portfolio, completing 3 bolt-on acquisitions and 8 divestitures, which generated a combined EBITDA multiple of 12x.
We used the net proceeds from these divestitures in combination with our over $900 million in operating cash flow to repay $1.4 billion in debt.
At the same time, we returned over $580 million to shareholders in the form of dividends and share repurchases.
Despite significant disruption in the U.S. retail landscape that has encumbered the sell-in of our products, the consumer macros have strengthened through the year as has the growth rate in our markets.
In the U.S., we increased market shares by 71 basis points, resulting in sell-out growth of 3.5% for the full year.
Our U.S. market share growth was broad based with share growth of 22 basis points on Fresh Preserving, 40 basis points on beverage containers, 55 basis points on Writing, excluding glue, 77 basis points on vacuum sealing, 109 basis points on Outdoor & Recreation equipment, 180 basis points on Food Storage, 193 basis points on baby gear, 273 basis points on Home Fragrance, 300 basis points on Fishing, 418 basis points on Team Sports and really, really strong increases on glue from Slime.
Consumer takeaway has accelerated through the year from 1.5% sell-out in the first half to 3.5% growth in Q3 and nearly 5% growth in Q4.
Despite these good results, sell-in, in the second half of the year was exceptionally choppy.
For the most part, the gap between sell-out and sell-in has been event-driven and is transitory.
As we come through the first half of 2018, we should move past the disruptions we've experienced since September.
Core sales in the fourth quarter would have been roughly flat versus prior year had it not been for 2 customer category cells.
First, on Baby, invoice sales at our largest baby care customers were down nearly 45% versus prior year related to inventory liquidation in advance of their Chapter 11 store closures, which are slated for Q1 and Q2 2018.
And second, on Writing, invoice sales at our third-largest customer were down over 55% related to a trade dispute we hope to resolve by the second quarter of 2018.
These specific issues were compounded by general inventory liquidation across a broader set of customers.
While we've taken pricing to recover hurricane-related resin and transportation inflation, the majority of these price increases did not take effect until early 2018.
And as a result, pricing continued to have a negative effect on net sales and margins.
Margins were affected also by steps we took to reduce inventories, including the reduction of production line time in Writing, Foods and Commercial Products.
We made a conscious decision to prioritize cash generation and working capital reduction ahead of our other key performance metrics.
And that helped in our delivery of nearly $1 billion of cash flow from operations in the fourth quarter.
I'm pleased with the way the organization responded to the call to reduce working capital and increase cash.
This choice enabled higher-than-expected repayment of debt in the fourth quarter.
Since the completion of the Jarden transaction, we have now repaid $3.4 billion of debt, including $1.4 billion in 2017.
So 2017 has been a transformational year for Newell Brands, a year of transition from both the Newell Rubbermaid and Jarden legacy models to a new Newell Brands model; a year of significant change in organization, operating models, leadership and ways of working; changes that are now 1-year-old with organizations and leadership teams just recently into a familiar rhythm of working.
Of course, all of this has happened during a period of disruption in segments of the U.S. retail landscape that we're particularly exposed to, given our category footprint.
While our second half promotional outcomes did not live up to internal and external expectations, we've put in place a new organization with a strengthened set of capabilities that will outperform our subscale single category competition over time.
Our capabilities in e-commerce, innovation and design are yielding results and will deliver value to shareholders that other approaches simply cannot and will not deliver organically.
I say this with a sense of certainty based on my 35 years of consumer goods experience in all kinds of different organization models and based on my team's proven track record of strengthening the financial performance of the companies we've worked at.
We believe sustained margin development and cash generation is dependent on building leading brands with differentiated value propositions, winning with winning customers and in growing channels and driving cost out of the business to provide both the fuel for growth and the funds for margin development.
With that as preamble, let me now hand the line over to <UNK> for a more detailed discussion of 2017 results.
And then I'll return to provide more perspective surrounding our outlook for 2018 and our plan to accelerate the transformation of the company.
Thanks, Mike, and good morning, everyone.
Our full year 2017 results were in line with the preannouncement on January 25.
During the fourth quarter, our core sales declined 1.9%, largely due to temporary customer disruptions in Baby and Writing while normalized EPS came in at $0.68 as compared to normalized EPS of $0.80 from the year-ago period.
Please note the year-ago figure includes approximately $70 million of pretax income associated with divestitures that were completed earlier this year.
Our focus on cash flow delivery in the quarter drove solid results as the business generated $990 million in operating cash flow compared with $992 million in the prior year due largely to favorable working capital movements.
Turning to the details.
Fourth quarter reported net sales were $3.7 billion, a 9.5% decline versus last year, driven by divestitures net of acquisitions as well as the 1.9% decline in core sales.
Foreign exchange was a tailwind.
Reported gross margin was 32.8% compared with 36.8% in the prior year while normalized gross margin was 33% compared with 37.2% last year.
The $33 million benefit from synergies and cost savings that was recognized in cost of goods sold was more than offset by several factors: unfavorable net pricing and mix, primarily in Writing, Food and Appliances; commodity and transportation cost inflation; and reduced fixed cost absorption, driven by our focus on reducing inventories.
We've begun to take pricing actions to help offset the impact of inflation.
Reported SG&A expense of $876 million represented 23.4% of sales as compared to last year's ratio of 23.6%.
Normalized SG&A expense was $735 million or 19.6% of sales versus 20.8% of sales in the year-ago quarter.
The year-over-year decline in the SG&A-to-sales ratio reflects the $42 million benefit from the cost synergies and renewal savings, lower incentive compensation expense, which more than offset the impact of incremental investment behind e-commerce.
Reported operating margin was 8.6% of sales compared with 12.4% in the prior year.
Normalized operating margin was 13.4% compared to 16.3% in the prior year.
Net interest expense of $116 million was below last year's level of $124 million, reflecting a lower debt balance as we paid down $1.4 billion of debt during 2017.
The reported tax rate for the fourth quarter was a benefit of 715% compared to an expense of 58% in the year-ago period, reflecting a onetime net tax benefit of $1.4 billion stemming from the Tax Cuts and Jobs Act in the U.S. The majority ---+ the major components of this noncash tax benefit include the remeasurement of deferred tax liabilities at a new 21% rate versus 35% previously, which results in a benefit of $1.5 billion, which is partially offset by a onetime transition tax expense of $108 million related to the mandatory repatriation tax on historical foreign earnings that have not been repatriated to the U.S. The normalized tax rate was 12% compared with 29.8% in the previous year, primarily due to a favorable geographic mix of income and a discrete tax planning benefits.
For 2018, we anticipate a tax rate of 20% to 21%, which reflects the benefit from the tax reform as well as our tax planning work.
We repurchased 5 million shares and ended the fourth quarter with 489 million diluted shares outstanding as compared to 486 million in the prior year with the year-over-year increase stemming from the shares issued in early July as part of the resolution of dissenter lawsuits.
Reported earnings per share were $3.38 versus $0.34 last year.
Normalized earnings per share were $0.68 compared with $0.80 last year.
Shifting gears to our segment results.
Net sales in our Live segment came in at $1.72 billion, increasing 2.7% relative to the year-ago period.
Core sales fell 1.8% as declines on Appliances and Baby more than offset growth in Home Fragrance and Fresh Preserving.
In Baby, we expect the impact from inventory destocking by our leading baby retailer related to their reorganization proceedings to continue in the first half of 2018 as the retailer works through inventory issues caused by significant reduction in its store count, as has been publicly announced.
Net sales for the Learn segment were $551 million, an 8.9% year-over-year decline.
Core sales contracted 9.7% as low single-digit growth in Jostens was offset by a double-digit decline in the Writing segment, which is primarily driven by retailer inventory destocking in the office superstore and distributive channels and a significant trade terms dispute with one of Writing's large customers in the U.S. For the Work segment, net sales were $705 million, representing a 3% decline year-over-year.
Core sales decreased 1.2% as growth in Waddington and Safety & Security was more than offset by lower sales in the Consumer and Commercial Solutions business.
Net sales for the Play segment were $563 million, which represent a 6.6% increase versus the prior year.
Core sales grew 5.4%, driven by growth in Outdoor & Recreation division, reflecting strong performance in Coleman, Contigo and Marmot.
Net sales for the Other segment were $198 million as compared to $596 million in the prior year with the year-over-year decline reflecting the divestitures which were completed earlier in 2017.
Core sales were down 0.8% as growth in the Process Solutions business was offset by weakness in Home & Family.
Importantly, the business generated $990 million of operating cash flow in the fourth quarter, about even with the year-ago period despite the divestitures.
Although still early days, we are pleased with the responsiveness of the business towards working capital improvement, particularly on inventories, which declined about $350 million from the end of the third quarter.
We expect to make further progress on working capital during 2018.
During the fourth quarter, we returned $264 million to shareholders through a combination of share repurchases and dividends.
I'll now turn the call back to Mike.
Thanks, <UNK>.
This morning, we reaffirmed our initial guidance for 2018, which calls for normalized earnings per share in the range of $2.65 to $2.85 and operating cash flow of $1.15 billion to $1.45 billion.
We also provided a net sales guidance range for 2018 from $14.4 billion to $14.8 billion.
This net sales range is provided using the new 2018 revenue recognition standards.
Importantly, our current forecast assumes continued ownership of all businesses for the entire calendar year.
Our guidance also assumes our leading Baby customer executes its restructuring plans as publicly announced with no further weakening of its financial condition and that we resolve our differences with our third-largest Writing customer in the second quarter of 2018.
We expect both Baby and Writing to have negative core sales growth in the first half of the year.
We also expect our first half results to sequentially improve from Q1 to Q2 with Q1 2018 results roughly in line with the quarter just reported.
Our guidance assumes the divergence between sell-in and sell-out growth is transitory and returns to more typical levels in the second half of 2018 with the first half negatively impacted by the dynamics in Baby and Writing and the lapping of the 2017 Slime pipeline fill in the second quarter.
Our guidance assumes an improvement in gross margin and operating margin with positive price and about $275 million of incremental savings and synergies more than offsetting bonus replenishment and inflation in sourced finished goods, resin and transportation.
We expect operating cash flow to increase substantially, driven by further working capital improvement, about a 50% reduction in normalized cash cost and the absence of cash bonus payments, partially offset by higher cash taxes related to the deferral of some 2017 taxes into 2018.
The most significant risk to our 2018 outlook relates to the U.S. retail landscape and the financial health of our leading baby gear customer.
We're committed to building a leading consumer goods company that delivers strong results and significant value for our shareholders.
On January 25, we announced our plans to accelerate the transformation of the company.
The board has expressed unanimous support for management's recommendation to explore strategic alternatives to the balance of our commercial and industrial businesses and our smaller consumer businesses.
The accelerated transformation of the company will result in a simpler, faster and stronger Newell Brands.
We will create an $11 billion portfolio of leading consumer brands with the entire portfolio responsive to our advantaged capabilities in design, innovation and e-commerce.
It'll be a portfolio that maintains the scale advantage built for the Jarden acquisition in our consumer channels with a business that's roughly twice the size of legacy Newell Rubbermaid with a substantially higher operating margin of nearly 15%.
Importantly, the proposed portfolio simplification will significantly reduce operations complexity, lowering our global factory, warehouse and customer footprints by about 50%, eliminating virtually all of the unbranded businesses and all major cyclical businesses, consolidating nearly 80% of our global sales on 2 ERP platforms by the end of 2019 from over 30 today and dramatically reducing our resin exposure.
We do not expect to lose more than $50 million of the remaining synergies and savings to be delivered and expect any potential dis-synergies resulting from the divestitures to be offset by an additional savings opportunity unlocked by the simplification.
So optimizing the portfolio will not compromise our ability to deliver the remaining synergies and savings committed to as part of the Jarden transaction.
We expect to generate about $6 billion in after-tax proceeds from the transformation program with roughly 2/3 of the proceeds to be used to delever the balance sheet to just below 3x leverage and sufficient capital available to help offset the loss of earnings associated with the divestitures.
The businesses we're looking to potentially exit are high-quality franchises with good teams that simply do not fit our consumer branded goods business model and would play more of a strategic role to others.
Multiples in the commercial and industrial space are quite high as evidenced by the roughly 13x multiple we achieved on the divestiture of our Tools business last year.
The processes associated with actioning the portfolio of changes under consideration have begun.
And there's been substantial interest expressed.
Despite the challenges in our business, we believe we're on the right track.
Our confidence is grounded in the knowledge that we have a leading portfolio of brands, advantaged capabilities in innovation and design with the commercial impact on the legacy Jarden brands still to come.
We have a peer group-leading e-commerce organization that will only be getting stronger in 2018.
We have a long list of opportunities for core distribution and international deployment and a pipeline of synergies and savings that are largely undisturbed by our actions to reshape the portfolio.
And as importantly, we have a forward-looking, seasoned and proven consumer goods leadership team that's adapting our playbook to the current market realities.
We could not be more committed and driven to deliver the transformative value-creation story that's inherent in Newell Brands.
Before I turn to Q&A, I would like to briefly comment on a recent development.
As many of you are aware, Starboard Value recently notified us of its intention to nominate 10 director candidates to stand for election to the Newell Brands' Board of Directors at our 2019 Annual Meeting.
Our Nominating/Governance Committee has a formal process in place to review all nominees and is considering the nominations as part of this process.
As you've heard today and as you'll hear more about at CAGNY next week, we have a clear plan in place to drive value.
The accelerated transformation strategy is designed to enable us to improve our operational performance and accelerate capital allocation optionality.
We continue to take actions that are in the best interest of our shareholders and enable us to maximize shareholder value.
I won't be able to provide more commentary on this today.
I would appreciate your understanding and would ask that you focus your questions on the topics we can discuss: earnings results and our transformation strategy.
With that, let me pass the line back to the operator to help facilitate questions.
Steve, that's a lot of questions.
But I'll take them one at a time.
The actions on portfolio were actually the continuation of a theme.
If you go all the way back to 2011 and look at the choices my team and I have made on legacy Newell Rubbermaid and the choices through 2017 into 2018, you see this thread that you can pull through those ---+ that history that's pretty well integrated.
We've sold most of our industrial and ---+ legacy Newell Rubbermaid industrial and commercial businesses.
Starting right when I joined the company in the middle of 2011, we sold BernzOmatic, which was a torch business.
We subsequently sold Endicia, which was an online mail order, a mail fulfillment business.
We sold Bulldog, which was a hardware business.
We subsequently sold the D\u0102\u0160cor business, which was the Levolor brand, which was a remodeling business.
We subsequently sold the Rubbermaid medical business, which was a business oriented towards hospitals.
We sold Mimeo, which was a business oriented towards schools and municipalities.
We then sold our Tools business.
And so the assets that are in the commercial and industrial space are really just continuation of a theme.
We've been moving aggressively as a company, as Newell Rubbermaid and now as Newell Brands, to pivot the company to become more consumer-facing and less cyclical.
And so the choice to sell the commercial and industrial assets is driven by that strategic orientation.
The moment we're in is an attractive one to be considering an acceleration of that activities, given historic multiples on commercial and industrial businesses.
If you go back and look at what we generated on the Tools business, we generated nearly 13x on Tools last year, which was a surprise for most folks in terms of the value generated through those assets.
And that was a really good win-win situation for us and Stanley Black & Decker.
We expect the same types of outcomes on the commercial and industrial businesses.
We executed 8 divestitures in 2017 of subscale, small consumer businesses as well.
So you've got ---+ largely subscale, small consumer businesses.
So you've got the 3 businesses that are consumer-facing that we're considering selling that are a continuation of those choices.
The reason to keep a business or to not keep a business from my perspective is grounded in whether those businesses can benefit strategically from the commitments we're making in capabilities and the flexibility we have within the P&L to invest behind the brands.
And the choices we've made are driven to focus our portfolio around the assets that can benefit the most from these capabilities we built in innovation, design and e-commerce.
The percentage ---+ all of the businesses that we left in the portfolio will benefit from those capabilities.
And as I said, even the consumer-facing assets that we'll sell would have ---+ while they could have benefited from those capabilities, they would have featured much lower down the priority list in terms of funding for investment.
And so we've made the choice to do this now and get it behind us, so we could focus on, first, fixing the assets and the core that are underperforming and then getting on with deleveraging the balance sheet and also applying the capabilities we have invested to create against the assets that would benefit the most.
So I think that's how I'd answer your question broadly.
With respect to how we got to the announcements we've made, there's a whole series of dynamics that underpin the sequencing of events that I don't think I'll get into today.
Sure.
So let me answer the last part of your question first.
As I mentioned in my comment, operating cash flow will benefit from a significant step-down, roughly 50% step-down, in the normalized cash cost in 2018 versus 2017.
A significant portion of that step-down relates to the cash cost associated with the restructuring and restructuring-related activities.
So we've organized our synergy and savings delivery through what we call the transformation office.
Those costs get normalized out of the P&L.
Those costs will come down year-over-year by about $50 million, '17 to '18.
And we have a whole series of other normalized cash costs that will reduce from '17 to 18, some related to deal bonuses, some related to M&A fees, some related to the debt extinguishment costs associated with the tender we issued earlier in the year.
But as I said, normalized cash cost will come down by about 50% year-over-year.
And then they will sequentially decrease in the out-years.
They don't stop this year.
The program was never designed that way.
The program is designed to deliver savings and synergies through 2021.
So there are cash costs that come out of the business associated with the delivery of those savings and synergies.
But you should kind of think of it as a sequential deceleration in those costs from 2019 onward.
I think the one point I would like to make and reemphasize that I made in the script is that the disposal activities will not compromise the synergy and savings deliveries that we've committed to as part of the Jarden transaction.
As I said, we're going to deliver about $275 million in 2018, which would bring our cumulative savings and synergies to over $840 million by the end of the year.
And we're committed to the $1.3 billion savings and synergy numbers that we articulated over the last year and have a line of sight to deliver them in the context of the new $11 billion portfolio, which gives us ---+ will give us some very interesting flexibility for both investment behind the brands and the capabilities, we will continue to invest in e-commerce, for example, and also simultaneous margin development.
And that's a really important part of the story.
If you go back and look at Newell Rubbermaid's legacy results, we accelerated core growth through the deployment of this model while simultaneously increasing gross margin from 37.5% to 39.4%, operating margin from 12.5% to 14.4% while more than doubling the A&P investment in the business.
We have a line of sight with this new business that we're creating to deliver a similar profile of performance.
What's changed is the retail environment.
And what's unique about our portfolio and that does not change with the change in portfolio footprint is the exposure to the stressed segment of the U.S. retail landscape.
And that will continue to be a bit of an overhang on the business with probably episodic events, like the ones we're dealing with right now.
But as we continue to scale our e-commerce business, if you do the math on that, and you expect double-digit growth going forward off of a $1.6 billion base as a result of creating a community of practice in a high-talent geography, like we have in the New York metro area, you get a mix effect to growth and margin development over time that is very, very positive.
And so I think in large part, the scenario we put forward is very, very attractive scenario.
We have to get through sort of this transitory and disruptive period that we're in, which is really largely a first half dynamic.
And then we get on with building the business from there in a way that's similar to what you've experienced from the legacy Newell Rubbermaid business from the second half onward.
And that's ---+ we're clear in that point of view.
We're clear that our plans should deliver that with the one variable being sort of the episodic dynamics within the retail landscape that we will have to accept and do a better job of anticipating, quite frankly.
Yes, thanks, <UNK>, for the question.
So let me start with the second question, I'll come back to the first question.
So the second question was about what gives you confidence in the back half of the year.
Well, I said all along that the investment we were making in brands and innovation on the legacy Jarden businesses would have an 18- to 24-month gestation period.
And so I mentioned the fact that we've tripled the value of the innovation funnel on the legacy Jarden businesses.
So the work that's gone down over the last 18 months has been focused on building the ideas, building the products and building the commercial launch plans associated with the innovation that was basically underleveraged in those Jarden assets.
And so we come to market, we begin to come to market with some big ideas in the second half of 2018 that leverage those investments.
And so our confidence is built on what we know is coming to market.
We've already presented all of those ideas to customers.
And we actually have already begun to present 2019 ideas to customers.
So that has ---+ we have a clear line of sight to that.
It's about commercially doing what we have the potential to do.
And that's always ---+ that's in the hands of the operating divisions and the brand development teams.
And for the most part, our history would suggest that we, in fact, do, do well with new, big, differentiated ideas.
So that's part of the confidence.
The other bit of the confidence is grounded by the fact we made a big investment in e-commerce in 2017 and we populated an organization here that is ---+ has been building through 2017.
In 2018, we will continue to invest in that organization to scale its presence from the U.S. to outside of the U.S. And we're ---+ despite what is a big, profitable and rapidly growing e-commerce business, we didn't get the full benefit of those ---+ of that organization build-out in 2017.
And so we expect as the year goes on to get an increasingly important impact from that organization.
And so those 2 things inspire confidence.
The other thing that the team has to deliver is it has to deliver margin improvement in 2018 and working capital reduction.
And I would say, connected to your first question, I think on working capital management in 2017, we could have done better.
With respect to margin development, we had the flow-through of synergies, but we were dealing with a very difficult environment with respect to pricing.
And we had some real difficulty with the slow creep in inflation in the first half of the year and customers pulling inventories out.
It was very, very difficult to get pricing implemented in 2017.
And so you've got inflation beyond what we planned, pricing more negative than what we planned.
And the combined effect of that on margins was not good.
So I think there's plenty of things we can do better, there always are for every leadership team and for every company I've ever worked in.
But I think the things that will be the determinant factors in our '18 performance will be the speed with which we can get the margin development happening.
I don't think it really does in Q1, knowing what I know about pricing, timing and inflation.
But I think we start to make real progress in Q2, and from that point forward, on the margin front.
And then with respect to innovation activity and e-commerce activity, we'll get a consistent build on e-com and a step change in innovation impact in the back half of the year that'll contribute to our overall performance.
I'm going to keep my comments though, <UNK>, focused on an internal way as opposed to an external way.
And I'd prefer not to comment on what other people are saying.
This team's just focused on doing what we need to do to drive the business and improve the performance of the company.
And we're not going to be distracted by all the other things outside of that context.
Well, in my comments about first half performance on Writing, we've captured the first quarter impact of that not being resolved, but we do assume a second quarter impact.
For this particular customer, our brands represent over a 40% share of their retail footprint.
And so we have a mutual need to resolve the conflict in advance of Back-to-School.
And I suspect that's how things will play out.
And like all of these things, you really have to be true to principle.
Otherwise, you end up compromising in a structural way your gross margins when you are in a situation where you disagree about performance for the payments that have been made.
And I think we're on the path to resolution.
But I don't expect that to occur really in the first quarter.
I expect, as we come into the second quarter, we'll get on a more ---+ into a more virtuous space with each other.
And this will be resolved and we will build out a strategic plan going forward, at least that's what I hope we can find a path to deliver.
We've taken a big hit in the fourth quarter.
I told you that the Writing business globally was down 55% as a result of this one cell.
So that gives you a sense for whether we were shipping inventory or not.
That continued into the first quarter.
And that had 2 effects on our overall performance.
One, it obviously impacted core sales.
As I said to you, the combination of that Baby one customer interface and the Writing one customer interface explains 200 basis points of the decline versus prior year and the fourth quarter.
I said that the business would have been flat effectively had it not been for those 2 events.
We experienced more of that on Writing and Baby in the first quarter.
And then things will turn, assuming that the Baby business doesn't face any more disruptions associated with TRU's restructuring plans.
Yes.
So <UNK>, thanks for the question.
I want to be ---+ I want to clarify something if that was the net impression I gave.
I'm not suggesting that the sell-in and sell-out, the divergence converges to parity.
I'm suggesting that it converges to a more historic relationship, like what we've experienced in the first half of the year.
I think you're right.
There's huge differences in the inventories that particular formats carry in the retail landscape.
So as the mix of our business shifts, we will see a mix effect on retailer inventories.
And that's why you have a pretty steady divergence between sell-out and sell-in.
The issues we faced in the back half of the year were more event-based at specific retailers, where that underlying disconnect between sell-out and sell-in was compromised by much more acute dynamics, either related to Baby or related ---+ in our leading customer's Chapter 11 filing or related to this particular trade dispute.
So you're right to assume that there's going to always be a disconnect.
And your question on whether that is an accelerating divergence structurally, I think, is something I can't really answer at this point.
The thing to remember though in all of these calculations is that it's not the absolute reduction that matters, it's the change in the rate of change that matters and impacts revenue.
So theoretically, you could have an issue.
But I think it's very modest in relative terms to some of these events-based dynamics, like Walmart's actions over the last 4 quarters, which is now behind us, where they took double-digit reductions from a percentage standpoint in their inventory positions or a reset of a particular customer's point of view.
We have one large distributor in Writing that made the choice in the middle of the year to change their inventory algorithm from holding over 23 weeks of inventory as a distributor to deciding they can only hold 12 and that they were going to take 18 months to get there.
Those types of events, I think, are discrete things that you have to kind of work through.
I don't ---+ I think we just have to be better at anticipating when those are going to come at us by making sure that our connections to particular retailers are sound and firm and that we are listening actively for the signals that are being sent to us.
But the structural stuff, I think, is more gradual and more manageable, to be honest with you.
Yes.
Well, I think the thing that we think ---+ we look at and we consider probably one of the most important metrics in any one of these businesses is how our brands are doing from a market share perspective because that's an expression of consumer involvement with the business.
So as TRU goes through its changes, it's not like the consumer isn't going to go buy her baby gear.
There's no real material ---+ I wouldn't expect a material change in the value of the market.
What does happen is that there are differences in price continuums by retailer.
There are differences in brand strength by retailer.
And so it's really incumbent upon folks like us to make sure that as those stores come out, that we're actively marketing to the consumer and trying to drive her to an alternative location, where she can find our products in the price tier that she's shopping in.
And so that's a little bit of the inside baseball type of details that are going on in the Baby business right now.
The other thing that's really important is we compete against subscale single category competitors typically.
And so when somebody as big as the leading baby gear provider in the U.S. faces challenges like the ones it's facing, we have the flexibility as an enterprise to absorb those hits and invest to create that switching behavior I just described in a way that our competitors just simply can't afford to do.
So this is where the scale of our consumer franchise really matters.
This is where, even in the future context, we'll have a huge scale advantage versus almost every one of our competitors in the categories we will be competing in.
And we get a leverage factor through scale that is really, really important in a situation like this.
So my sense is that we should see continued share consolidation.
As I mentioned, baby gear shares were up 193 basis points in the U.S. in 2017 despite the back half turmoil created at the leading retailer.
And the teams mobilized to try to sustain that level of share improvement year-over-year in '18 despite the disruption they're experiencing.
And that's why I described it as transitory because on the back end of whatever that restructuring looks like, people are still going to be buying baby gear.
Consumers are still going to be making brand choices based on the value propositions that those brands have.
And we want to be within arm's reach of every one of those consumers, whether it's in brick and mortar or whether it's online.
And we've invested to create this advantaged capability in e-commerce that should serve us really, really well through this period.
So there's a lot to do in those moments.
But the capability agenda we've invested to create over multiple years at Newell Rubbermaid and the extension of those capabilities in the new ---+ in the context of Newell Brands, the doubling down of investment we've made on e-commerce, they will all serve us well through this period of disruption, particularly relative to our subscale single category competitors.
Sure.
So good questions, <UNK>.
We delivered 4 more days of inventory reduction in the fourth quarter than we did in the fourth quarter a year ago.
So we've outperformed what we typically.
.
About $100 million.
About $100 million more came out in the fourth quarter of '17 than in the fourth quarter of '16 because your observation is right, there's always this bleed-down of inventories.
But it was worth about 4 more days.
The other thing that the team did a great job of in the fourth quarter was progress on receivables and extension of payables.
But really the receivables number was probably the most important contributor, beyond the inventory, to working capital movements.
And that had to do with really getting into the details of customer compliance with respect to our agreed trade terms and fighting for our cash.
Obviously, that's an ongoing dynamic.
But the team really kind of put the full-court press on and made good progress.
And it's an interesting bit of learning for us in that, that may offer opportunities going forward.
Every day of receivables is about $49 million of cash.
Every day of payables and inventories is about $29 million of ---+ $28 million, $29 million of cash.
So these are really, really important levers for us.
And there's a huge amount of opportunity tied up in working capital.
Next year, we expect to continue to make progress on inventories.
We've got roughly about 7 days of inventories planned to come out in 2018.
We'll continue to make progress on payables.
Our payables days are in the mid-60s.
And most consumer goods benchmarks are in the low 70s.
Unilever would be in the low 90s.
So there's a lot of opportunity here on payables.
We're working that in a structural way through the procurement activities we've got going on, on synergies.
They're not only negotiating rate-based benefits but also terms benefits.
So we should be able to make more progress there.
I think if I look at our working capital metrics versus any consumer goods benchmark, there's a ton of opportunity, there was at legacy Jarden and there was at legacy Newell Rubbermaid.
We have today made some good progress after a really bad Q3 as a result of the top line miss.
And that gives us encouragement and gives the organization kind of the energy boost and the confidence to kind of really go for this.
Next year, our incentive schemes approved by the board and I think probably released, I think, publicly today ---+ the 8-K ---+ later on today that our compensation scheme for the total corporation will be cash flow-based and earnings-based.
The divisions will have a stake in the corporate performance.
That will be roughly 50-50 against our external goals.
And then the divisions will have their own set of metrics that are operating income-based.
They'll be focused 75% of their incentives around division target, 25% tied to the corporate performance.
So we're going to put skin in the game for the entire organization on continued progression of working capital improvements.
As I said in my comments, we have significant ---+ a significant step-up in operating cash flow projected for 2018.
<UNK>, what was your first question that I didn't answer.
Yes, well, I think that's a really good point.
I think our gross margins in the first quarter will look very much like what our gross margins looked like in the fourth quarter because we're pushing production time out of Q1 on Writing.
Typically, we would start to build inventory in the month of March for Back-to-School sell-in at the end of June.
The teams have found a constructive way to do that without having to start those builds so early.
And we want to get ---+ keep the momentum going with respect to working capital movements versus what we were able to deliver year ago right from the beginning of the year.
We'll take the hit because we're going to prioritize cash above gross margin in the first quarter.
But we'll take the hit on fixed cost absorption to gross margin in the first quarter to enable the movement of that inventory and the production plans out later into the year.
We think that's the right call to make.
We will pay a mix penalty in the first quarter because we'll continue to struggle with the one retailer I was referring to in Writing.
And Writing has obviously a positive mix effect on the overall company.
But I think the way to think about gross margin progression is Q1 looks a lot like Q4 and then things really begin to flow.
We get the resin pricing implemented more broadly by about February 1.
Most of those actions begin to get traction.
So we'll get a bit of that benefit in Q1 and the flow-through of that benefit into the second, third and fourth quarters.
We will get the mix benefit from less of a downdraft related to this one particular retailer on Writing.
I think one of the interesting business stories that's sort of lost in the cloud of discussions from 2017 is the progress on Yankee Candle in Home Fragrance.
And that business delivered growth in 2017 with a decent margin despite the challenges of Yankee retail.
And so we've got some really interesting learning out of the pop-up store that we did in the holidays in New York.
We got interesting learning from the personalization work we did.
The team is really energized and focused around leveraging those insights for profitable growth going forward.
We've extended the shoulders of the portfolio into wholesale, which is yielding tremendous results as represented in the 273 basis points of market share growth on Home Fragrance.
So I think this is an interesting story.
We will continue to have to phase into the headwinds associated with retail, Yankee retail.
But the shoulders of that business are performing well.
And Yankee has the potential to mix the company up if we're able to sustain the growth performance.
Another hidden gem in 2017 was the performance of the Jostens business, which grew nearly 2%, which is a credit to Chuck Mooty and his team and some of the investments we've made in building out not only the scholastic and high school, grade school, college aspects of the business but also the professional aspects of the business.
And that's an interesting story that also has the potential to mix us up as we go forward.
So there are lots of factors that will contribute to the margin progression.
You should expect Q1 to look very much like Q4 and then things to really kind of get back into the more ---+ the zone you would normally expect because the choices on manufacturing activity will get into more of a normal rhythm and we will get more pricing leverage.
We'll continue to get procurement benefits through the synergy work we're doing and then we get into a more virtuous delivery.
We expect gross margin improvement year-over-year.
And I think you should expect us to continue to deliver gross margin improvement from this year onward.
It's the lifeblood of the business.
Yes, so first, we did pay some cash taxes in 2017 related to disposals, but we are ---+ included in our cash forecast for 2018, we are reflecting the fact that there's more ---+ the majority of the taxes related to the Tools divestiture are hitting 2018.
So that's factored into our guidance on cash flow that we talked about.
And then in terms of Q4 and how we came in above where we thought, I think 2 things in principle.
One, admittedly, we sort of at the top hedged back a little bit on our forecast on inventory.
And the business units were running ---+ were operating at a target that was more aggressive than what we were projecting.
Frankly, some of that was just we wanted to make sure we're getting the right traction.
And we saw that come through.
And you saw that in the change in working capital and as well as the effects on the gross margin in the quarter on absorption.
So that was one piece.
And then the second piece was really on receivables that ---+ and Mike alluded to it.
But the team really did a nice job of stepping up on a lot of internal processes and practices that really paid some dividends in terms of ---+ relative to our own forecast on receivables.
The other piece admittedly just within the forecast accuracy is the pace in which our sales occurred during the quarter were more front-loaded.
And therefore, you'll collect more within the quarter.
So that had some influence in it as well.
But operationally, we feel really good about what the receivables group did and that capability sustaining going into this year.
Yes.
So I mean, most of the pricing that we're taking right now is related to resin inflation that spiked, as you know, with the hurricanes in late August into September.
So you have a 60- to 90-day lag with retailers on price implementation from announcement date.
So most of the announcements were made in early October.
The big retailers are just ---+ you end up with a negotiating posture that probably pushes implementation dates back.
As I said, they will go 2/1 for the most part.
And those increases are designed to recover the resin spikes we saw in the fourth quarter.
Inflation has moved negatively on us since then.
So we will likely have to do more pricing.
But I don't know that we will do that through invoice price changes.
We'll probably do that through customer programming adjustments, which are another way to capture pricing.
So those things are underway.
Those are the types of discussions the divisions are having.
Just to be clear and transparent, the divisions are pursuing more price increases than we've captured in our assumptions and in our guidance.
So I think it's going ---+ it is a tough environment out there to get these things landed.
It will continue to be a tough environment to get these things landed.
Divisions build plans that are typically ahead of what the corporation assumes in its guidance.
And we've hedged some of their assumptions back, given the risk profile on some of them.
So I think this will be an ongoing discussion.
You've heard it from a lot of people, it was difficult to get pricing in the fourth quarter.
That was true.
I think the inflation spikes that occurred on resins make it more palatable and easier for us to engage in pricing discussions than the gradual inflation we saw through the first half of the year.
So my confidence is higher this year that we'll get things done that we couldn't get done last year.
We've also pulled back on some of the programming activity we had last year that didn't yield the kind of returns we thought were appropriate.
That also is a path to positive price.
Now you should not expect us to be giving up volume.
This will be a year of a blend of price and volume.
And we expect ---+ once we get through this very, very volatile period that we're in the first half of the year, we expect to see a blend of both in the back half contributing to a meaningful improvement in the underlying growth on the business.
So I don't know if that answers your question, <UNK>, or whether it was too vague but probably the best I'm going to offer today.
Yes.
Well, I mean, we will continue to invest in e-commerce in 2018.
But the way you should think about it is that we've got to do the things we need to do within our overhead structure to fund that investment from the business units that are experiencing the tough declines in their brick-and-mortar businesses.
And so the difficult conversations, like the one I described with the Writing customer, are in part designed to enable the reallocation of resource to where the most significant return on investment can be generated.
And those are tough things to do.
But that's how I'd characterize how the investment in e-commerce occurs in 2018.
And so this won't be a big spending year because we have to calibrate spending to the environment we're in and the growth dynamics that are out there.
And with the volatility we'll experience in the first half of the year, we have to be very cautious to not spend beyond an appropriate level tied to the revenue we believe we'll be able to generate.
But we can fuel the big investment bets we want to make, whether that's innovation, whether that's the investment in e-commerce, by challenging the businesses that are having the more stressed performance, to look at the return on investment they're getting on the choices they're making.
And we're a more engaged and actively involved leadership team than the design that Newell Rubbermaid used to have as a holding company, where we delegated all that authority into the divisions.
We don't think that's the right approach in this environment we're in.
You have to be prepared to shift resources to the winning channels, the growing channels and the winning customers.
And that is a very difficult thing for divisions to embrace because of the risk associated with it.
So if you disaggregate those choices to the lower levels in the organization, what you do is you compromise the pathway to making the whole greater than the sum of the parts.
Because people will aim off those choices whereas the corporation can accept those risks with involvement in the business.
And so it's a different operating model, it's a different way of working than either the legacy Newell Rubbermaid prior to my joining in 2011 or the legacy Jarden organization prior to Jarden becoming part of Newell Brands.
But we're quite clear, this is the right model for the moment we're in.
And we don't believe the moment we're in changes very much with respect to the shifting dynamics in consumer purchasing activities and approaches and the impact that's had on the retail landscape, forcing companies like ours to pivot their resources from where they've historically been focused to where the market is moving towards.
And companies that don't do that aggressively and proactively will end up experiencing real trouble because their top lines will compress and the fixed cost absorption associated with declining top lines will be profound on their margin structure.
So this is a very, very important topic.
And it's at the heart of why we've built our operating model the way we have and why we operate the way we do.
So <UNK>, I don't know if that answers your question, but I think it was sort of an important thing to put out there.
Okay, <UNK>.
I guess, that's our last question.
I just have a couple of final comments before we sign off.
Just a thank you to all of my Newell colleagues.
This has been an incredibly challenging year.
And you've probably never worked harder.
I want to thank you for your perseverance, for your drive and for your determination.
And while we may not be happy with the outcomes we delivered, we put in place and built an organization and a set of capabilities that are going to serve us very, very well into the future.
Let's stay focused on the here and now and not be distracted by all the headlines and be uncompromising in our drive to reach our long-term potential.
Thanks so much for the support and for your drive and attentiveness.
That's it for me, operator.
| 2018_NWL |
2016 | SYK | SYK
#Thank you.
Sure.
I think if you looked quarter to quarter, Q3 to Q4, our margin is fairly consistent, and I've talked about this before.
There's ---+ like you mentioned, there is lots of variables that impact our margin, not only price, but FX, acquisitions.
And certainly, one of the biggest factors is mix, and the mix plays out in two ways.
It plays out in geographic mix, but also sort of business and product mix.
And so, as I look year-over-year for at third quarter, really probably the biggest impact that we had, was related to business mix, in terms of how much MedSurg versus Orthopedics versus international, we had last year versus this year.
And then, on the FX front, we entered the hedging program back when foreign currency was a lot more volatile, and the whole idea was to lock in the predictability of foreign currency for us.
So like you had mentioned, currencies move up and down.
Our hedging program provides stability and predictability to us.
And so for, the third quarter, I think as I said, there will be sort of a nominal impact on sales related to translational.
But that we'll have a potentially minor impact similar to this quarter, related to transactional FX.
And that's where I think we'll come out.
Yes, I don't know.
I wish I had the currency crystal ball to figure out what ---+ how things were going to flow.
But it's hard to say, because it's not only impacted by say, what we've done in hedging, but what the underlying transactions are.
So I don't think I can really comment that far out at this point.
Thank you all for joining our call.
Our conference call for the fourth quarter 2016 results will be held on January 24, 2017.
Thank you.
| 2016_SYK |
2017 | ALOG | ALOG
#Thank you, <UNK>.
Though perhaps not bell-ringing, our third quarter results were as expected given the return to core strategy in Ultrasound.
As you can see in the press release, the reexamination under profitability constraints of the Ultrasound diversification strategy yielded very modest continuing revenue.
In contrast, our Security and Detection business will experience a very successful 2017 and continuation thereafter.
Medical Imaging, now extending its appeal to numerous embryonic imaging customers generally in Asia, is doing well, while the broader market remains under pressure in the more traditional relationships as outsourcing in health care markets has not yet fully relaxed.
I ask you to recall that in Medical Imaging, we are shifting from a components to a higher value system kind of strategy.
All these patterns will be distilled by the end of Q4, at which time we will provide fiscal 2018 guidance at the traditional year-ending telecom.
We do expect returning to our core activities.
Particularly in Ultrasound, we'll permit an encouraging view of FY '18 to '20.
Some favorable points from Q3 FY '17 would include our motion control business, which is reported inside Medical Imaging.
This business will exhibit nearly 20% year-over-year growth, a trend we believe will continue.
Further, the operating margin in Medical Imaging is up 2.6% from a year ago same period.
This business segment and the security segment as well still exhibit attractive cost structures and, thus, operating leverage.
By contrast, the profitability results in our Ultrasound segment earned all the attention we are providing, thus justifying the dramatic restructuring to be concluded this quarter.
Our highest priority is successfully executing the restructuring in a disciplined way, manifesting a cost structure productive at current volumes and attractively scaling with future growth.
It is unfortunate as well as unanticipated at the start of the restructuring effort that our closer examination of the Ultrasound initiatives have resulted in such a dramatic impairment of goodwill and intangibles.
However, our analysis was deliberate, evaluations patiently awaited and conclusions endorsed by very experienced Board of Directors.
Soon time to move on to FY '18 shortly.
We continue the certification process of ConneCT, our new Checkpoint product, perhaps with a late summer completion.
<UNK>et feedback continues to be encouraging, and international demo sites are being arranged.
Once launched commercially, the ConneCT should catalyze a growth spurt in the security business.
Legislation is now passed in the Senate and the House and encouraged a vitalized net bio perhaps during the second half of 2018.
The aforementioned activities announced a quarter ago executed the completion in FY '17 this quarter, along with maturation of a mix of Ultrasound, Security and Medical Imaging products will yield favorable revenue comparisons for the second half of 2018.
Nobody is more anxious than we are to move on to that period.
Now I invite our CFO, <UNK> <UNK>, to discuss the financial details.
<UNK>.
Thanks, <UNK>.
Good afternoon, evening, everyone.
I'll start on Slide 5 of our quarterly financial highlights.
Revenue dropped 5%, as expected, as growth in security was offset by declines in Ultrasound and Medical Imaging.
Non-GAAP EPS, earnings per share, was $0.79 per share, roughly flat with the prior year and in line with expectations.
GAAP earnings per share decreased to negative $4.78 per share, reflecting impact of the restructuring announced in the previous quarter with a $2.1 million charge or $0.11 per share.
The larger charge was the noncash impairment recorded of $73.1 million or $5.29 per share.
The charge was triggered by impairment indicators related to our Ultrasound segment as we reduced future revenue expectations primarily related to ongoing delays in the introduction and commercialization of our general imaging platform through our technology partner as well as Oncura Veterinary performance.
In addition, we impaired our intangibles related to our Sonic Window technology.
Our impairment charges were partially reduced by a reversal of our Oncura Vet contingent liability of $2.1 million.
We believe the general imaging product can still be an upside as well as our point-of-care offering to our future Ultrasound results.
We are evaluating strategic options for both our Vet and Sonic Window businesses.
As <UNK> has mentioned, our restructuring is progressing over expectation that we will finish our process by the end of the fourth quarter.
We believe now that we will be more towards a higher level of savings of $15 million to $18 million versus the $12 million to $15 million we communicated last quarter.
We do expect we will incur further restructuring charges in the fourth quarter related to personnel as well as fixed assets and inventory.
These are anticipated based on a shutdown of our Vancouver site and final product road map decisions.
So I'll turn to Slide 6 and quarter 3 financial results.
Revenue and gross margin were down based on lower volume in Ultrasound and Medical Imaging.
Non-GAAP operating expenses dropped about $1 million and would have been down $2 million if not for some onetime cleanup related to our Ultrasound optimization efforts.
GAAP expenses, as noted earlier, are significantly higher, caused by the noncash impairment charges.
As I indicated before, we expect further charges, both GAAP and non-GAAP, in finalizing our Ultrasound portfolio optimization efforts by the end of the year.
Non-GAAP operating margin was down a little over 1 point because of lower revenue volume.
Improvement though in other income expense from a reduced FX charge plus a slightly lower tax rate brought non-GAAP EPS back closer ---+ close to prior year results.
I'm going to skip by Slide 7 on quarterly performance trends as we already have covered the key points.
I'll move to Slide 8 in operating performance by segment.
Medical Imaging revenue fell 5% with declines across all the modalities.
Non-GAAP operating income margin though improved by 3 points despite a gross margin decrease from the revenue drop as we reduced R&D investment and initiated corporate structure actions to reduce G&A.
Turning to Ultrasound.
Ultrasound revenue fell 7%, resulting from continued delays in our general imaging product as well as lower EMEA distribution offset in part by strong China, Asia performance.
We have lowered our revenue forecast based on weakness in our Vet business and the residual effect of our restructuring efforts on our sales force.
Revenue is now expected to be down high single digits for the fiscal year.
Non-GAAP operating margins deteriorated, as expected, based on lower revenue and portfolio cleanup in the expense area.
We are now anticipating that the Ultrasound business will end a low double-digit negative operating margin for the fiscal year.
As noted earlier, we expect based on the communicated restructuring savings that the segment will return to positive profitability in fiscal year '18.
Turning to Security.
Security grew 2% based on continued high speed demand.
Unfortunately, as we have discussed in the past, volatility is associated with this segment, and we lowered our forecast for the year as high-speed shipments were pushed to the first half of fiscal year '18 from the fourth quarter.
We still expect full year growth in the range of 15% to 20%.
Non-GAAP operating margin dropped 2 points, reflecting investment in both R&D and sales and marketing for the ConneCT products.
I'll move to Slide 9 and year-to-date results.
Revenue continued to be positive for the year, driven by security results.
Gross margin is down about 140 basis points, reflecting primarily product/customer mix impacts.
Non-GAAP operating expenses have risen about $3 million, related primarily to first half sales and marketing cost associated with the Oncura acquisition.
Backing out CEO transition cost and onetime ultrasound optimization cost incurred in the third quarter, expenses would have been flat year-to-date.
GAAP expenses, as we discussed, are higher because of a noncash impairment charge but partially offset by the BK matter settlement in FY '16, which obviously did not occur in '17; the Oncura contingency reversal; and lower restructuring charges.
Overall, non-GAAP EPS is down about 13%, reflecting gross margin mix impact as well as higher expenses, partially offset by favorability in the other income expense line because of lower FX impact in FY '17.
And my last slide is Slide 10, covering working capital and cash flow.
We had another positive cash quarter with $13 million in operating cash and $11 million of free cash flow generation.
The balance sheet results were relatively consistent with the prior quarter, and our expectation is this will be true for the fourth quarter.
Capital expenses ---+ expenditures are now anticipated to range from $10 million to $12 million for the fiscal year.
I'll now turn the call back over to <UNK> to discuss our outlook.
So just to repeat an earlier comment, we're talking only about FY '17.
We'll be back in 3 months, and at that point, we'll be guiding for FY '18.
So as you see on Slide 11, the ---+ we'll have mid-digit ---+ mid-single-digit declines with non (sic) [non-GAAP] operating profit margins in the 8.5% to 9.5% and a non-GAAP EPS around $2.40 to $2.70.
Going to the particular businesses and Ultrasound, not surprisingly, since we have been examining that portfolio for about 6 months, we're seeing high-single-digit revenue declines with negative low-double-digit operating margins; Medical Imaging, a different profile, so we see mid-single-digit revenue declines but continuing a very productive cost structure with high teen operating margins.
And probably the highlight of the year this year, the Security and Detection business, high-teens revenue growth with low-teen operating margins, but we would highlight that it's a volatile business and we expect a slightly soft Q4.
So with that and prior to going to the Q&A, I have one supplementary comment and it's appropriate to come at the end of the FY '17 outlook.
Given the results reported in the recent quarters, in concert with the concern about the pace of anticipated progress, the Analogic Board of Directors has directed that all options, internal and external, be considered to accelerate the pace of value creation for our shareholders.
We will discuss this initiative again in 3 months when we provide guidance for FY '18.
And with that, I would invite the Q&A.
Yes.
I think that your arithmetic is correct in Q4.
As we finish the progress in terms of the restructuring, we don't think it's going to be a great revenue quarter.
We always keep an outlook active.
On going out farther, it's sometimes sufficient or not, but we think given the first half comparisons next year to first half comparisons of this year, probably not as favorable.
But we are convinced when we get this behind us mid next year, the revenue comparisons at that pace should be more favorable.
So that's sort of the high tide, low tide point.
<UNK>, do you have additional comments.
No, I think you'd captured that we would expect a stronger second half versus first half next year, but we'll crystallize those numbers at the September call.
This is <UNK>.
I would answer that we had some softness in general across a number of the modalities.
There's a little bit in all the different pieces, which led us to lower the numbers a bit in the fourth quarter.
I'll take the call ---+ the question, Larry.
It's a combination primarily focused on the noncore aspects of Ultrasound.
The base urology or surgery business is fine, but the other pieces, the general imaging product, the point-of-care products, the Sonic Window products, the Oncura products, all of the expectations ---+ and I think we talked a little bit about our concerns on this last quarter.
And that resulted when we looked at those revenue expectations.
Those were the drivers for why ---+ so I'd say it's the 3 pieces.
It's ---+ the general imaging element, the Sonic Window element and the Oncura element were the 3 major impairments that occurred within the quarter, and fibers that caused the impairment within the quarter.
Yes.
Larry, this is <UNK>.
Just to make sure that you hear.
We're putting those to a fairly harsh profit constraint and requirement now.
One time, we might be even more relaxed, but we are determined to be in businesses that are going to create value.
And so I think that's resulted in some of the conclusions that we have reached.
Yes.
I would agree to that.
Both.
Yes is the answer to that question.
We remain confident in the technology that we own.
We think it's going to be the best in the business, and we think it could arrive perhaps in the qualification sometime late this summer, but it's always an uncertain process.
And we all know when we know.
Best guess, late summer.
Yes, your math's in the general ball game, yes.
It might be off a couple of cents, but that's about right.
Yes.
I can tell you the big reason for the range is ---+ because we would have recorded these charges already, is the final decisions relating to the portfolio optimization decisions as they impact fixed assets and inventory.
And that's why there's such a large range, and there are a variety of decisions we got to go through with the sales and marketing teams, the operation teams to finalize what will be the NRV implication, net realizable value implications, for inventory associated with our decision in some of the fixed assets.
So that's why the range is so wide.
Yes.
Your math is correct, Jim.
And it's across the board.
I'd say Ultrasound relates somewhat to some of the portfolio decisions we've made ---+ are making.
Security, we talked about the volatility.
You had a customer move out some shipments.
And imaging, we just had a general move-out of some of the shipments, which caused that to further decline.
Well, Sonic Window was in its infancy.
So it was less than 1%, even less than 0.5%, so very, very low number.
Oncura was probably in the ballpark about 2% to 3%, 4% of our revenue for Ultrasound ---+ for the whole company, 2% of the whole company.
| 2017_ALOG |
2016 | FCN | FCN
#I don't have the exact forecast in front of me.
Maybe someone could dig this out.
But let me just say a couple of things about that more conceptually.
First of all, the goal of having all of our businesses be growth engines, means that ---+ growth engines will typically at least have 5% growth in headcount a year.
And if you look at the businesses which we said were positioned to be growth engines as of now, we talked about in that way earlier this year, you'll see the numbers are much higher.
My sense is that Corp Fin, E-Con, strat-com ---+ those businesses average closer to 10% headcount growth, than they do 5%, or at least in the middle of that.
And over a couple of years even higher, I think crop-fin might be up close to 25% over two years.
Which is probably not sustainable, but is this measure of, when you have the businesses positioned ---+ we have the ability to attract great people, and when you have a business positioned and you go after it, it happens.
The issue is, as we have been sequentially working through businesses, and figuring out where we have a right to win, it's meant we've cut back other places.
So if you looked at strat-com, which has grown a lot over the last year, and the first year, actually looked like it did not grow it headcount at all, and that was because we were investing some places, like Brussels and some places, and we were exiting other places.
And so you look at things and see net headcount zero, or down in certain sub-parts while you're doing that focus.
And that's what we've been going through this year with tech and some parts of FLC.
And so I think the three parts of the business which we have thought we had got fundamentally to a good place, are well on that way, and well north of 5%, I think if you look at the numbers year on year, and will be at the end of the year.
The issue is how much corrective action had to take place in some of the other places.
And how much does that drag.
And it is the net of those that will affect the end of the year numbers.
You know, and if you remember, FLC you know we exited 85 people in a business in Brazil.
We took some overhead actions, and some actions in various overseas places, and then we've had all of these movements that we have been doing in tech.
My view was earlier, not withstanding all of that, the net of that would come out in the mid-single digits.
I was targeting 5% at the end of the year.
Whether our current forecast is 3.8% or 5.2% I don't know, but probably somebody could get back to you on that if we disclose at that level.
But it still mid-single digits for this year.
There is no hold on that at this point.
I put temporary hold on it while <UNK> was getting on board just so that I would not make all sorts of decisions, that he then said, what the heck did you do, <UNK>.
But we don't make any commitments as to when we are going to use that.
If you think about this company's history, we've done a lot of share repurchases and in retrospect, we did it at market peaks, and you know ---+ what I'm trying to do with this company, is cumulate enough cash that we can take advantage of lots of things in the marketplace.
If ever the stock fell out of favor you want to have cash.
I remember starting this company and the company had just bought back stock at $0.42 and shortly after, the stock was then at $0.29 and I wanted to go buy back shares and we did not have any money to buy back shares.
I said but four weeks before I joined you bought it back at $0.42.
And they said, so what's your point.
I mean, we are never get into the situation.
But also, I think the cash ---+ we have been very careful about acquisitions.
My sense is great acquisitions come along when they come along.
I always want to have the cash available for great acquisitions when we have it.
So we are not ---+ one of the things that happens in professional services firms is ---+ sorry, a little philosophy ---+ if you look at industrial companies they are flush with cash when the markets are booming, and that's when they do their acquisitions.
And then when the markets are in troughs, nobody has any money to do acquisitions.
We are never going to do that.
I want to have cash available to be opportunistic on share repurchases, acquisitions, when the time is right.
And we have moved this company into that position.
The balance sheet of this company I think is never been as strong, and I don't know that there are very many stronger ones in this industry.
So we have no constraints, no artificial blockage, on share repurchases, but nor are we making any specific commitments as to timing on any of that.
Does that at least address your question.
Great.
Do we have any other questions.
The number I always use is net.
On gross, we add a lot of people.
In professional services there is always turnover, right.
I don't know many professional services firms that don't have, you know, 15% turnover in a given year or whatever.
So if you're going to grow X you have to grow 15 plus X; so it was net.
So I don't know where the 3% number comes from, so let me answer the question conceptually.
All right.
I think it is a good question.
We will always have ongoing pruning which is day-to-day stuff.
We will also always have some businesses where we made bets, where we thought they would work, and have some fix agendas.
So the notion of saying, we are not hitting our head count needs because of fix agendas, is, if used universally is not an appropriate thing to do.
I think the way to think about this though, is in the last two years, what we have done is done a systematic move that, I don't think we have ever done in this company, in a business-by-business, sub-business by sub-business, turning over each business, and saying where do we really have the right to win in strat-com.
Which subparts of it are we betting on.
Which subparts are we retreating from.
Where do we have the right to win in each of the other businesses.
And that systematic process as we have gone business by business, has led to, in my experience, a bigger set of resets both positively and negatively than you would do on an ongoing basis.
And so when I exclude Brazil, I do it because that is a consequence of a more systematic process that hadn't been done in this company for a long period of time.
Going forward, I think if it's normal routine attrition, when we're saying each business should be headcount for growth, net of all that we ought to be growing headcount 5% or more, even including all those things.
Did I address your question, <UNK>.
<UNK>, we don't break it down to that level of granularity, I'm afraid.
But you can see, that if you look at the year-to-date, you can see the technology, the e-con, the corporate finance, which are the big engines doing quite well.
And you can see that the technology side and some of the FLC sides, not as much.
And that is, virtue of some of those situations which we have addressed.
That is a good question.
And it is one that I'm having active discussion with internally.
So, look, we'll give you updates as we always do, we will give you updates as any material strategic changes occur.
It obviously can't take four years before you sign new contracts, or else you're kidding yourself, right.
That's just not the way professional services work.
We have some people pretty focused on it, and there's a lot of interest in the market, to be honest, at this very point in time.
So we'll figure out the right way in the normal course of updates to keep you guys informed.
Good morning, <UNK>.
Are you a Cubs guy.
Good luck.
If there is more technical answer, I will let <UNK> ---+ but that's going to stay as one reporting segment, at this point.
We're not going to be breaking those out at this point.
The answer there, the opportunity there is to expand our market opportunity by allowing us to use channel partners as well.
It is a future [stake].
It probably wasn't universal but it was broad-based.
It was very broad-based.
We just had, and I think it just happens sometimes, you had a lot of stuff end; some of it we expected, some of it we did not expect.
Sometimes litigation ends abruptly, usually because of good things for your client.
But we had a bunch of stuff end, and then if people have been working as hard as they were in the first half of the year, and it happens to be July and August, people don't necessarily return phone calls.
They sort of say, can we meet in three weeks after I take my vacation.
So we always have lots of vacations in July and August, but we had a lot of vacations in July and August.
So it was pretty broad ---+ widespread.
It was just more than I expected.
But we had good pipeline of work and people kept reassuring me that September would be better.
And I was like, alright, is August going to be better.
And so August was better.
It was not fabulous, but it was better.
So then you get reassured.
And then September actually has been good, but it was pretty widespread.
It wasn't like one spike.
I'm not sure it was worse in 3Q than it was in 2Q.
Here's the thing, I think we have good leadership in that group at this point, who is really focused on the right stuff.
It's actually probably the most bonded leadership team.
It's not a big of a partner group in there, it's probably 20 partners, maybe 25.
And they're all focused on the right stuff at this point in time.
I think they're heading in the right direction.
Part of your question was, do I think it's where I want it to be now.
No.
Do I believe it will be there pretty soon.
Yes.
They are working on the right stuff.
And I think that's the same thing for some of the other sub-parts of FLC that were lagging.
That's why I believe, this FLC as a whole, will be returned to being a contributor to organic growth beginning next year, because I think the weakest parts we have really good attention on.
And the good parts ---+ it works.
It's interesting, I took a look at a chunk of North America, where I think we are so strong.
And I looked at how many headcount we had added over the last two years, and it was 100 heads ---+ billable heads.
And I looked at what our revenue per billable person was, in that part from two years ago and this year, and we added 100 heads to that sub-part.
And the revenue per billable head changed $1.00 a year.
For that sub-part ---+ maybe I shouldn't say the exact numbers.
When we add headcount behind the right set of professionals, in the right markets, it just continues to grow the business.
And maybe there's a six-month delay, or maybe you get a headwind but it works.
It's a matter, sometimes we've had some positions where we've been not focused on realistically assessing how strong or weak we are in doing the things that we needed to.
And I think we now have management focused on that.
Some places you wish had it happened a little earlier, but I think we have management focused on that everyplace.
And I that's why I have the confidence that we're going to have all the businesses turned into a sustainable engine for growth beginning next year.
Did I address your question, <UNK>.
I don't know that specifically, I will let <UNK> think about this.
My experience is that you don't have the full effect in the third quarter, because you don't have that many ---+ the third quarter is July, August, September.
You don't typically have the new hires from campus starting in July.
They usually start in September.
Now the lateral hires can start pretty evenly through.
And those tend to be more expensive people, the sheer numbers, the numbers are usually in the third quarter, the numbers are mostly the campus hires and those usually come in September.
It's about half-and-half, and your characterization in terms of the months is correct.
Well good.
Thank you very much.
Just to reiterate where we were.
I think the quarter actually came in very much where we expected, and we are reaffirming guidance.
I think the more important issue is the progress we're making on all of these businesses, and I'm excited about that.
And as some of your questions point out, we are not through all the fix agendas, but we are not that far away either.
And it does not mean we will not have fix agendas in businesses going forward, you always do.
But this first systematic walk though all of our businesses.
I think we're near completion.
And when you look at the places where we have completed it, and the trajectory they have and the confidence that the people have, as we heard in the town hall, or where you see in the results.
It's fun.
And sometimes this business can be pretty fun, so thank you very much your time and attention and your support.
Have a good day.
| 2016_FCN |
2016 | MAN | MAN
#Yes, we tend to be slightly more involved in the manufacturing side than our competitors.
We are, as you correctly point out, not involved on the construction side.
So we tend to skew a little bit more industrial than what the market is and what our major competitors are.
In terms of Northern Europe, I guess what I would say is that the UK came in ---+ we were a bit cautious on the UK.
I would say the UK came in close to as we expected.
As I mentioned earlier, when we look at the Nordics, that came in slightly better than we would have expected.
And Holland and Belgium continue to outperform.
So we saw very strong growth there.
And Germany had very good results as well, and you saw the organic growth of 7% in Germany.
And that was driven by an increase in our Proservia business during the third quarter as well.
So I would say that those were the main drivers of the Northern Europe performance.
Remember there that we have the anniversary of the 7S acquisition in Germany at the beginning of September.
So we will have that drop off, and that will be part of our organic growth in the fourth quarter.
So <UNK>, just to be clear, <UNK> made the point, which I think is important one ---+ in Northern Europe there is some slight acceleration, on an organic constant currency basis, into the fourth quarter.
It's just, you have this acquisition that we're lapping that makes it look like maybe the growth rate comes down.
But in fact, at the midpoint of our guidance, we are anticipating the underlying growth to pick up just a hair.
I would be happy to talk about that.
I would start by saying, in terms of capital allocation strategy, our strategy has not changed.
So we continue to look at share repurchases as a good mechanism to return cash to our shareholders.
You certainly saw that in the third quarter.
Now with that being said, as we've talked about it in the past, we continue to do that opportunistically.
So we don't have a set amount.
We do have the authorization, and when we think that there is opportunity, we will continue to do that in terms of share repurchases.
On the acquisition side, in line with our previous strategy, which is unchanged, is, we will continue to look at good bolt-on acquisitions in the solutions and the professional, the experienced side, the IT-focused side, of our business.
And that's really what you've seen this year in terms of the ones that you referenced.
I would say, that will continue to be our focus, is on those good bolt-on acquisitions that are a good cultural fit for the organization overall.
And from that perspective, we will continue with that strategy.
Yes, overall, <UNK>, I would say that pricing remains rational.
And as we have talked about in previous quarters, of course you know that in France, we took share almost three years in a row, and then in the last two or three quarters, we were slightly behind market.
So really what you can see us doing in France is carefully and slowly adjust to new market pricing.
And that's to get a little bit closer to market, and I think that's exactly what we have seen.
Although we are still probably slightly behind, we're comfortable that we are making some progress there that is showing up in the numbers.
But overall, I would say that pricing is rational.
And that, of course, means that it's competitive in many places.
The slow-growth environment that we are having gives us the upside in terms of companies wanting to have more agility and flexibility.
And that drives the demand for our services and solutions.
Now it also means that companies are doing what we're doing, which is, making sure they're very careful with their costs.
And clearly that is why our market is and always has been very competitive.
So we're always balancing volume versus price decisions.
And we are very committed to a disciplined pricing approach, where we really look at the profitability on a client-by-client basis when we make a decision to engage with our services.
Well, we think digitization is, of course, a very important part of our strategy.
The new world of technology, however, gives us a great opportunity to participate in that technology in a very different way from what we've had to do in the past.
Which is essentially, develop and/or own significant technology initiatives ourselves.
But we feel that we can get the best-of-breed technology solutions into our operations by partnering with technology partners all across the world, and really benefit from those technologies.
And clearly we're also looking at new areas where we can evolve our service offerings and create more value as we go on, and as the value creation in our value chain evolves over time.
But we primarily believe that leveraging the technology evolution that is out there in the market is a preferable strategy to trying to be a technology company and keep pace with the investments that you would have to do to stay at market.
And that would be our view.
Our value comes from analyzing and gathering insights from all of the data that we have.
And that, of course, is a tremendous asset that we do have and that we own.
But in terms of the tools that give us that insight, we are just interested in getting the best that's out there in the market.
I think the corporate expense level, <UNK>, in the third quarter will generally trend in line towards the fourth quarter.
We did have some adjustments to incentives and other items that were part of on the third quarter, and we anticipate that there will be some part of that activity into the fourth quarter as well.
And in terms of the other items impacting that line, I think that will generally trend into the fourth quarter as well.
Well, we're definitely gaining share in the Belgium, Netherlands and in Germany.
If you recall, we were slightly behind market in the Netherlands after applying some strong price discipline in 2015.
So the team in the Netherlands have really done a good job in getting back to market, and now executing extremely well.
Which is really also the explanation to our out-performance in Germany, as well as in Belgium.
And Germany, of course, comes on the heels of a good growth also in the third quarter of 2015.
So our comps were quite tough in a market that isn't growing that much.
So we're pleased with our progress there.
And a lot of it has to do with our positioning in the market.
And as you know, with the 7S acquisitions, we now have Germany being a very big operation in the Company.
It will be north of $1 billion, and it's a very good operation.
And we think we still have further upside, because it's one of those markets where other margins are better.
So we're pleased both with our improved positioning in Germany, as well as, of course, with the excellent execution by the German team.
Well, we feel really good about where we are in Europe and the improved performance in Northern Europe, but also the opportunity that we still believe is there in Southern Europe.
Because if you look at the penetration rates across Europe, on average they are probably still 15% to 20% below prior cyclety.
So we still have upside opportunity there.
Emerging markets, with the growing populations, are still good.
So I would say, overall, based on our footprint, we're optimistic within the context of a slow-growth environment.
So that means it can be uneven.
It will, as I mentioned in my prepared remarks, require very disciplined execution, great price discipline and really running the business well.
And that's what we're looking forward to do into the fourth quarter.
Then, of course, really carrying on into next year as well, building on the foundation we have laid.
This is the last question.
Yes, sure.
We saw some good progress in Italy during the third quarter.
And as <UNK> mentioned in his prepared remarks, we actually, in September, looked positive, as far as our growth.
Which has really been slightly more ---+ a faster recovery than we would have anticipated.
And we hope that we continue, and believe that we will continue to see that also in the fourth quarter.
We knew we were behind market, we knew the gap that we had, and the team is executing very well.
And as you can see from our results, not only executing well on making up the gap, but also managing at the same time, despite a top line that dropped, improving our profitability in margin terms, of course, but also in absolute terms.
So the team is doing a great job addressing that gap.
And we are, of course, looking forward to seeing that continue into the fourth quarter and beyond, so we get to market.
Well, I would say, we are very confident that our operating margins are something that we're going to achieve.
And as we've talked about in the past and as <UNK> mentioned earlier during our call, what we need to do that is, of course, getting our revenue and our growth trajectory up to mid single-digits, so that we get some good leverage and we continue to improve our operating margins.
As a relates to specific targets on cost efficiency and productivity, I would say it's really something that we're going to ---+ have worked on very hard in the past, as you've seen from our results, and we will continue to work on very hard.
Because we know that this is something that we will keep needing to make progress on ---+ getting better productivity, leveraging technology, improving our processes, developing our recruitment centers.
So there's really a whole host of activities that we are engaged in that are going to continue to improve our efficiency.
So with that, I would like to thank all of you for participating in our third-quarter earnings call, and we look forward to speaking with you again at our fourth-quarter earnings call.
Thanks, everyone.
| 2016_MAN |
2016 | APH | APH
#That's great.
Well, listen, we really appreciate everybody's time this afternoon and we wish you all a pleasant conclusion here to 2016 and I can't believe to say it, but we will see you all in 2017.
Thanks very much for all your time today.
Thank you.
| 2016_APH |
2016 | VRSN | VRSN
#Yes, thanks for the question.
So you're correct, our renewal rates are up about 1% year-over-year, our preliminary renewal rate in the quarter is 73.7%, as <UNK> mentioned, up from 72%.
The improvement we're seeing is primarily in the previously renewed rate.
That's up about 80 basis points year-over-year from about 82.7% a year ago to 83.5% this year.
And that improvement in the previously renewed rate, we're seeing that both in US and international markets.
On our first time renewal rate, it's also up slightly, but we're primarily seeing that improvement in the US market.
On average, that first-time renewal rate is still around the 50% range, though.
Again, Steve, we look to manage all our expenses, not particularly a particular line item ---+ in a particular line item.
I mean, we've also had slightly lower registration fees in the second quarter versus the first quarter.
So because there tends to be more new names in the first quarter, we tend to have higher registration fees for ICANN, than we have in the second quarter.
So it's a little seasonal dip there from that.
But we continue to look at our expenses across the board, add resources where we feel it's appropriate, but in total, we're really focused on that total non-GAAP operating expense as a key metric that we're looking to manage.
The fundamental rationale for the two agreements is addressing the priority, as called for by NTIA of security and stability in the Root Zone.
And that's the reason that the .com agreement is being extended, so that it can be coterminous with the Root Zone maintainer agreement.
The two agreements are related in that sense.
So hopefully that helps you understand that the two agreements are really part of an effort to provide security and stability during this transition process of Root Zone oversight from NTIA to ICANN.
I think in that sense, you view them as part of an effort to assure security and stability during a transition process.
Sure, <UNK>.
As we talked about last quarter, we did expect the China volumes to normalize and at least in the second quarter, they absolutely did normalize for us.
So at least what we're currently seeing is those are at much more normal levels.
As far as the license agreement, I don't really ---+ I don't have any particular expectations.
We've always operated in China.
We've done well there.
I think our brand is quite strong there.
I don't really have any change of expectation, just related to the license, to how we perform.
Anything you want to add, <UNK>.
Yes, I think the license is important, but we have been operating with the approval of the Chinese government for a period of time, as they introduce new processes for their local registrars to follow.
There was a new licensing regime that was announced some time ago.
We've been in that process for a period of time, and as I mentioned in my earlier remarks, we now are the ---+ as far as we know, the first registries, .com and .
net to be approved.
So we are licensed for those registries to operate in China, which is important, although we did expect that process would yield the result that it did.
So I don't see any interruption in the availability of our products and their operation in China, so I think it's certainly an important milestone for us, but one that we've been working with the Chinese government on for a period of time.
That in and of itself I don't expect to change anything from the registrant point of view.
It just simply enables to registrars to comply with local law.
Thank you, operator.
Please call the Investor Relations department with any follow-up questions from this call.
Thank you for your participation.
This concludes our call.
Have a good evening.
| 2016_VRSN |
2018 | V | V
#Welcome to the Visa's Fiscal Second Quarter 2018 Earnings Conference Call.
(Operator Instructions) Today's conference is being recorded.
If you have any objections, you may disconnect at this time.
I would now like to turn the conference over to your host, Mr.
<UNK> <UNK>, Senior Vice President of Investor Relations.
Mr.
<UNK>, you may begin.
Thanks, Katie.
Good afternoon, everyone, and welcome to Visa's Fiscal Second Quarter 2018 Earnings Call.
Joining us today are Al <UNK>, Visa's Chief Executive Officer; and <UNK> <UNK>, Visa's Chief Financial Officer.
This call is being webcast on the Investor Relations section of our website at www.investor.visa.com.
A replay will be archived on our site for 30 days.
A slide deck containing financial and statistical highlights has been posted on our IR website.
Let me also remind you that this presentation includes forward-looking statements.
These statements are not guarantees of future performance, and our actual results may differ materially as a result of many factors.
Additional information concerning those factors is available in our most recent reports on forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our website.
For historical non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release.
And with that, let me turn the call over to Al.
Thanks, <UNK>.
We are now ready to take questions, Katie.
(Operator Instructions) Our first question today comes from Dan <UNK> from RBC Capital Markets.
I had a question around pricing and the demand environment in Europe in particular.
There seems to be some suggestions, I think, in the market that scheme fees on the acquirers are rising pretty quickly and have been so for the past couple of quarters.
And I'm just wondering is there a dynamic that you guys have been able to take advantage of recently.
And then secondly, on the clearing and settlement, that sounds good that you guys are done there.
Once you get authorization migrated, is there a meaningful opportunity from a product perspective that we should be thinking through.
Well, first of all, Dan, on the pricing front, when we first paid the acquisition of Visa Europe, we took some pricing, we subsequently take in some pricing.
And as I look out, I think there's pricing opportunities.
I'm talking about Europe now, pricing opportunities in Europe looking forward as well.
In terms of the migration, I think once we get through ---+ I mean, first of all, once we get through, one of the biggest benefits that is going to be available is that, VisaNet being a global system and with us having 4 data centers around the world, we're going to be able to ensure real fallback for our clients and for our business in Europe, prior it was 1 system running in 1 data center.
So that's one big advantage that we will have in terms of backup and security.
I think beyond that, there's going to be opportunities in some of our risk tools in loyalty for sure, where we'll be able to offer new and different capabilities to clients in Europe that they wouldn't have had on the old legacy system.
Our next question comes from Don <UNK> with Wells Fargo.
Al, I was wondering if you could talk a little bit about sort of how you came to the thought process on the shared single button digital wallet approach.
I know you've been working on Visa Checkout for a while.
And can you talk a little bit about how it will work from a logistics standpoint.
First of all, Don, this is something that the EMVco standards body actually developed, of which we're a participant.
We actually believe that the ---+ we're very excited about this.
I think that I talked to some of you about this in the past.
I think that there's way too much clutter in the e-commerce checkout environment.
And it's just not good for users, and it's not good for merchants.
It creates too much friction.
There's consumers who don't know what to do.
And after they actually make a decision to buy, it's too confusing for them and they fall out of the buying process.
And that is ---+ that's just lost business for everybody in the ecosystem.
So because of the simplicity, because of the security and because of what we think is going to be a much better user experience, Don, we're very excited about it.
We're committed to it and are doing everything we can to move forward to make it a reality.
Well, we've been committed to Visa Checkout.
We remain committed to Visa Checkout, especially in certain geographies and in ---+ for certain merchants where they see value.
But I think the ultimate future as I see it in e-commerce, and it will take time to bleed it in throughout the entire ecosystem, is to move to this EMVco standard, which creates a single button, which is much more analogous to the situation that you see in the physical world, where there's a single terminal and all products run through that terminal.
In essence, we've had, in the e-commerce world, a moral equivalent of multiple terminals, if you will.
And I think that's just terrible.
It's lousy for the merchants.
It's a bad experience for consumers.
So we're excited about this secure remote commerce framework and standard that EMVco has come up with.
Our next question comes from <UNK> <UNK> with SunTrust.
I wonder, Al, if you can kind of frame up the opportunity as you see it in China and India in particular, obviously, big, well-highlighted, cash-centric markets.
And I wonder if you can just give us a sense of Visa strategy.
I know China has been particularly challenging, but to address, maybe India, what kind of time line you think there is for sort of material contribution from potential electronic payments growth there.
Well, <UNK>, let me start with China.
I mean, we continue to be very excited about China.
We have an application in to become an international payment provider in China, and we're hoping that the People's Bank of China and the Chinese government look favorably upon our application, and we can begin the process of moving toward being ready in cooperation with the government in China to be a domestic player.
In the meantime, we're continuing to work with our over 50 bank partners in China to continue to try to grow our coverage in China as well as obviously facilitate as much cross-border volume from traveling Chinese as they leave the borders of China.
In the case of India, India is in a different place because we ---+ we're very pleased with where things are in India.
And India, post demonetization, has really attracted a huge interest, so, and that makes sense because the cash displacement opportunity is really great there.
The reality is we're the market leader.
We've got over 50% share in credit and debit, and we continue to grow in 2018, despite the fact that we're growing over some huge numbers that were related to demonetization in 2017.
We're really working with the Indian government on the Bharat QR code and scaling that.
I think we're up in somewhere in the area of 450,000 merchants that are enabled for this standard QR code.
We're growing overall acceptance.
We've doubled from the fourth quarter of '16.
We've doubled the number of POS terminals by the end of last year to 3 million.
We're continuing to partner with our issuers there in terms of building awareness and usage and we're also we're partnering with clients there on digital solutions, tokenization, contactless, scan and pay.
So I see China as something we're excited about, but something that's probably still a couple of years away in terms of us being a player there and being able to start to produce any kind of volumes, never mind meaningful volumes.
But India, I see, is a long-term play, they're ---+ a country of nearly 1.4 billion people, and I think we've barely scratched the surface in terms of the opportunity.
It's kind of ---+ as big as the numbers feel from a relatively close to a standing start.
I think that it's an exciting opportunity for the industry, and as the market leader in India, we see it as a very exciting opportunity for us.
Our next question comes from Jason Kupferberg from Bank of America.
This is [Ryan Carreon] for Jason.
I was hoping you could dive a little deeper into the international revenue growth in the quarter which came in well ahead of what we are modeling.
Is there anything worth calling out that surprised you with the upside.
And I would think the spread between volume growth and revenue growth also widened pretty materially.
I'm assuming there is some benefit from FX in there, but was there any pricing benefits in the quarter.
You have several things in there, so I'll take them one by one, Jason, if I can get to them.
Oh, [Ryan] I'm sorry.
Very well there, Ryan , I guess Jason is elsewhere today.
So why was it better than ---+ it was better than we expected.
Coming into the year, as you know, our inbound business to the U.S. has been a weak business for several years because the dollar was strong.
And coming into the year, we hoped that with the weakening of the dollar, there would be some improvement in that business.
And we projected a step-up in the growth rate.
We were pretty much in line with our expectations in the first quarter, but the acceleration continued pretty fast into the second quarter.
And in many ways, the inbound business to the U.S. has grown faster than we expected.
So the recovery has been coming earlier than we might have projected.
That's one reason.
The other reason is the outbound business from Europe, business that is leaving the EU in total, also grew in the double digits for the opposite reason because the euro and the pound are now stronger.
Those 2 clearly were much stronger than we expected and they're very important corridors for us.
The revenue impact is greater because the mix of business is better, because the inbound business to the U.S. for us is an attractive business and the mix of our cross-border business certainly got better.
There was no pricing that was any ---+ new or different than anything that was in place prior to coming into the quarter.
Certainly, exchange rates got a little better, so that certainly helps that line more than other lines.
And then overall, I mean, adding to these 2 corridors, the cross-border business, because of strong global economy, has been strong just about everywhere in the world.
Our next question comes from <UNK> <UNK> with Citigroup.
My question was with regards to debit volume growth in the U.S. If you could break down what's driving this increased macro or in the spend trend, any particular wins to call out.
And also just to clarify, is Visa Direct classified here.
Yes.
So the debit growth was clearly very strong.
And at this point, as we told you earlier, it's not benefiting from any conversion type benefit.
This is real apples-to-apples growth and, therefore, quite heartening to see it as strong as it was.
As we've dug into it, it was pretty broad-based.
We're seeing growth, as I mentioned in my comments, across many segments of retail and across all the everyday spend categories, which essentially attest to a pretty strong consumer profile in terms of propensity to spend.
As the business shifts more to e-commerce, that clearly also helps in many ways.
And then as far as overall sort of the underlying sort of mix of business, that also remains very good.
So all in all, just about every aspect of the debit business looked very good this quarter.
Our next question comes from <UNK> <UNK> with JPMorgan.
Just I guess I want to follow up on a couple of questions on the international and whatnot.
I'm curious, Al, in your travels, has the nationalism sort of theme changed at all.
I know you're making a push towards localizing a lot of the business.
I heard your answers around China and in India, but just bigger picture, I'm curious if the whole nationalism sort of pendulum has shifted in any way in your mind.
<UNK>, in the last 5 weeks, I've done a trip to Korea.
I've done a trip to China, and I've done a trip to the Middle East and Northern Africa.
I still see quite a strong nationalism theme.
I think from my perspective, which I've said before, this business, this payments business is a very local business.
So clearly on one hand, the solution set that we need to go to market with, our issuer clients and our merchant clients, is different market-by-market, and that's a positive thing.
And we recognize that and we're putting more resources as we add personnel, adding more people out in the actual countries because that's where the action is.
The negative or the watch-out of nationalism is what happens in terms of regulation and domestic processing, and does that grow around the world.
And then what are the rules as it grows.
There's domestic processing in a number of markets, some of them it's a very fair playing field where their government is not mandating that you must process on the local processor but it's yet just another option.
In a couple of countries it's not quite an even playing field, and we continue to push and work with those governments to try to get us there.
So that's what I'd say I've seen, <UNK>.
Our next question comes from <UNK> <UNK> with Cr\u0102\u0160dit Suisse.
I was wondering whether you would talk a little bit about whether you're thinking about any sorts of incentives, whether it's a carrot or stick-type incentives to kind of encourage the move towards that single pay button.
And just as a related thing, since you did link in the discussion with PayPal and Visa Direct, have you ever given any kind of metrics on the size or growth rate of that channel for you.
<UNK>, it's Al.
We're in the top of the first inning here on the secure remote commerce and the single pay button.
We're just getting familiar with the standards from EMVco and trying to understand exactly what we have to do and what merchants have to do in order to make it a reality in the marketplace.
I think that our kind of immediate focus is to get very familiar with the technical aspects of what needs to happen in terms of getting it set up.
I ---+ my personal belief, we'll have to see how this plays out, is that this is going to come as really, really positive news for both consumers and merchants.
And I think that if done correctly, which we hope that it is, that adoption is going to ---+ the curve of adoption is going to be quite quick.
That said, there had been cases in the past where to accelerate progress, we have thought about and used incentives, but we're nowhere near being able to make a decision on that at this point.
And I'm hoping we don't because I'm hoping that it's such a very clear improvement in the user experience and the friction, it goes out of the system that people will adopt very, very quickly.
In terms of your second question, which I think was around volumes related to PayPal and Visa Direct, we haven't provided any color on that as of this moment.
I would say that we're pleased with the way adoption of Visa Direct is continuing.
As I said in my remarks, right now, there's a few use cases that we're focused on and we're pleased with those use cases and we're trying to increase, in essence, the distribution of those use cases over time.
We're hoping to actually look to add further use cases, which will further expand the universe of places where Visa Direct can be used.
So I think there's a tremendous amount of upside relative to Visa Direct as we look out over the next couple of years.
Our next question comes from <UNK> <UNK> with KBW.
<UNK>, you talked about sort of the stronger economy driving some of the more robust trends.
I was wondering, in the U.S., was any of it discernible from tax reform, like have you guys seen any impact as it relates to tax reform.
And then on the shared button comments, as far as costs are concerned, are there any cost savings as a result of not having to go full force with Visa Checkout.
Or are there other costs that we have to contemplate given the new initiative.
Right.
In terms of are we seeing any impact from tax reform on consumer spending, I would have to say that it's hard for us to isolate those kinds of impact.
So I don't think we have a point of view on that, and it's probably a little too early in any case.
So I'm not sure I can tell you anything specific on that front.
As it relates to the button, as I've said earlier, many of these questions are relatively premature given where we are.
In terms of Visa Checkout, we remain as focused on it as we were.
We will use the Visa Checkout in those parts of the world where it clearly is a valuable option for people, especially outside the U.S. In the U.S., there are merchants who would see value in it.
We would definitely use Visa Checkout as a solution there.
Once the single button solution is available, then we'll just have to see how that plays between the Visa Checkout option and the single button.
In the meantime, we will have to spend some money to develop the single button option from a technology standpoint and all that.
Well, we generally don't talk a lot about what our pricing plans are.
We obviously look ---+ we have a dedicated pricing team.
We look at pricing on everything that we do from the pricing to issuers, the pricing to acquirers, plus the services that we make available to our issuer and merchant customers, and we look at the price value equation.
We look at the competitive set and we make judgments on an ongoing basis.
And I think that's the most I'd say about it.
I just want to ask a question for you, Al.
You talked quite a bit about contactless payments and adoption rates across the globe.
Can you maybe just give us a sense about the details of your plans around the U.S..
You talked about some enablement for ---+ on the merchant side, but what are you doing to get that stronger on the bank issuer side.
Any plans you can articulate there.
And then maybe share with us your expectations, say, maybe 2 years out about what the penetration rate could be or look like in the U.S.
Well, Jim, I think the U.S. market, I think I've talked about this before but maybe I haven't, the U.S. market is a bit different.
It's a little upside down in terms of how this opportunity has ---+ presents itself.
Usually, around the world, the issuer side of the equation has been ahead, and we've had to kind of pull the merchant community along, which I actually think is the harder lift.
In the U.S., we've kind of got the opposite situation, where we've got nearly 60% of the top 100 enabled.
We've got virtually all the terminals being shipped today are enabled for contactless.
The whole transit system push, which is happening at a fairly large clip in terms of interest is a stimulant.
So I ---+ in our case, in the U.S., the reality is that we need to catch up on the issuer side, and that's a smaller constituent group versus millions and millions of merchants.
So we're in lots of discussions with our issuer partners.
And I think that there's a lot of interest on the part of our issuer partners to move to contactless.
Nobody's too anxious to do mass card replacement, but I think as cards start to get replaced, you'll start to see more contactless evolve.
That said, as I said in my remarks, this is at least a year or 2 to get this off the ground before you start to get the beginnings of movement.
And then if the U.S. is like other markets, which I've no reason to believe it won't be, I think that, we'll, in a couple of years, we'll ---+ if we're in a single digit that we'll start to see real acceleration then over the next couple of years.
And I'm hoping maybe because they ---+ it's really progress is more going to be driven by issuer side movement that maybe the adoption could curve ---+ could be actually a little bit quicker than we've seen in some of the international markets.
But that said, I'm not going to get into predicting business right now as to exactly what level of penetration it would be in a couple of years.
But I can tell you this, we're excited about it and we're pushing on it.
This is Vasu <UNK> for <UNK> Faucette.
Just 2 really quick ones, one on Visa Direct, you guys talked a lot about traction there.
Could you maybe talk a little bit about what geographies you're seeing more traction in.
Is it mostly in the U.S..
Or what international geographies you're seeing more traction.
And then from a P&L perspective, where are these volumes and revenues getting captured.
And then quickly on just following up on the nationalism question before, recently, I think the Central Bank in India is considering some regulation that all user data needs to be stored only in the country.
So what would that mean for Visa in terms of your ability to process transactions there.
Okay.
So I think there were 3 questions there.
Visa Direct.
So Visa Direct is a product running on VisaNet, so it is a true global offering.
I mean, it ---+ because VisaNet is global, Visa Direct is global.
And it's operating in a large number of markets around the world, including Europe now that we've got VisaNet starting to run in Europe.
So I mentioned in the remarks that today probably P2P remains one of the bigger use cases for Visa Direct, but there are other disbursement use cases that we're looking at and are coming on stream that are also producing volumes on Visa Direct.
I think the second question was where is it captured.
Where do we see most of the volume.
It's payments volume, right.
And some of it is mostly domestic, but there are some cross-border, so it's mostly showing up in service fees and data processing.
Right and the U.S. certainly is among the better developed markets.
You were asking the question from a geography standpoint, and we're starting to see volume in Europe and other parts of the world.
And as we've told you, our goal is to have 1.7 billion or so debit credentials enabled by the end of this calendar year on a global basis going all the way to 2 billion.
And then there was one.
.
And then the last question on India.
Yes, the RBI, the Central Bank of India had issued, in the last 10 days or so, data localization rules.
We're still get ---+ starting to get ---+ trying to get our hands around them and understand what it means.
They're looking for some form of adoption in 6 months, which is a tough time frame.
So it's early, again, very early there.
We're in almost daily discussions with our tech team, with the government in India, with the RBI in India to try to get a sense of what are they really trying to accomplish and what might be the best way to get there.
So again, more to come as we continue our dialogue with the folks in India.
And with that, we'd like to thank you for joining us today.
If you have additional questions, please feel free to call or e-mail.
Thanks, again, and have a great day.
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